Olympic Steel, Inc.
Q4 2011 Earnings Call Transcript
Published:
- Operator:
- Good day ladies and gentlemen and welcome to the Olympic Steel Incorporated fourth quarter and yearend 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.
- Michael Siegal:
- Good morning and welcome to our call. On the call with me this morning is David Wolfort, President and Chief Operating Officer; and Rick Marabito, our Chief Financial Officer 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 that we do not undertake to update or that may not reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Important assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those set forth in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including our 2011 Form 10-K, which we anticipate filed 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 better depict from our overall flat rolled performance in 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 from the fourth quarter of 2010. Fourth quarter of 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’re not including Chicago Tube and Iron’s volume in our tons-sold report. Total flat rolled tons sold increased by 15.3% 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 or $2.1 million or $0.20 per diluted share for 2010. Our 2010 fourth quarter financial results included two non-recurring items that reduce 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 $0.01 a share in the 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 infrastructure roll outs and facility startups. Our largest and most exciting project of 2011 was a successful startup of our third temper mill located in Gary, Indiana. The temper mill became operational in December 2011 and has about 150,000 tons of incremental capacity. Now as we like to say open for business in 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. 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 capability of customers and adding to our product portfolio were part of our accomplishments quite frankly. And our balance sheet remained strong with our new five year $335 million credit facility that was put into place on July 1, 2011 it provides us with a strong foundation for continued growth and the value creation. Also well, we previously announced earlier that Olympic Steel’s Board of Directors approve a regular quarterly cash dividend $0.02 per share to be paid on March 15, 2012 to shareholders of record March 1, 2012. And I will now turn the call over to Rick.
- Rick Marabito:
- 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 in a little more detail on the non-recurring 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 items on our income statement and it’s shown below operating income. The charge resulted in a $0.05 negative impact on fourth quarter and in full year EPS. And the impairment relates to the write-down of ideal real estate to its current appraised value. The real estate is owned by our OLP joint venture company, which seized operating back in 2006. Next is part of purchase price accounting the company standards required us to write-up certain CTI inventory to its fair market value as defined in 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 it’s finally our 2011 consolidated effective income tax rate was unusually low this year as 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 have favorable impact of approximately $0.17 per share in the third quarter. So in summary in these 2011 charges resulted in the following EPS impacts by quarter. So second quarter negative impact of $0.05, 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 worth while going through those as we did have some unusual items this year and it did impact quarter-to-quarter. In addition to the non-recurring 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 are startup costs and expenses and losses were occurred 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 adjustments in the second half of 2011 since the acquisition of CTI because prices in 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 Olympics Steel hold 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 as we provide in our earnings release and in our Form 10-K and MD&A and foot notes and as David, Michael said our 10-K were 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 it 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 and 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 leasing, 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 inventory strategically turns 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 roll receivable DSO totaled 42 days, pipe and tube DSOs are under 40 days and 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 a majority of the debt balance relates to the $149 million of net cash borrowed to effectuate the CTI purchase on July 1. And finally our shareholder’s equity per share increased to $26.28 at year end. And I will now turn the call over to David.
- David Wolfort:
- Thank you, Rick and good morning to everyone. We accomplished a great deal in 2011 and we are proud of our achievements last year. We completed the transformational acquisition of Chicago Tube and Iron on July 1, 2011 as both Mike and Rick have remarked and we welcome the 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 and 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 and what is normally the seasonal time of price increases. So in 2012, is starting off as a non-traditional year in terms of seasonal pricing strength. At Olympic we purposely increased our inventory to higher levels than normal to start the current year as we favorably purchased 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 for 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 sales. Our strategy has been to invest in Greenfield initiatives during the market downturn of the past few years, when facilities, equipment and people are 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 subjective to a drop in nickel surcharges in last quarter and also our growing contract business had associated drop in the trailing indexes that are associated with the pricing of this growing marketplace for us the contracts 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 puts 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 initiative in various stages of completion and we look forward to their favorable contribution to our sales and earnings results of, 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 for the acquisition of Chicago Tube and Iron on July 1, 2011 is 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 cost while better servicing customers. This nearly $30 million project provides over 150,000 tons of capacity and what 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 it’s 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 they have 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 in 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 McNeeley, in addition to being President of Chicago Tube and Iron was added to our Board of Directors in 2011, his strategic thinking and experience and education and governance are a welcome benefit. This concludes our formal comments and we will now open the call to your questions.
- Operator:
- (Operator Instructions) and our first question comes from (Inaudible) from Steel Market. Your line is open.
- Unidentified Participant:
- Hey guys good morning.
- Michael Siegal:
- Good morning.
- Unidentified Participant:
- I guess can you break out your tons sold for just the fourth quarter for me and then I have a few others as well.
- Rick Marabito:
- Sure, I will take that one Mike. So Nate, our fourth quarter tons sold and as you know and we’ve commented we the tons sold reporting is for the flat roll group. So there is no ton 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.
- Unidentified Participant:
- And how much of that was direct tons?
- Rick Marabito:
- We were 243,000 direct versus 231,000 direct last year.
- Unidentified Participant:
- Okay, and can you, you said that the startup costs in the fourth quarter were $775,000 correct?
- Rick Marabito:
- Yes.
- Michael Siegal:
- Yes.
- Unidentified Participant:
- And what are those going to continue into 1Q and how do you see those moving forward?
- Rick Marabito:
- I will take that Michael.
- Michael Siegal:
- Yeah, go ahead Rick.
- Rick Marabito:
- Yeah, we 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 it David commented most of the startup costs so a big chunk of the fourth quarter startup cost 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 are 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 are going to have similar type expenses in Streetsboro probable a little bit more than we had in fourth quarter. And so in summary what I would tell you is that we will 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.
- Unidentified Participant:
- Okay and then I mean, is that in the warehouse and processing line?
- Rick Marabito:
- Well, it’s a combination of yes there is some in warehouse and processing as we hire, there is some in administrative costs in terms of getting the facility 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.
- Unidentified Participant:
- Okay, can I ask one more?
- Michael Siegal:
- Sure.
- Rick Marabito:
- Sure.
- Unidentified Participant:
- Can you just kind of remind us of your spot the contact mix and its debt and if there is a big change between sheet and plate?
- Michael Siegal:
- Well, I would say we have a growing emphasis for more contract business. Historically we were probably in a 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 allowed the contracts are tied to. And I’m not sure Nate what your specific question is about plate.
- Unidentified Participant:
- No, I would just ask if there is I guess a meaningful variance between sheets exploited.
- Michael Siegal:
- No, it’s like the heavy highly engineered products seem to be having more momentum a lot of the flat roll products but you know that’s just indicative of the specific demand at the moment.
- Unidentified Participant:
- Okay, thank you guys very much.
- Operator:
- Thank you. Our next question comes from Martin Englert from Jefferies & Co. Your line is open.
- Martin Englert:
- Good morning everyone.
- Michael Siegal:
- Good morning.
- Rick Marabito:
- Good morning.
- Martin Englert:
- 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 to going forward should this drop back down to where it was 14.5% to 15.5% of sales or is it going to remain roughly around that 53?
- Rick Marabito:
- Well, 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 are 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 impacts the percentage not so much the true dollars. So as we look at first quarter I would tell you our anticipation is, 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 the fourth quarter.
- Martin Englert:
- Okay, but I know you mentioned that a large portion of the startup cost 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%?
- Rick Marabito:
- It was over half.
- Martin Englert:
- Over half. Okay. Actually there if I could ask one more question as far as the demand did you mention that overall the heavy equipment automotive looks relatively good as effective to grow year-over-year. Any signs of weakness because of the economic weakness and slowdown over in Europe and Asia as well as part of the export demand for that equipment.
- David Wolfort:
- Martin, I will take that and David here and the answer 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 based 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.
- Martin Englert:
- Excellent, thank you very much.
- Michael Siegal:
- Thank you.
- Operator:
- Thank you. Our next question comes from Ed Marshall from Sidoti & Company. Your line is open.
- Ed Marshall:
- Hey guys, good morning.
- Michael Siegal:
- Hi Ed.
- Ed Marshall:
- So, 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 roll. But that obviously supports why you went after this particular business but now you’ve had it for six months I mean how do you see this shaping up, do you even find if it’s performing better than you thought it would. You know it’s kind of can you add some additional comments surrounding that CTI acquisition?
- Michael Siegal:
- Well, let me comment first at and maybe David wants to comment afterwards. But yes it is performing every bit to our expectation and I think as David indicated this was an exceedingly well managed organization that restore 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 costs, 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.
- David Wolfort:
- Hi Ed, David here. 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 unquoted. So when you have a highest of expectations you are rarely surprised or disappointed and CTI’s case led by Don McNeeley we were surprised how strong this company has allowed us to further penetrate a marketplace. So 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 to the welcome 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.
- Ed Marshall:
- What kind of synergies if I may have you identified in that acquisition again you’ve seen it for six months. And when you speak of synergies are you talking about revenue synergies because of you know cross selling of the product lines or you are talking more and you did mention cost synergies, so I’m assuming there is some of those as well.
- David Wolfort:
- Well number one Ed you are 100% right and that is revenue synergies and the combined entities even though we only have half the 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 much, 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.
- Ed Marshall:
- If I may can you quantify some of the costs or I’m sensing that you don’t want to do that at this time.
- Michael Siegal:
- No, we do not.
- Ed Marshall:
- 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 are seeing some pricing pressures but could you kind of give us any kind of sense of direction of what you mix?
- David Wolfort:
- 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 your throughout the year and we see further growth in ’12. Remember that the biggest part of our capital expenditures beyond, which was $39 million was our third temper mill and as I remarked, as I remarked earlier it’s coming on quicker than the two previous temper mills its 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 will 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 our 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 are serving businesses that are continuing to recover at double digit rates off of the recession of late ’08 and ’09.
- Ed Marshall:
- So if I can sum up with I think you are saying about the Gary facility that’s underutilized right now as you are starting to fill out the capacity shipping capacity around. I get the sense that operating expense that you incurred to startup the cost of yields incurred in the fourth quarter and will continue to incur say through the first, through 2012 will minimize as you start to fill out that capacity. Do you assume by the end of the year you will be close to a run rate capacity of coming close to filling that or there you are going to see still some decrement there?
- David Wolfort:
- No, I think you are right. I think we will continue to push as fast as we can but I would again as coming up faster and the short answer is yes we will see it at it’s reasonable capacity certainly towards the end of the year incrementally growing quarter-over-quarter.
- Michael Siegal:
- The other aspect of it is it’s got a people issue here too. So obviously when you start facility bring out one shift you don’t bring out a second shift. So, some of this does require a certain amount of training.
- Ed Marshall:
- Right.
- Michael Siegal:
- So as David indicated we’ve seen a very fast ramp well faster than the other two temper mills. We are now beginning to prepare to start the training for second shift already into the second quarter. So we will run two full shifts by you know the third quarter we will be thrilled.
- Ed Marshall:
- Excellent. Guys, this is great news. Thanks again.
- Michael Siegal:
- Thank you.
- Operator:
- Thank you. Our next question comes from Sandeep SM from Goldman Sachs. Your line is open.
- Sandeep SM:
- Hey guys, good morning.
- Michael Siegal:
- Good morning Sandeep.
- Sandeep SM:
- We have recently seen some shift by the E&D companies from oil, natural gas to oil side. Can you just give a mix of CTI what kind of exposure do you have for each of these sectors.
- Michael Siegal:
- They really don’t have a bigger exposure to the OCTG market at all. I would state nothing but it’s really demonisms to their overall performance. We would be looking at Sandeep as we move forward and look at the growth opportunities with CTI in a scenario of exploration but it’s really is not impacting the development.
- Sandeep SM:
- So, what kind of growth did you see in that sector in 2012 and for CTI?
- David Wolfort:
- Well Sandeep CTI has been an 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 20 some, 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 the (Inaudible) laser, which is a big capital expenditure and we hope to, hope we will expand that market penetration in the existing markets that we are in now. Without putting too much pressure on them as listening to this we certainly would anticipate at least 10% growth on the CTI side of the equation.
- Sandeep SM:
- Okay, thanks. And the next question is what is your expectations regarding inboard. You’ve seen the U.S. prices come off a bit and you have seen global prices it depends on where you look at. But Europe at least has mode of return do you expect inboards to keep coming in for next couple of months or do you expect that to slow down in the coming months?
- David Wolfort:
- No Sandeep, I think you written about it I think most have commented on it. There is the highest price the steel marketplaces here in the U.S. the dollar is strong other currencies obviously are weaker and so we see more imports now and more offers now than we saw last year. Well 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 is more demand too.
- Sandeep SM:
- Okay and if I could ask one more question when I think about your I mean the flat product side, can we expect another double digit volume growth in 2012 or do you think that it will maybe delayed a bit?
- David Wolfort:
- Well I will tell you that’s strong but we are gearing towards that. And I don’t want to specifically give you away percentage of growth in flat roll that we are going to have in 2012 but I would tell you as I commented earlier 2011 saw a growth of 16% and 2012 is stronger than ’11. So we are 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 significant amount of more, significantly more tonnage moving through our facilities. So, without getting specific on percentages a very close view to what’s your insinuative.
- Michael Siegal:
- Sandeep, we got lot of new capacity that we didn’t have we it was our expectation that it will run very strong.
- Sandeep SM:
- Perfect, thanks a lot.
- Operator:
- Thank you. Our next question comes from Aldo Mazzaferro from Macquarie. Your line is open.
- Aldo Mazzaferro:
- Hi, Michael and David. How are you?
- Michael Siegal:
- Good.
- Aldo Mazzaferro:
- Good, we are going to look specifically at the temper mill and try to the Gary temper mill and try to gauge the market demand there. What sectors we should be mostly looking at that specific piece of equipment.
- Michael Siegal:
- Certain 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 say we are servicing the agricultural the mining industries and obviously the heavy machinery industries. There is no new market for this, this is just meeting the customer demand that we have that we couldn’t fulfill with internal processes.
- Aldo Mazzaferro:
- I see, so a separate question on the you guys quantified your startup cost 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 is that, that’s not included in those startup costs I would assume. It’s not can you give us a feeling of what magnitude those might have been.
- David Wolfort:
- Well Aldo those are my remarks are commercial remarks that’s the compression on the March and then we saw in some of these new geographies there. As you would expect competitors to protect their, protect return. And so as we penetrated some of these new marketplaces our traditional mark up was under a little bit of pressure first is our normal established marketplace where we are a known entity.
- Aldo Mazzaferro:
- Great.
- David Wolfort:
- We can quantify it.
- Aldo Mazzaferro:
- Right, right. Okay. Just one more I had one, could you describe a little more about what exactly you are doing in Mexico in terms of customers down there in processes and services that you are putting out?
- David Wolfort:
- Well 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 customers and again as Michael indicated related 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 are giving them that opportunity to avail themselves of just in time delivery and lean manufacturing. And we are servicing on them in the same way as we do up north so very easy for us to migrate down there with one of our strong customers.
- Aldo Mazzaferro:
- Great, can you say what sector that customer is in machinery again?
- David Wolfort:
- Yes, construction equipment and mining equipment.
- Aldo Mazzaferro:
- Right, alright. Thank you.
- David Wolfort:
- Thank you.
- Operator:
- Thank you. Our next question comes from Tim Hayes from Davenport & Company. Your line is open.
- Tim Hayes:
- Hi good morning.
- David Wolfort:
- Hi Tim.
- Tim Hayes:
- Two questions on your contract business that historically was 60% going about two thirds. Just what is the average line to reset pricing on those contracts?
- Michael Siegal:
- Yeah a month to three months.
- Tim Hayes:
- Okay and then any status update on the option about the fourth, putting the fourth temper mill in the Southeast.
- David Wolfort:
- The answer is that, the answer is we have to absorb what we’ve undertaken. I would tell you we obviously have a very significant amount of capital investment and we will irrespective of the fourth temper mill. Obviously we would like to see some of the suggestion and profitability come to us from the investments. Like the fourth temper mill is under act of exploration but there is nothing to announce.
- Tim Hayes:
- Thank you.
- Operator:
- Thank you. Our next question comes from Mark Parr from KeyBanc Capital. Your line is open.
- Jason Brocious:
- Hey, good morning guys, this is Jason Brocious for Mark. How are you?
- David Wolfort:
- Good, how are you? I was just considering Mark. Okay.
- Jason Brocious:
- I was just wondering the 29.9 gross margins you gave for CTI does that include the inventory mark up impact.
- Rick Marabito:
- Yeah.
- Jason Brocious:
- Okay and you guys had talked in the past that OCTG might be a viable strategy for CTI in the future. I mean is that something you are still looking into.
- David Wolfort:
- Yes.
- Jason Brocious:
- What would the timeframe be on that and what would be involved in switching from the commercial boiler stuff to the CTI focus to an OCTG focus.
- Michael Siegal:
- Well I don’t know if we would lose the one focus or the other but let’s just say from an add to perspective adjacent OCTG is a difficult market to enter without the inquisitive so I would just tell you that that’s obviously commented the acquisition marketplace is looking outside after being robust.
- David Wolfort:
- 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 though it all be accretive as Michael just indicated.
- Jason Brocious:
- Okay, alright. And I know that going after the large OEMs been a focus over the last few years. I mean as 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?
- Michael Siegal:
- Yeah, you know there is no small contracts shall we say so. We’ve migrated almost two thirds of the business to contractor it’s pretty much also you wanted to customers.
- Jason Brocious:
- Okay, alright. Well, thanks guys.
- Operator:
- Thank you. I show no further questions in the queue. I would like to turn the conference back to Mr. Michael Siegal for closing remarks.
- Michael Siegal:
- Thank you, well we continue to operate for our shareholders and stake holders and around a set of explicit core values with focus toward our mission. We are 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 higher than trending 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 Americas future we have expanded aggressively coming out of the recession and we are just beginning to see the possibilities of these opportunities present themselves. And as a reminder it is not my policy to provide forward-looking earnings estimate for the upcoming quarter or the year or to endorse any analyst sales or adjustments. So we anticipate releasing our first quarter 2012 earnings on or around May 3, 2012. So this concludes our call and we really thank all of you for your participation and support for Olympic Steel. Thank you.
- Operator:
- 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.
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