Olympic Steel, Inc.
Q1 2009 Earnings Call Transcript

Published: 29 Apr 2009

[Operator:]

Good day, and welcome to the Olympic Steel First Quarter 2009 Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Michael Siegal, Chairman and CEO. Please go ahead, sir.

[Michael Siegal:]

Thank you. Good morning and welcome to our call. On the call with me this morning is David Wolfort, our President and Chief Operating Officer, and Rick Marabito, our Chief Financial Officer. I want to thank you all of you for your participation and your interest in Olympic steel. Before we begin our discussion I want to remind you that during this call, we will provide forward-looking statements, that we do not undertake to update, or 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 annual report on Form 10-K. Earlier today we reported our financial results for the first quarter of 2009. Let me review some of the details from our earnings release. Our first quarter net loss was $25.5 million or $2.34 per diluted share compared to net income of $13.2 million or $1.21 per diluted share for the first quarter of 2008. As we previously announced, our first quarter 2009 results include an inventory lower of cost or market charge of $30.6 million that was recorded as of March 31. Our first quarter sales totaled $141 million, which is down 48.8% from the $275 million recorded in the first quarter of 2008. The sales decrease was due to lower selling prices for steel and a sharp decline in volume sold. Our first quarter sales volume totaled 171,000 tons compared to 315,000 tons shipped in the first quarter of 2008. This represents a 45.6% decrease compared to the 41.8% decline in total service center steel shipments reported in the Metal Service Center Institute's March 2009 Metals Activity report. In 2009, results were impacted by the dramatic and ongoing decline in industrial activity in all segments that we serve, resulting in a sharp and greater than expected decline in our customers demand for steel. This was most evident in our plate and fabrication operations where many of our large OEM customers for which we performed a preponderance of our value added services experienced substantially lower production than they originally projected in their steel usage schedules. As we worked through the first quarter, we saw steel demand deterioration far greater than we anticipated. Our top 20 customers primarily consist of large multinational OEMs that we have served for years. For our top 20 customers, we experienced significantly greater declines in the first quarter 2009 deliveries than experienced with the rest of our customer base. This decline is not due to Olympic losing market share with these customers but rather indicative of just how dramatically our large OEM customers have curtailed their buying and production in the first quarter. As a result of the weaker than expected demand, we ended the first quarter with high inventories outside of our normal turnover objectives. In addition, a large portion of the inventory was purchased in late 2008 and held for customers resulting in that inventory being inappropriately costed today. Our customers are giving little disability of when their production might increase and really are unable to accurately predict their future demand. Therefore, in March, we decided that the best course of action for Olympic Steel was to reduce our inventory and our debt and to no longer hold this customer specific inventory for our customers. Selling carbon plate in today's market versus providing our customers with value-added component products made of the same plate obviously has created a significant gross margin challenge. Our current inventory turnover objectives assume future shipping levels at approximately those experienced in the first quarter. As we execute on right sizing our inventory to our preferred historical Olympic Steel turnover rates and work through high cost inventory purchased specifically for customers, we will experience operating losses that generate significant cash flows to reduce and potentially eliminate all debt. We are focused on managing working capital, generating cash and lowering our debt. We anticipate making significant improvements in these areas in the second quarter and the remainder of 2009. We entered this recession with a strong financial position based upon our desire to focus on the business basics of cash flow and working capital management. We avoided the use of leverage in the past to purchase overpriced assets, which allowed us to enter this recessionary cycle with one of the strongest balance sheets in the service center industry. Our metrics are not where we would like them to be in the first quarter. The economic and financial environment is the most challenging that we have experienced in our lifetimes. We expect to weather the difficult climate with a strong balance sheet, a prudent approach to working capital turnover, a keen focus on expense reduction and our core values. We have a strong and easy to understand balance sheet with no defined benefit plans, no pension, not postretirement liabilities, no financial derivatives, no hedges, no off-balance sheet transactions other than typical operating leases, a bank agreement committed through December 2011 with no interim debt maturities and only $6.6 million of goodwill. We have a significantly lower expense base, and an experienced management team that provides Olympic Steel with a strong foundation for long-term success in the steel industry. We also reported that we are continuing to pay a quarterly dividend in this environment. Olympic Steel Board of Directors has approved a quarterly cash dividend of $0.02 per share to be paid on June 15, 2009 to shareholders of record on June 1, 2009. This represents a $0.03 per share decrease from the quarterly dividend in March 2009. I will now turn the call over to Rick to comment on some of our financial results in more detail.

[Rick Marabito:]

Thanks and good morning everyone. First, I would like to cover the inventory lower costs or market charges that we recorded. As we indicated in our previous release, the charge was actually taken on our inventory as of quarter end. So our first quarter results did not contain any favorable impact of reduced inventory cost flowing through our cost of sales. In terms of how the LCM charge is presented, the $30.6 million amount is recorded on our balance sheet as a reduction of inventory and was reflected as a separate line item in our income statement under the costs and expenses section. The $30.6 million adjustment was calculated in accordance with Generally Accepted Accounting Principles or GAAP to state our inventory at market under a two-step process. Step one is to reduce our total inventory from its cost basis to our average sale price at the end of March. Step two then further reduces the inventory value for the future cost of completion to get the inventory to the point of sale. Next, I would like to review our banking agreement. As we previously announced, we amended our credit agreement in April to change certain covenants to allow for the current deteriorating market conditions and to allow for lower cost to market adjustments. The amendment also increased our variable borrowing rate to approximately or between 5% and 6% compared to our average borrowing rate of 2% in the first quarter of 2009. We entered the quarter with $89.1 million of debt and have already reduced our borrowings down to $65.9 million in April. So we had a significant reduction already in the month of April. We anticipate further reduction in debt through the balance of the second quarter and beyond. We currently have approximately $32 million of availability under our credit agreement and our balance sheet remains strong with the debt to equity ratio of only 0.3 to 1. For the first quarter of 2009, our operating expenses totaled $31.9 million. This is a $13.1 million or 29.1% reduction from the first quarter of 2008. As we indicated in our April 6 press release, we estimate that our annual expense rate has now been reduced by approximately $65 million or 35% from the $187 million we incurred in the full year of 2008. And later in the call, David will review some of the details of our expense reduction actions. First quarter capital spending totaled $7.2 million and our reduced capital projection for the remainder of the year is about $8 million. So we have reduced our capital spending budget from about $30 million as we went into the year now down to about $15 million in total. And we can reduce our future spending if market conditions so warrant. We recorded an income tax benefit of 39.7% in the first quarter of 2009 and the majority of that tax benefit can be carried back to prior years resulting in future income tax refunds. And finally, our receivables remain strong and healthy with a 39 day DSO in the first quarter. Now I will turn the call over to David.

[David Wolfort:]

Thank you, Rick, and thanks, Mike, and good morning to all. And following on some of the comments that both Mike and Rick pointed out here early this morning, our goals in the near term are clear and focused. We intend to do the following then to continue to reduce our inventory and to use the cash generated to pay down debt as Rick described earlier and we have accomplished quite a bit here in the last quarter. We will continue to preserve cash by scaling back our capital expenditure spending for the balance of this year, again as Rick just depicted a moment ago. We will reduce our costs while satisfying our customers with our quality product and outstanding service that they have come to deserve. And we will garner new customers with greater market share with our existing customers in a marketplace where customers are looking for strong financial stable and experienced supply-chain partners like Olympic Steel. Earlier, Mike and Rick have already covered the inventory and debt topics in some detail, so I would only add that we expect to reduce our debt significantly by taking down our inventory tonnage by about 25% between the next three months, and we have already eliminated some 11% over the quarter, assuming market conditions remain stable. In terms of capital spending programs for 2009, as Rick remarked just a moment ago, in the first quarter, our spending was primarily related to finishing projects that we started last year, 2008, including our building expansion in Chambersburg, Pennsylvania, and the expansion in Winder, Georgia facilities, both of which have been completed this past quarter. We also successfully went live with our implementation of our new IT system in Cleveland in January and will continue to migrate that system to two additional facilities here in this past quarter. During the balance of 2009, we anticipate spending about $8 million to finish paying for these projects, to roll out our new IT system beyond Cleveland and for maintenance projects and capital expenditures. Next I would like to highlight our operating expense reduction to align our spending with the current depressed levels of the steel industry shipments. We quickly reacted to the decline in the business at the end of 2008 and our fourth-quarter expenses decreased by $13.7 million or 27% sequentially from the third quarter of 2008 and our first quarter expenses are down another $4.6 million from the fourth quarter. First-quarter 2009 expenses were also down $13.1 million or 29% on a year-over-year basis. We have also made further expense adjustments announced in our April 6 press release. Our initiatives include the elimination of temporary labor, elimination of overtime hours except for customer service requirements, reduced workweeks and lay offs. To date, we have reduced our headcount by about 21% from our peak levels of last year 2008 and to start 2009, we instituted a wage freeze, and our senior management team voluntarily took a compensation reduction equal to 10% of the base salary. We also have a highly variable compensation program throughout Olympic Steel that is performance-based and tied to sales and margins for our sales personnel and pretax profitability for our management and staff. At the end of March, we followed these actions with company wide base pay reductions ranging from 2.5% to 10% effective March 30, 2009, benefit reductions of 20% cash, and a 20% cash compensation reduction by our Board of Directors. Including the much adjustments, our executive management team has now taken cash compensation reductions equal to 20% of each of our base salaries. And as Rick has stated, our expense reduction initiatives result in estimated annual savings of about 35% or $65 million from 2008 levels. We will continue to monitor business conditions closely and adjust our costs and spending further if need be. We have also achieved some significant milestones in 2009. We believe we are first service center to achieve ISO 14001 environmental certification for our operating locations in January and that is all of our locations. As stated earlier, we successfully went live with our new Steelman IT software in Cleveland in January and as I noted we continue to migrate to a number of our other facilities. In March, we reached a new three-year agreement with our employees in our Minneapolis plate facility covered by collective bargaining agreements, obtaining the same cost concessions achieved at all of our other nonunion Olympic locations. In summary, no one including Olympic Steel is immune to the effects of steel prices falling by 65% from the fourth quarter of 2008, coupled with service center shipments dropping by some 42%. Our short-term plans are targeted and focused. We will continue to reduce inventory and continue to pay down debt and we will continue to execute on our expense reductions and capital spending plans and we will positioned Olympic Steel for return to profitability. We have built a company with a strong foundation and a tested and experienced management team, which serves us well in these difficult times. We're confident that we will successfully navigate through this business cycle to emerge an even stronger company when steel demand returns. This concludes our formal comments and we will now open the call to your questions. Thank you.

[Operator:]

Thank you. (Operator instructions) And we will take our first question from Mark Parr with KeyBanc Capital Markets

[Mark Parr:]

Hi, good morning guys.

[Michael Siegal:]

Mark, hi.

[Mark Parr:]

I was just curious about if you could give me a little more color on the refinancing or the changes in your debt situation, is there any change in terms of how availability is calculated, or is there any change in the potential higher end of the availability?

[Rick Marabito:]

Hi Mark. It is Rick. Yes, we – the agreement made a few modifications to the availability and then modified some of the – I call them the income statement covenants. So specifically on availability, the cap on sort of hard reserve was increased from a covenant of $10 million to a hard cap of 20. So in essence there is $10 million extra reserve that we can borrow against on the line size. So that was the main change to availability. And then on the income statement covenants, we basically got the fixed charge covenants, which would have been the one that would provide difficulty given the LCM charge. We got that pushed out and it won't be tested until made part of next year and in its place they put a EBITDA rolling test. So those are the main changes in the agreement.

[Mark Parr:]

Okay. And what is the new EBITDA rolling test?

[Rick Marabito:]

The new EBITDA rolling test is a three month rolling test of $5 million negative EBITDA.

[Mark Parr:]

Okay. So if you are below – was that on a trailing 12 month basis?

[Rick Marabito:]

No. It is just a rolling three-month, so it builds up. April would be a one month test; May would be April and May; June, it would be April May, June, and thereafter it is a rolling three months test.

[Mark Parr:]

Okay.

[Rick Marabito:]

Tested monthly.

[Mark Parr:]

Okay, all right. That is helpful. One other thing I was curious about, it seemed as if the gross profit margin ex the mark to market charge was a bit lower than what – at least it was lower than what we were looking for, I was just wondering you know given the fact that the largest customers had significant delta from smaller customers, is this a reflection of the profitability metrics of the larger customers that you have or was there a change in mix say to more service center business or was it a function of competitive market conditions, could you talk a little more about the profitability there from a gross profit perspective in the first quarter?

[Michael Siegal:]

As we like to say Mark it was probably E, all of the above. But the significant degradation of gross margin was primarily perpetuated by the lack of our major customers as we indicated, the top 20 customers, which we supplied a preponderance of value added products, the pieces and parts business, really taking a much bigger degradation in terms of their intake versus the rest of our customer base. So as David indicated, we had some significant pickup in new business at the service center level as you would call it and really a significant degradation in terms of our ability to ship out pieces parts from our fabrication divisions. That was probably the biggest factor on the degradation of gross margin dollars.

[Mark Parr:]

Okay, all right. And it looks like your total operating expenses were about I think about $32 million in the quarter, is that right?

[Rick Marabito:]

Yes. $31.9 million.

[Mark Parr:]

Okay. And where would you expect that to be in the second quarter? Can you give us any color there?

[Rick Marabito:]

Yes. They should be lower. I mean part of the expense reduction is that we implemented as we talked about went into place on April 1. So and then if you annualize, Mark, we gave a little bit of guidance in terms of last year expenses were $187 million and we said we would be $67 million lower. So if you kind of take those numbers and extrapolate them over the next three quarters, you can get pretty close. But it'll be a little lower.

[Mark Parr:]

Okay, all right. That is helpful. And then it looks like your – did I see on cash balance up over $50 million at the end of March? I mean is there something…

[Rick Marabito:]

No. I don't – I'm not sure what you're looking at.

[Michael Siegal:]

In the release, Mark?

[Mark Parr:]

Yes.

[Michael Siegal:]

All right.

[Mark Parr:]

Yes. I missed that.

[Rick Marabito:]

We don't even – I don't think we even released our cash balance to the 10-Q Mark. So I don't know what you would– maybe you were trying to derive the balance?

[Mark Parr:]

You know what, that was – I apologize for that.

[Rick Marabito:]

No problem.

[Mark Parr:]

Okay.

[Michael Siegal:]

(inaudible).

[Mark Parr:]

All right. No – yes. Yes, it has been one of these really like laid back easy going weeks and on top of that somebody keeps changing the time of conference calls. I guess…

[Michael Siegal:]

Yes…

[David Wolfort:]

So we're not sleeping, we like to do this pretty early.

[Mark Parr:]

All right. I appreciate that color. Thanks very much. I will pass it on.

[Michael Siegal:]

Thanks, Mark.

[Mark Parr:]

Thanks, guys.

[Operator:]

And next, we will move to Sal Tharani with Goldman Sachs.

[Sal Tharani:]

Good morning guys.

[Michael Siegal:]

Hi, Sal. Good morning.

[Sal Tharani:]

You gave us a guidance sort of person time I remember in history actually you started mentioned what your outlook is over the next couple of quarters or at least going forward. Is there any compelling reason that you wanted to do it this time?

[Michael Siegal:]

Yes. I think it is important because there are so many mixed signals from our suppliers and our competitors, Sal. You know we have seen from you know on one side (inaudible) different outlook on what the marketplace is and you see sort of what Reliance and Castle have said. I think we may have – our own opinion may differ a little bit more substantially than we normally see. Again, I can't speak to other people's customer base. But we don't want to – our objective is to manage our business within the walls of Olympic Steel. We have specific set strategy that has worked very well for us and continues to work well for us. However, having said that, our customers are really – may be different than some of the other people out there and what we're seeing is a real lack of visibility and a real I would say sort of a negative position than some of the things that we have read in terms of our customers making products. So I think it was appropriate that we don't really anticipate and don't like making forward statements. We just want to make sure that people understand that we are managing our inventory down and we really don't see a lot – other than the new business activity that we are lending, we don't see our customers going back into production, and particularly with automotive declaring – General Motors declaring the 90 day shutdown – nine week shut down, excuse me, you I think there's going to be some challenges for all of us that we just wanted to put some color on it. David, you want to add anything?

[David Wolfort:]

I think that – I think Mike has discredited described it accurately. Sal, one of the things that we anticipated was that January would be as poor as December, and we were really looking for February to show a modest improvement over the depths of late December and what we knew would be an extended layoff period in January. In effect, we did see some modest up tick in February and that was quickly evaporated by the front of March, which compelled us to accelerate our reduction of inventories and reduction of debt. And I think we were late into the quarter in terms of seeing the manifestation of our efforts, and so what Mike and Rick have described is that we continue those efforts diligently and they are on an accelerated basis because as Mike described, our top 20 customers, which are large multinational OEMs, all great brand names, all terrific companies, their participation was down dramatically in the first quarter, and so we have accelerated the reduction of the inventory to compensate for their degradation in business.

[Sal Tharani:]

Okay. On inventory write-down, Rick, you gave some comments, I missed that. You have taken your inventory mark to the current crisis, is that correct or March 31 price?

[Rick Marabito:]

Basically, Sal, it is a two-step process. It is step one is to lower the cost of inventory to what our average sale price was at the end of March. And then step two is to further reduce the inventory basically for the cost to complete that inventory, in other words to take the inventory and what we would call a purchase form to a salable form. So that is how we calculated our LCM under GAAP.

[Sal Tharani:]

Is there any guidance that you may have to take more, or do you think that you're pretty much done?

[Rick Marabito:]

Well, that is hard to say. The way the calculation works obviously, if there is continued deterioration in the market in the price of steel, you know I can't sit here and say one way or another, but it is basically – as I said it is determined based on the difference between a cost basis and the sell price.

[Michael Siegal:]

To answer that in a different way, we don't anticipate it, but it may occur.

[Sal Tharani:]

Got you. Mike, we have been – from some service centers we have heard that mills are actually also competing for various tiny small businesses. Are you facing similar situations?

[Michael Siegal:]

Yes. I would say Sal – you know, we would like to say that 150 is the new 50, but you know the steel mill today is challenged by effective production, and what they're telling us is that 100 ton order today is like what a thousand ton order was six months ago. And so the mills in order to effectuate an efficient production rolling scheduled may actually be putting steel on the ground to finish the effective rolling schedule for sort of spot sales just because they have certain – they don't have enough current orders to effectuate a profitable rolling schedule. So yes we're seeing some mills actually put material on the ground for sale, but that is nothing new. We have seen other steel mills do that in the past, we are just seeing probably more mills do it at present.

[Sal Tharani:]

Great. Thank you very much.

[Operator:]

(Operator instructions) Next, we will move to Luke Folta with Longbow Research.

[Luke Folta:]

Hi, good morning guys.

[Michael Siegal:]

Hi, how are you Luke?

[Luke Folta:]

Well, not bad. Just one question regarding inventory at the OEM level, how do you see supply there? And do you think there is kind of a glut of inventory you need to work through in the event that they pickup?

[David Wolfort:]

Luke, this is David. I think it varies but I think the OEMs have continued to reduce their inventory. I think they have reduced a great deal of it. You know Jim Owens of Caterpillar on his call I think a week ago indicated that Caterpillar would reduce $3 billion worth of inventory, obviously a global company that has resources parked in different parts of this world. As it pertains to our OEMs, we have seen our OEMs reduce their finished goods dramatically and their raw materials, and I would tell you that they have done a pretty effective job and that is the severity of the participation that we have seen in the first quarter as they have reduced their inventories dramatically. So I would tell you for the most part I think the OEMs have de-levered themselves at least for once that we participate in.

[Luke Folta:]

Okay. And just a follow-up, regarding the competitive environment at the distribution level, have you seen any sort of improvement there regarding kind of irrational pricing behavior?

[Michael Siegal:]

I think – is that a double negative or a double positive?

[David Wolfort:]

Again Luke, David. I feel that a little bit of that, there are a number of competing interests in the marketplace. There is an overall interest to reduce inventory. Then there are some in the service center industry that are significantly challenged for financial resources. That coupled with the fact that there are those that are owned by non steel people who are continuing to shed assets and all of those complicate the marketplace. In short I would tell you that I think we have seen a preponderance of the deep cuts and if there is any further degradation in pricing, it'll be very small. For the most part, a lot of the competition that we see, competitors are selling at a loss and that has, that has challenged the marketplace and of course the steel mills have responded by eliminating capacity. And to be a little bit fair, as Sal asked the last question as to whether we compete with mills, to some degree we do, Luke, and I would also just add a little color that the mills are finding themselves competing with OEMs, who are – who continue to deliver their inventory in large portion, and these are large direct buyers from the mills, who are shedding inventory and complicating the marketplace. But I think we have seen the majority of that through the first four months of this year.

[Luke Folta:]

Hi, great answer. Thanks a lot guys and good luck to you.

[Michael Siegal:]

Thank you.

[Operator:]

And Phil Gibbs with KeyBanc Capital Markets will have our next question.

[Phil Gibbs:]

Hi guys. I just had a couple housekeeping questions. As far as your effective tax rate for the year, your book tax rate, what are we looking for, something similar to the first quarter?

[Rick Marabito:]

Yes. I would say Phil that it would be – our view right now is that it would be pretty similar.

[Phil Gibbs:]

Okay. As far as interest expense that is largely a function of your debt balance, I would assume, but something along a 5%, 6% interest rate?

[Rick Marabito:]

Right. So if you use 5% to 6% on the rate and then we talked about taking our debt balance down significantly, and we already gave you the number where it is at the end of April. So…

[Phil Gibbs:]

Okay. And so is there any help you could give us on the first quarter cash from operations?

[Rick Marabito:]

You know we haven't disclosed that number yet. That will be forthcoming in a couple of days when we filed our 10-Q.

[Phil Gibbs:]

Okay. And on the volume side into 2Q, given that there has been looks like incremental weakness into March and maybe kind of volumes are hanging in or decelerating at a slower pace into April, what should we look for as far as volume momentum into the second quarter, kind of let's say on an absolute basis relative to the first quarter?

[Michael Siegal:]

Yes we saw, I think as David indicated in his earlier remark, we anticipated obviously not a good January, that took place. We anticipated a better February, that took place. We anticipated a better March, that did not take place. In fact as David indicated, we saw a degradation in volumes in March that really caught us by surprise relative to the information that we were given by our customers, and their build schedules as anticipated. Right now, as David indicated, the rate of decline is slowing. We're starting to see some marginal pickup but as we were surprised in March, we can be surprised again. But I would tell you we are not seeing significant degradation in the volumes nor are we seeing any kind of material pick up either. So I would tell you relatively flat.

[Phil Gibbs:]

On the price – that is helpful, on the pricing front, I mean are we still seeing prices implied realized prices falling into the second quarter, still looking for bottom?

[David Wolfort:]

Phil, this is David. I think the rate of decline again follows the rate of that line of transactional business and it is shrinking. I think that the cited reports are lagging a little bit, but we are seeing the bulwark of reductions is there, another $20 a ton, maybe. But again there is a number of issues, a number of large issues and the confluence of those issues are continued inventory reduction at the service center levels and of course month over month, we continue to see that. That of course shrinks at some point in time and of course still more production has been reduced dramatically. And so once you do that, quite frankly, pricing is leveling off. I would tell you from its April level which were down a little better over from March.

[Michael Siegal:]

I mean it is two things which hasn't been said. Obviously it is a fight for cash, it is not necessarily just a fight for the order, so (inaudible) is going to drive the marketplace. And some as the banks have taken the credit and the asset quality has deteriorated, the value, who is being squeezed the most next is really the determining factor. As you look at the MSCI data in terms of inventory and on order inventory, we are expecting obviously with what we have seen being not ordered, we're going to see a lot less of the volume being dumped into the marketplace, but there's still a lot of pressure on people to generate cash by the banks.

[Phil Gibbs:]

Okay, thanks guys.

[Operator:]

And we will move on to Tim Hayes with Davenport & Company.

[Tim Hayes:]

Hi, good morning.

[Michael Siegal:]

Hi, Tim.

[Tim Hayes:]

Just one question, could you repeat what you said about the outlook for operating income? I just missed that.

[Rick Marabito:]

We didn't give any outlook on operating income, Tim.

[Tim Hayes:]

I thought I heard something, operating loss is expected in the upcoming quarter or quarters, but did I mishear that?

[Rick Marabito:]

No. I mean I think that was in Michael's prepared comments when we were talking about the market deterioration continuing, but we didn't give any guidance.

[Tim Hayes:]

Okay. All right, very good, thanks.

[Operator:]

And next, we will move to Fritz von Carp with Sage Asset Management.

[Michael Siegal:]

Hi, Fritz.

[Fritz von Carp:]

Hi. I was wondering could you give me some color this weakness you have seen or opening of the general conditions for plate versus thinner grades? I mean I was guessing that maybe because of your comments on the OE customers leading the weakness, I thought that might be hurting plate more than the cold rolled or whatever, but could you help?

[Michael Siegal:]

I mean plate is a two faceted business right. There is the spot market selling rectangles, which we have historically have been in since 1954, and then it is obviously what we migrated to, which is in the pieces and parts businesses, and we're geared for selling the pieces parts more than we are for the rectangles. So as we see the degradation of the pieces parts business, and see some limited production in that area, we are forced to then cut back into the rectangle business, which from our own perspective, is obviously something that products are a less, and we have be selling it for the last seven years. So that is the margin compression that is occurring. And I hope that answers the question, Fritz.

[Fritz von Carp:]

Okay. And how much of your – I understand that there's this big difference between a value added part and a rectangular plate, but how much of your business volume do you think ballpark originates as a piece of plate as opposed to originates as a hot rolled or cold rolled coil?

[Michael Siegal:]

In the presentation – give me one second, Fritz – we show on the presentation that tons of plate are roughly let us call it 16.2% of our actual tonnage versus 50% of hot rolled, 11% cold rolled, 12% tooling.

[Fritz von Carp:]

Okay. And would you say that the customers that you're seeing, the sort of the exceptional weakness that surprised you that you were talking about, is it fair to say those are in heavy equipment type end markets, or could you give me some general characterization sector wise where you are seeing this exceptional weakness?

[Michael Siegal:]

That is a market, highly engineered discrete products, which involve construction equipment and construction machinery as you depicted, also mining. That is another aspect. So literally any piece of equipment that you see that can be leased from the large leasing companies is the equipment that we're seeing being affected.

[Fritz von Carp:]

Thank you very much.

[Michael Siegal:]

Thanks Fritz.

[Operator:]

And next, we will move to Nat Kellogg with Next Generation Equity.

[Nat Kellogg:]

Good morning guys. Two questions, I know obviously if we look at the utilization rates and all the stuff, prices have obviously come down, but they seem to have been trying to be relatively disciplined in this environment, I'm just sort of curious of what you guys are seeing at the service center level with some of your competitors and how that environment – I mean it sounds like from what you are saying, it is a pretty competitive environment to the point maybe even where some guys are getting a little sloppy? I mean is that what you guys are seeing, or has it been relatively disciplined despite the fact obviously it is very difficult environment?

[Michael Siegal:]

It is very competitive out there.

[Nat Kellogg:]

And then on collections and customers, I realize your big customers are probably okay, but how has collections been for some of the smaller guys?

[Rick Marabito:]

You know, Nat, it is Rick. So far it has been pretty good. I mean we, as I commented, our receivable base is still strong. Our DSOs in the first quarter were under 40 days, which historically that is a very strong number for us. And today like you said most of our big customers are in a strong financial position. They are just not taking as much steel. So as we sit here today, our receivable is in pretty good shape. Obviously we do have about 8% or 9% of our sales goes into the automotive marketplace but so far so good.

[Nat Kellogg:]

And just on auto shut down and possibly another shut down this summer, am I correct in thinking that a lot of that tooling revenue typically has been focused on the auto or is that not right?

[Rick Marabito:]

Predominantly, that is correct.

[Nat Kellogg:]

Okay. So that might be something we could see come down a little bit in the second and third quarter if this auto shutdown happens as people said?

[David Wolfort:]

Nat, we budget for that. It is not atypical that automotive goes down in July; this is extended, subject to review obviously from the automotive side of the equation. But again about half of our tool processing goes to tool related businesses – auto related.

[Nat Kellogg:]

Okay great. That is helpful. All right. Thanks very much guys. It is all I have got.

[David Wolfort:]

Excellent.

[Operator:]

And at this time there are no further questions. I would like to turn the call back over to the speaker for any additional or closing remarks.

[Michael Siegal:]

Thank you, operator. As a reminder, it is our policy not to provide forward-looking earnings estimates for the upcoming quarter or year or not to endorse any analyst sales or earnings estimates. We anticipate releasing our second quarter 2009 earnings around July 30. And this concludes our call and we thank you for your questions and your interest in Olympic Steel. Thank you all.

[Operator:]

And that will conclude today's conference. Thank you for your participation.