Olympic Steel Inc (ZEUS) 2013 Q2 法說會逐字稿

Good morning and welcome to the Olympic Steel second-quarter 2013 conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. Some statements made on today's call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995 and may not reflect actual results. The Company does not undertake to update such statements, 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 are set forth in this Company's reports on Form 10-K and 10-Q, and press releases filed with the securities and Exchange Commission. Today's live broadcast will be archived and available for replay on Olympic Steel's website. At this time, I would like to introduce your host for today's call, Olympic Steel's Chairman and Chief Executive Officer, Michael Siegal. Please go ahead, Mr. Siegal.

Thank you, operator. Good morning and thank you all for your continued interest in Olympic Steel. On the call with me this morning to review the 2013 second-quarter and first-half results are David Wolfort, President and Chief Operating Officer; Rick Marabito, Chief Financial Officer; and Don McNeeley President and Chief Operating Officer of CTI. I will begin with a brief overview of our results, then Rick will provide additional color on the financials and David will give the operational update. After that, we will open the call for your questions.

During 2013, we, Olympic, made significant progress on the objectives that we outlined on previous calls. Specifically, our six new locations are now all pretax profit contributors. Our gross margin percentage is improving, inventory levels are down, and our inventory turnover is up. We are spending significantly less than previous years on capital investments. Additionally, we paid down a meaningful amount of debt in 2013 and we will comment more on all of these accomplishments throughout today's call.

By now you should be aware that the second quarter, the industry itself experienced softening steel prices and less volume shift compared with last year. We were not immune to these market dynamics. Our sales declined 10% in the quarter and 11% for the six months. Despite these market pressures, our gross margin percentage increased in both periods compared with last year, providing evidence that our recent investments to diversify our product mix, penetrate new geographies and provide more value-added processing and fabrication is working. With the completion of our capital expansion project, the positive contributions from our new locations and working capital improvements, we are now generating much higher levels of free cash flow, which has been used to reduce debt. Since the beginning of the year, we paid down more than $34 million of debt, further strengthening our balance sheet.

Our major IT spending on the new system development is also behind us as we complete the final implementations. Rick will elaborate more in a moment about our working capital reductions and how we are allocating excess cash. In spite of all that we have accomplish internally, the market itself remained challenging in the first half of 2013. Demand was down, as evidenced by the year-over-year decline in service center shipments reported by the MSCI and steel prices have been stubbornly soft. The June and July uptick in mill pricing is the result of production curtailments related to the unscheduled blast furnace outages in Middletown, Ohio and the ongoing strike at another mill in Ontario, Canada. These supply-side disruptions are short-term issues that will likely be resolved. In fact the AK situation has been described as already back to full production.

In terms of our segment results, flat products contributed $5 million to consolidated operating income, down from $7.3 million in the same quarter last year. We reduced variable operating expenses in this segment by $2.1 million during the quarter. Our pipe and tube segment contributed $3 million to operating income in the second quarter, down from $4.4 million in last year's comparable period. The decline in operating margin was due to increased variable expenses from more sales volume versus last year, as well as higher employee benefit costs.

In response to the lower sales and earnings, we initiated cost reductions late in the second quarter. These efforts will be completed in the third quarter and are expected to reduce consolidated operating expenses by more than $4 million on an annualized basis. We also announced this morning that our Board of Directors has declared a regular cash dividend of $0.02 per share, payable on September 17, 2013 to holders of record on September 3. And with that, Rick, I will turn the call over to you.

Thank you, Michael, and good morning, everyone. I will review the financial highlights and then turn the call over to David for his operation review.

Starting with tonnage, tonnage of flat-rolled products declined to 573,000 tons in the first half of 2013. This was 6.6% lower than last year, and was driven by the weak spot sales market and softer demand from certain customers, particularly in the mining sector. Average selling prices also were lower in the quarter compared with 2012. The lower volume and pricing resulted in consolidated second-quarter net sales declining 10% to $331 million, compared with $367 million last year.

For the six-month net sales were $669 million, down 11% from $749 million in 2012's first half. Despite weaker industry demand and pricing, our gross margin percentage improved in both the three- and six-month periods. As previously disclosed, in this year's first quarter we recognized $1.9 million in pretax LIFO income related to recording inventory valuation adjustments from 2012. In the second quarter, we recorded $0.4 million in 2013 LIFO income as average prices continued to decline, bringing the first-half LIFO income total to $2.3 million. As a reminder, LIFO is associated with CTI's inventory. LIFO positively impacted gross margin percentage by 11 basis points in the second quarter and by 34 basis points for the six months.

Excluding the LIFO income, consolidated gross margin expanded to 20.7%, up from 19.5% in last year's second quarter, and to 20.7% in the first half versus 19.6% in 2012. The margin improvement was driven by our ability to successfully maintain consistent per-ton profitability despite the lower volumes and prices. Consolidated operating expenses were essentially flat year over year, which means that they did increase as a percentage of sales given the lower revenues. Operating expenses decreased $3.2 million in the flat products segment, partially offset by an increase of $3.5 million in the tubular and pipe products segment.

Fixed costs such as occupancy, depreciation and amortization were higher in 2013, due to our recent capital investment. This contributed to operating income declining to $6 million in the quarter from $9.7 million last year. For the six months operating income was $15.6 million, compared with $22 million last year. As Michael indicated, it enhanced our future profitability we have executed on expense reductions and these reductions do not impede our ability to service our customers.

Interest expense declined 24% to $1.7 million in the quarter, down from $2.2 million last year. For the six months, interest expense was 22% lower at $3.4 million compared with last year's $4.3 million. This was due to lower average borrowings and a lower effective interest rate. Our average interest rate was just 2.9% for the first half and that compares with 3.2% last year. Net income for the second quarter was $2.5 million or $0.23 per diluted share and that compares to $4.5 million or $0.41 per diluted share last year. For the first half of 2013, we earned $7.7 million or $0.69 per diluted share, compared to $10.8 million or $0.98 per diluted share in 2012.

The LIFO income had a positive net impact of $0.02 per share in the second quarter and $0.13 per share in the first half. As Michael said, we have transitioned from our multi-year capital investment program and we are now concentrating on optimizing these new facilities. As a result of the lower CapEx, which is now running well under depreciation levels, as well as our inventory reduction efforts and our other working capital improvements, we generated substantial free cash flow in the first half. In the first six months of 2013 we generated $34 million in cash from operations, reversing the $32 million in cash we used for operation in last year's first half. Much of this was related to the reduction of inventory, which is down more than $41 million since the beginning of this year. At June 30, we held $249 million in inventory and that compares with $290 million to start the year.

We also improved our inventory turnover. Turns for the flat products have increased from 4.2 times in the first quarter, to 4.5 times in the second quarter. Our goal is to operate the business and at approximately five inventory turns per year. As we have commented previously, we averaged less than four turns in 2012, and for the first half of this year we are now averaging 4.4 turns. During June, we were actually running at about 4.6 turns. So we're making great progress on the inventory objective in 2013.

Perhaps the most noteworthy balance sheet accomplishment is the significant amount of debt we've paid down. During the quarter we lowered outstanding debt by almost $30 million. At quarter-end we held $208 million in total debt, down from $237 million at the end of the first quarter and $242 million at the start of this year. This lowered our debt-to-equity ratio from 83% at the end of 2012 to 70% currently at the end of June. Since our debt peaked during last year second-quarter, we have paid down more than $100 million of debt or 33% of total borrowings.

Our successful working capital management and inventory reductions together with operating cash flow, significantly improved our financial position in the first half of 2013. Working capital needs may increase modestly in the second half of the year. We talked a little bit about the price increase in effect, however we will remain focused on improving our inventory turnover and further fortifying the balance sheet by paying down debt. And finally, at the end of the quarter, our shareholders' equity increased to $27.25 per share, versus $26.54 at the end of 2012. Now, I will turn the call over to David for the operating highlights.

Thank you, Rick, I will speak to our operations and market, but first let me speak to our operations. Operationally we had a very active second quarter. Notwithstanding the market's challenges, we continued to advance our stated objectives on a number of fronts. We are proud to report that each of our six new start-up locations is operating profitably in 2013. These new store fronts provide us with product and processing expansion in new geographies.

We've already detailed our favorable results in reducing inventory. We had particular success in reducing aged stock beyond our normal disciplines. We also re-balanced our inventory tonnage amongst all of our new facilities as we gained a better sense of normalized volumes in each of these facilities as they are reaching maturity. Our new locations are all appropriately inventoried as we speak today. We geographically broadened our product distribution at marginal cost, with the integration of pipe and tube products at our Mexican facility in Monterrey and our Cleveland locations. This now makes three locations where we distribute both flat-rolled and pipe and tube products. Our first integrated product location was initiated in 2012 in Mount Sterling Kentucky.

Our specialty metals team continues to win new business and increase market share in the US in both stainless steel and aluminum. The operating expense reduction initiatives already highlighted by both Michael and Rick, are expected to remove more than $4 million of annualized costs from our consolidated operating results. Our actions include consolidating certain shifts, reducing permanent and temporary staff, controlling overtime, and gaining efficiencies and consolidation of freight movement. These efforts will begin to manifest in the third-quarter financial results and will be fully recognized in the fourth quarter.

Finally as reported on our last call in January, our Cleveland temper mill incurred damage and was taken off-line. The equipment was quickly repaired and successfully returned to full production in May. During the downtime we absorbed all of our customers' needs on our other temper mills located in both Bettendorf, Iowa and Gary, Indiana. The downtime expenses are covered by insurance.

Let me turn to the market now and from a market standpoint, as Michael alluded earlier, steel prices have been deteriorating steadily all year until several unforeseen supply disruptions resulted in the swift up-tick late in the second quarter in pricing. These unplanned disruptions helped support the producers' incremental price increases which originated on May 22. The price rebound was welcome relief, however the bounce was off of very significantly depressed levels. Excess global supply remains an industry issue and we are cautious in our view of the sustainability of the total of the four of these increases which have recently been announced. Until real demand returns and unless consumption increases, lower input costs will continue to impede pricing power. The relatively short mill lead-times are allowing end-users to operate with lean levels of inventory. Given the forward curve and consensus forecast for lower prices, there is reluctance on behalf of steel buyers to jump back into the market and increase inventory levels at current pricing points.

Now, before turning the call over to questions, I would be remiss not to mention that, as most of you are likely aware, since our first-quarter call we lost Sol Siegal, the Founder and Chairman Emeritus of Olympic Steel. Sol was not only the driving force of the Company's founding, he also was a great man and of course, Michael's father. It was a sad day for us, but we are all proud to have been associated with someone who was dedicated not only to this Company, but also to his family, his country, having served in World War II, his local community and many philanthropic causes. Olympic Steel would not be where it is today without Sol's high standards of business excellence and social responsibility which he exhibited throughout his lifetime. With that, we will now open the call for your questions. Operator?

(Operator Instructions)

Luke Folta, Jefferies.

I'm just looking through your 10-Q here that looks like was just filed, I'm just calculating the flat-rolled gross margin, and I'm getting -- looks like it's about 19%, which is the highest we've seen in quite a while, I think since first-half 2011. I wanted to get a sense of how much of that was due to the recent price movement we've seen? I was thinking that the price increases on flat-rolled would be more of a third-quarter impact. Can you help me think about how that's going to flow through for you?

Sure, Luke, it's Rick. So, first, I would say your commentary is correct, it's not due to the-end-of-the-quarter market-price increases. We commented a little bit in the call earlier, you know on the flat-rolled side we also like to look at our margins on a per-volume basis or a per-ton basis. We have really been able to, even in a market price that had pricing decline and demand shrinking industry-wide, we were able to maintain our gross margins per ton. So, that consistent margin per ton, as you apply it to a lower revenue base, had an impact on raising the margin percentage.

But as Michael also talked about, strategically we've put a lot of emphasis on growing our businesses in some areas that do provide higher gross margin. I think you are also seeing that impact.

All right. I understand you don't want to give guidance, but when we look at the third quarter, as we think about the moving parts, with pricing now as a tailwind for you, we would expect that gross margin will likely be higher in the third quarter, all else equal?

Luke, Dave Wolfort here. We're going to have to anticipate demand picking up quite a bit to have some sustainability on these price increases. The leadership on May 22 by US Steel foreshadowed the next three increases. But we have some questions as to how sustainable they really are, until we really see some significant demand increase.

July is typically not as strong as second quarter. August has a nice rebound for us, so we will wait to see. Although most analysts are talking about second half being stronger, we will have to see what unfolds.

Okay. On the tubular side, if you look at the margin performance there in the second quarter, I was going to [say something like it will] impact first quarter to second quarter. But when you strip that out, margins were down sequentially. And you highlighted employee benefit and some increased variable costs being the drivers. Is there something one-time in nature in the numbers, like bonuses or something like that, that impacted the second quarter that we should think about going forward?

Not really, Luke; there was no really one-time impacts. We did talk about, on the pipe and tube side, we actually had, although we don't report it because it's not that meaningful of a number in terms of tons sold, but their volume was actually up year over year. Part of the expense increase is due to, as I said, variable increases related to volume. We did call out and highlight some of the employee-related costs that are up; those are not necessarily one-time costs. We did talk about and highlight, both on the flat-rolled, and on the pipe and tube side, will both have initiated the expense reduction plans. Really, the story on the pipe and tube side is, is the impact of lower pricing squeezed the margins a little bit.

Got it. Okay. And then, the CapEx expectation -- CapEx is coming in meaningfully below what you thought it would be so far in the first half. Can you just talk about what the drivers are there? Is this something that is related to the timing of when you expect to have certain projects done? Is it just better execution? Can you help us understand that?

Yes, I think, Luke, it's a combination of things. It's, one, do payments get made on projects? But we do have one project in the back half of the year, which is the expansion for Chicago Tube and Iron in St. Paul. That will probably be $3 million in the back half of the year, as opposed to a -- over $4-million project. Obviously, it is not spread equally.

But no, we are very disciplined. We spent a lot of money over the last three years, and what we said is -- we're pretty much done with a lot of the capital projects beyond maintenance. So, while we are below even what we expected to spend perhaps, we are very disciplined now on the capital deployment.

And, Rick, did you give an updated full-year CapEx expectation?

No, I didn't, but I think you got the first-half number, and then Michael really gave you the guidance that I would, which is -- the first half was pretty much maintenance-type spend. The back half, we will have higher CapEx due to the timing on the Chicago Tube and Iron St. Paul facility. So, should you probably add another $3 million for the back half, on top of what normalized first half was.

Okay. All right, guys, congrats on the progress there, and I will turn it over. Thanks.

Aldo Mazzaferro, Macquarie.

That was a very nice tribute to Sol, and Mike's dad. I just want to express my condolences as well.

Thank you.

In terms of the business trends, the margin seems to have gone away a little bit compared to the expectations, considering your value-added investments in the aluminum and the stainless. Can you talk a little bit about how much of your business mix was in those higher-value-added products generally, and whether that increased or decreased on a sequential basis? I'm just trying to get a feel for whether you're seeing those businesses suffer margin compression, as well as the basic carbon business?

I would say, Aldo, there's no question -- as we like to talk about is the figures don't lie, but liars figure. Obviously, when you look at just a pure percentage, the stainless and aluminum side of the Business has a lower percentage, but more real dollars. And that's why Rick tried to indicate on Luke's question about -- what we look at is what's the margin per ton? Because there's so many moving parts in all of Olympic Steel, you really look at what we're trying to accomplish. But there's no question that nickel pricing has had a dilutive effect on the transaction price in that segment year over year.

[Obviously], like everybody, we hedge it to some degree, and we try and manage it. But I think everybody was kind of surprised over the last 18 months that nickel fell as far as it did. As an inventory company, there's no question that we get impacted by that.

The other thing which David indicated is -- all of us have some degree of aged inventory -- aged for a lot of different reasons. David indicated a significant reduction of aged inventory. Aged is usually product that may have some discrepant aspect to it, so you're liquidating it for lower than traditional margins. As we cure the balance sheet, in the short term we did impact some margin in that regards.

Great. Rick, would that account for the difference in the inventory reduction and the receivable increase? I guess that would have been timing towards the end of the quarter?

Well, the receivable -- there are a little bit different drivers on those, too. Typically, due to seasonality, accounts receivable are always at their low point at December 31. Typically, the last two weeks of the year, the sales really taper off. So, always you see an increase in receivables, even in a down year. You see a big increase in the accounts receivable, and it's primarily driven to that, not by that. Obviously, we've maintained all our disciplines in the receivable turnover and that type of thing.

On the inventory side, we really re-focused our efforts, as Michael and David both commented on the call, in terms of getting back to the turnover rates that we like to see. And we've made -- I think we commented on our opening call for the year that we would like to, by the end of the year, get back to and close to that 5 inventory turn mark. We started at a little under 4, and we're right there.

Just one other comment on the receivables. Our receivables, Aldo, are probably in the best shape that they've been in a very long time. When we look at the current kind of receivables, even though it's higher, the actual days sales in receivables is as low as it's probably been in years.

And final question, Rick, can you help us understand the employee benefit increase -- like magnitude and what caused it?

Yes, it's mainly healthcare costs are going up. In terms of magnitude, we quantified the increases and decreases by segment. Obviously, we've seen, on both segments, our healthcare costs go up.

Also, on the pipe and tube side, aside from the employee benefits, we probably weren't as efficient as we could be in some work and some jobs. So we did run more overtime than we had been in prior quarters. Part of our expense reduction initiatives that we've already put into place have us reducing those areas. But the specifics on the employee benefits is healthcare.

All right, thanks very much, guys.

Sal Tharani, Goldman Sachs.

Mike, you mentioned you have reduced inventories. Is this on the new locations that you have reduced inventory?

No, I think it's a -- well, the answer is -- to some degree, yes, Sal. Obviously, as you open a new facility, you anticipate a certain marketplace. You are never perfect on that. As David indicated, as they get into their maturity, you start to adjust during the course of the first 18 months of operations to get the inventories right sized. Not just the size, but also the right product. You assume you're going to sell something, and then it turns out to be a little bit different.

But I think it's a combination of -- we're doing some significant inventory reductions at almost all of our locations. Clearly short lead times, as David indicate, certainly don't give us any comfort that we need to be long on inventory. Like everybody, I think we shortened our inventory across the board. But, yes, at the new facilities, particularly in Gary.

And the other thing is, Mike, this has been an unusual year. We had a much weaker first half, and then we are starting to see some strength right now. Maybe some of it has to do with the disruption in the operations at some of the blast furnaces. Is it fair to assume that the second half this year, year over year should be much better for you than the first half?

Well, if I was that smart, I would be a richer man, but I would say -- having Congress on 30-days break for the summer has certainly calmed down all the bad news out of Washington. I think a lot of it, as you look at the actual numbers, I mean, the obvious -- the domestic GDP has not been strong. Obviously, there's great concern over what China demand really is or is not. You've seen the disruptions in Europe.

And so I would tell you, Sal, we have no great confidence that GDP in the United States is going to be much higher in the back half than it is. Sequestration is still there. Certainly when Congress comes back into session, we will expect all of the name-calling and the negative news that comes out of Washington about the world is coming to an end. And clearly, the news in China is building no confidence for anybody either.

While there are signs of certain recoveries in the marketplace, you've got certain other issues, like mining and other parts of the consumption market that gives us pause. I would tell you the back half looks for us to be whatever a normal steel market is. We're looking at a normal steel market, not a full recovery as some people are predicting.

Okay. And on the mining sector, you mentioned in your prepared comments, and again right now -- are there opportunities for your existing mining business to move away from there? It looks like it's going to be a weak environment for quite some time.

Our obligation, Sal, is always to fill our facilities. So, if mining is depressed for a period of time, we are going to find a bridge or countermeasures, and we're going to find other participation. Our value-added processing is not specific to any one industry; it's very flexible.

Let me just punctuate that in reverse, just give you a little color on a couple of things here. Remember, as we authored six new facilities coming up, we're going to have some duplicative inventory as we support customer bases, as those businesses start to evolve. They've evolved through last year, and now they are all profitable, as I suggested. What we've managed to do is de-leverage the inventory in supporting locations in favor of these new geographies. So we are now well positioned and appropriately inventoried, and we get to reduce our inventory, and reduce our distribution costs with these new facilities.

Additionally, disciplines, as Mike and Rick have both outlined, whether it's in our inventory or others, or debt, certainly is always vogue with Olympic Steel. And as we add more facilities, our view is that we need to maintain all of those disciplines and make sure, in a marketplace like today, that we don't get too aspirational about where the market is actually going, as opposed to what the real manifestation of the marketplace. The view is that we have had four years of recovery, we are into a very slow growth pattern that has really just started for the second half. But it's slow, as Michael indicated, and we're positioned to take advantage of that marketplace as it continues to grow.

That was good color. Thank you very much, guys.

Phil Gibbs, KeyBanc Capital Markets.

Can you give us an update on the progress of the Gary temper mill at this point in time?

It's great. (laughter) No, really, I think that when you look at start-up facilities, especially of a piece of equipment, that it can be that complicated. We are very pleased with the configuration -- with the ability of the machine itself to perform. We really kind of have a hand-picked workforce up there that is very motivated to increase throughput. And we see significant kinds of production improvement over the other facilities that we have with temper mills.

Second, we've seen great acceptance, both from the standpoint of direct sales in a market where there is a lot of other temper mills, as well as opening up our welcome mat for outside processing. So we're seeing really good acceptance of the temper mill, and real good production on it.

Any sense of the utilization there right now, Michael?

Well, if customers are listening, we have more room to take more orders. (laughter)

Fair enough.

But I would just say we're operating somewhere around 60% of capacity.

Okay. And then, David, when you said the start-ups are operating profitably, do you mean that on the net-income basis? Or is that on a cash-flow basis? Or both?

Both. (Laughter) Both. They're running well.

Let me also just add, as Michael has been very complimentary of Gary, that without that Gary facility, we would've really been in some trouble as the shear went down on our Cleveland temper mill. So, Gary was able to step up. Obviously it cost us some additional freight. We are insured -- business interruption insurance.

But without the advent of Gary, we would've been in tough shape. So it was gratuitous that that operation was up and running as quickly as it was.

And my last question is on the expense reduction plan. I did have in my thought process that you guys would be doing a little bit of this, as some of the start-up costs had wound down. But how much of this is in addition to some of that start-up cost winding down? Is more of this focused on the pipe and tube segment, or is this more broad based?

Yes. So, it's Rick, Phil. It's broad based, it's both segments, and it has nothing to do with the start-up costs phasing out. These are initiatives that we took to reduce current run-rate expenses by $4 million.

Some of it in the tubing, some of it --

Yes, I told him, I said that it's --

Some of it, but not the majority.

Thank you. Appreciate it, guys, good luck.

Edward Marshall, Sidoti.

I wanted to follow up with that last question about the cost reductions. You quantified them, and it looks like roughly 1.5% of the operating cost of the Business. Is it employee or is it structural? I assume the size of it means -- suggests it's employee?

Yes, it's mainly employee. We hit, Ed, on some of the items. It's some headcount reduction. It's elimination of some temporary labor. We did some shift consolidations. So those are the types of expenses that are being cut.

Should we expect a one-time adjustment or cost to hit on severance or anything like that?

No, the severance was not that significant, and the severance has already been absorbed in our second quarter.

Okay. It's really early to talk about this, especially with the utilization rate at 60% at Gary, but my question is -- for a while back, there was a fourth temper mill. And I'm just curious with the market being down, and maybe the price advantageous to you, what are your concerns about -- and I understand you've talked about CapEx. What are your thoughts about potentially a fourth temper mill down the line, and locking those prices in as the market is on its heels? Just curious.

I would say in the near term that project is significantly delayed until -- that we see significant improvement in the market. Again, as you look at covering the North American market, a fourth temper mill for us would be beneficial from a growth perspective. We're just not ready to do that at the present time, so it's probably a couple of years away at the earliest.

Okay. Thanks, guys.

(Operator Instructions)

John Ockerman, Davenport.

With very little demand recovery that you all expect in the second half, do you think that you could get to 5 turns by year end? Or is that something that really would be a 2014 story?

No, I think that, John -- Dave Wolfort here -- I think that our inventory is appropriately leveled. Today that reaching 5 is not anything that's a stretch. It's significantly easy, especially with shorter lead times. They've expanded here recently, but we would see some pullback, unless something dramatic happens.

Also from a demand perspective, we see demand moving up slightly. We say growth, but it's nominal growth on a GDP level. Of course, a lot of different industries, mining is down, that affects us, but we will find others. Other businesses are up, some related to equipment that goes to arial lifts and so forth, has been fairly robust. Reaching the 5 turns is our goal, and we've made some pretty good progress here to date.

Okay. And do you have a targeted debt level, debt to cap, something that you would want to get to before, say, making another acquisition or investing in growth?

We do. Obviously the public service center is the metric that is typically used as the debt-to-EBITDA number. After we made the pipe and tube acquisition, and finished our investments, we are obviously on the higher end of that ratio, and our initial goals were to get to the midpoint. So we would like to be in the 3.0 range, and that's a target for us.

We've obviously made some good progress on debt reduction that we highlighted here today. I think in the second half of the year, obviously with prices moving up here, we will have that impact going the other way, in terms of potential increased working capital dollars. But we're still very confident that we're going to continue to march the debt down.

Okay, thank you.

Corinna Petry, American Metal Market.

Dave, Mike, Rick, I wanted to ask you guys a little bit about the breakdown in percentage between spot and contract that you guys are doing. And then, on the spot side, what is the competition like among service centers? I'm hearing there's a lot of that in flat-rolled. Thank you.

(laughter) There's always a lot of competition. Spot business today is a little bit different than historically, Corinna. Spot business used to be small fabricators and service centers. A lot of small fabricators today work off of resale programs from the large manufacturers that they supply.

To some degree, the overall spot market is less than it used to be. Clearly, with short lead times at the domestic producing industry, the spot market to service centers is lower than it has been, but typical of a slow-demand universe. We probably have a bigger contract to spot business than we would like, but that's the market that we -- this is the profession we've chosen. That's just the way the universe is today.

Service centers trade a lot with each other. When they're short on inventory, we've seen a relatively small pick-up in service center phone calls, looking for a coil or a plate here and there. But by and large, the spot market is going to be soft until you see lead times at the domestic production industry start to extend out.

Thank you.

At this time, I show no further questions. Would you like to make any closing remarks?

Always. Thank you.

In conclusion, let me just say that we'd like to note, over the course of the last several years, Olympic Steel has basically demonstrated its resilience and its transparency, not only by withstanding the recession and the slow recovery, but by emerging as a stronger and better-positioned Organization. We've improved our mix of business by diversifying into different products and new geographies. Our financial results are becoming less correlated with industry's pricing environment. We see tremendous opportunity in front of us to grow the higher-margin processing and services we offer. And even garner more market share with our specialty metals, and pipe and tube, businesses.

We look forward to communicating our continued progress when we report our third-quarter results in the Fall. Once again we thank you for participating on this morning's conference call with us. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.