Olympic Steel, Inc.
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[Operator:]

Good morning, and welcome to the Olympic Steel First Quarter 2013 Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. 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 the company’s reports on Form 10-K and 10-Q press releases filed with the Securities and Exchange Commission. Today’s live broadcast will be archived and available for reply 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.

[Michael Siegal:]

Thank you, operator. Good morning and I would like to thank all the listeners for their interest in Olympic Steel. On the call with me this morning to review our 2013 first quarter results are David Wolfort, President and Chief Operating Officer; and Rick Marabito, Chief Financial Officer, and welcoming Don McNeeley, the President and Chief Operating Officer of Chicago Tube & Iron who is in Cleveland this week. I will begin with a brief overview of our results and Rick will provide additional details on the financials and David will give an operational update. After that, we will open the call for your questions. We reported this morning that sales and net income recovered from the fourth quarter levels reflecting improved business conditions entering the New Year. First quarter sales of $338 million were 16% higher than the $292 million that we reported in last year’s fourth quarter. However, on a year-over-year basis, steel prices and volumes declined resulting in an 11.5% decrease in sales versus the company’s first quarter record sales last year of $382 million. The decrease was impacted approximately half by price degradation and half by volume declines. This quarter’s net income was $5.2 million or $0.47 per diluted share versus the $6.2 million or $0.57 per diluted share last year. Despite lower volume and declining prices, gross margins improved year-over-year reflecting success in our continued strategies of providing more value-added products and services to our customers. Tubular and pipe products turned in another strong quarter of operating results. Collectively, our new facilities have successfully transitioned from incurring start-up costs to becoming cash flow positive and earning contributors over the past several quarters. These organic investments are poised to make increasingly positive contributions to net income for the balance of this year and beyond. We are extremely proud of our contributions in adding good wage and benefit American manufacturing jobs, improving the lives of individuals and communities. In addition, I would like to point out that we have accomplished these expansions safely on time and under budget in a difficult operating environment. I am very proud of our management team and the various operating individuals for their exceptional efforts in bringing these new facilities to production in a socially responsible fashion. It is also with a great deal of pride for us all, that I acknowledge Esther Potash, who has been with Olympic Steel for 15 years and currently serves as our Chief Information Officer. Last month, Esther was awarded the 2013 CIO of the Year in the public company category by Crain’s Cleveland Business. This award was based on her accomplishments related to Olympic Steel’s companywide IT system implementation and integration and her active community and philanthropic pursuits reflecting Corporate Citizenship that is one of Olympics Steel’s core values. We congratulate her and her entire team for this well deserved recognition. We also announced this morning that our Board of Directors has declared a regular cash dividend of $0.02 per share payable on June 17, 2013 to the holders of record on June 3, 2013. We are delighted to have the Board gathered here in Cleveland today as we are holding our annual shareholders meeting later this morning. With that, I will turn the call over to Rick.

[Rick Marabito:]

Thank you, Michael and good morning everyone. I will review quarter’s financial highlights and then turn the call over to David for his operational review. In this morning’s press release you may have noticed that we started breaking our corporate expenses as a separate line item when reporting our segment level operating income. This was done to enhance our management of the holding company configuration and also to increase transparency into the respective two segments. The expense items reflects corporate overhead that is not directly related to either of the two reporting segments and was formerly allocated to our flat rolled products segment. These enterprise level expenses were flat year-over-year and total just under $2 million in each period. Also disclosed in our release was a pre-tax adjustment to record out of period LIFO income of $1.9 million related to the pipe and tubes segment. Previously unrecognized LIFO income from the fourth quarter of 2012 was recorded in the first quarter as a reduction of cost of goods sold and as an increase to inventory. This resulted in an after tax benefit to diluted earnings per share of $0.11 for the quarter. Volume in the flat rolled segment decreased by 6.3% to 292,000 tons from 311,000 tons in last year’s first quarter. This is slightly better than the 6.6% decline in total industry shipments as reported by the MSCI. Consolidated gross margin including the LIFO adjustment, which the LIFO adjustment expanded our gross margins by 60 basis points, consolidated gross margin totaled 21.3% in 2013’s first quarter versus 19.7% last year. Despite the lower volume and selling prices, we have realized better margins per ton sold in the quarter due to an improved mix of products and value add services and better inventory management. Operating expenses decreased to $62.3 million from $63.1 million in last year’s comparable quarter. However, due to lower sales during the period, our operating income declined to $9.6 million compared with $12.3 million in last year’s first quarter. As previously indicated our pace of capital investments is declining. This year’s CapEx budget of approximately $15 million is projected to be below our annual depreciation of roughly $20 million. During the first quarter of 2013 capital expenditures declined to $1.7 million compared with $8 million last year. Depreciation and amortization was $5.5 million in the quarter compared with $5 million last year. Our effective income tax rate for 2013’s first quarter was 34.7% that compares to 38.9% last year. This year’s rate was lower due to changes in federal tax laws that went into effect on 1st of the year. Specifically there is a research and development catch up provision which lowered 2013’s first quarter rate by 2.3% and is estimated to lower our annual tax rate by 0.5% during the entire year. We anticipate that our effective income tax rate will increase to 37% to 39% for the full year of 2013. Turning to the balance sheet inventory totaled $275 million at quarter end, down $15 million or 5% from $290 million at year end. Inventory turnover rates improved in the first quarter of 2013. The flat products turnover was 4.2 times, up from just under four turns in 2012. We still have room for improvement and our objective remains five inventory turns. We continue to make further reductions in inventory during the second quarter, here this current quarter reflecting – reflective of short mill lead times in current market conditions. The credit quality of our receivables remains very healthy with consolidated DSOs averaging less than 40 days. Flat-rolled DSO totaled 41.5 days and tubular and pipe DSOs were 30.3 days. We continue to serve a diversified mix of industries and manufactures mitigating our sector risk. We paid down another $5 million of debt leaving us with the total of $237 million at March 31st. Since our borrowings peaked in the second quarter of last year, we have reduced debt by $73 million or 24%. We also have $89 million available under our asset-based loan that is up from $63 million at year end 2012. In addition to further solidifying our balance sheet, the lower debt balance contributed to a 19% decline in interest expense for the quarter compared to last year. Our effective borrowing rate in the first quarter was 2.9%, which was below the 3.5% rate in 2012. And finally at the end of the quarter, shareholders’ equity increased to $27.06 per share from $26.54 per share at December 31st. Now, I’ll turn the call over to David for the operating highlights.

[David Wolfort:]

Thank you, Rick. I would like to start with one of our key areas of strategic growth and that is specialty metals. We continued to expand our domestic market share of stainless steel according to the MSCI additionally we are expanding our participation in aluminum. On the stainless steel side, this is a sector where we are concentrating our efforts as we further penetrate manufacturers in the food service industry and commercial white goods. Next our carbon flat rolled and plate market share remained stable and our first quarter total processing volumes were up by 5000 tons or 26% versus last year. This was due to strength in the automotive sector on a year-over-year basis and an increase in sales from our New Temper Mill in Gary, Indiana. During the quarter, progress continued with our commercial sales integration. We are now offering tubular and pipe products to legacy flat product customers and likewise introducing our flat products and capabilities to Chicago Tube & Iron’s customer base. Stocking of tubular and pipe products is underway at our Mount Sterling, Kentucky facilities and we are now stocking tubular and pipe products at our location in Monterrey, Mexico. In addition, we are extending the tubular and pipe distribution network to our Cleveland market where warehouse preparations are nearing completion and stocking should be completed by early July. We have a couple of items not within our control. One area that is not within our control is the price of steel. Steel prices hovered in the low $600 per ton range in the first quarter of this year, while this was up from the end of 2012, it was about $100 of ton below comparable year ago levels. By diversifying our value-added services, product offerings and geographies, we are working to reduce the impact of commodity price fluctuations on our financial results. Our objective is to be able to manage profitably at any point in the pricing cycle. Results were also negatively impacted in the first quarter by production curtailment at our Cleveland, Temper Mill. The mill suffered damage in mid July, sorry, at January and was partially taken out of production reducing capacity by about 50%. As a result, we sustained higher transportation and incremental cost associated with fulfilling orders from our other facilities. A majority of these additional expenses have been offset by business interruption insurance as we expect the Temper Mill to be back to normal production in May and indeed we are back to normal production as we completed those repairs in late April. It is worth noting that our ability to satisfy customer requirements without any interruption during an unscheduled outage such as this is a genuine competitive advantage for Olympic Steel. The operating teams at our Temper Mill in Iowa and our new Temper Mill in Gary, Indiana immediately stepped up with production and our logistical teams did not miss a beat. With the help of a proprietary truck fleet, deliveries remained on schedule reflecting our extraordinary operating flexibility and commitment to customer service. I’d like to conclude by stating that our growth and expansion projects have been thoughtfully designed to provide lasting benefits to our customers, employees, communities, and shareholders. While we are strategically evolving into more downstream pursuits, including fabrication and parts, specialty metals, and other niche marketplaces being a socially responsible firm will always remain part of Olympic Steel’s cultural fabric. With that, we will now open the call to your questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Luke Folta with Jefferies. Go ahead please.

[Luke Folta:]

Good morning, gentlemen.

[Michael Siegal:]

Good morning, Luke.

[Luke Folta:]

First question I had was just regarding the gross margin in the quarter. Firstly, can you breakout what the segment gross margin and SG&A was for the two? But the question I had was if I – even if I pullout the LIFO credit that you had in the quarter, it seems like your gross margin is about 100 basis points better than what we saw last year. And we didn’t get a lot of the price improvement in the first quarter. So, I guess I am just trying to get a sense of what really was the driver of that? Was there any inventory effect there or do they have to do with other things going on your business?

[Michael Siegal:]

Lot’s of questions.

[Rick Marabito:]

Yeah Luke, it’s Rick. The first question is you wanted the breakout on the segments. I have that. I will find it here, but we will be filing our 10-Q later today and that will be inclusive there. To answer your questions, I think Michael and David both hit in the call, it had the lot to do with our strategy and continuing to move into some of the value-add in higher margin areas of business. So, whether it be the contribution of CTI or the value add on the flat-roll side, that’s what you are seeing.

[Luke Folta:]

Okay, but it wasn’t due to low cost inventory that you were able to buy in the fourth quarter and you got some advantage in the first quarter?

[David Wolfort:]

Luke, we always appropriately bought at any stage of the year. But as Rick well said, this is David here. As Rick well said, this is the confluence of a number of our key strategies as we continue to evolve and grow our market share of value-added. Additionally as we do some cross-selling with Chicago Tube & Iron and Olympic Steel in our reciprocal customer basis, and then of course, our specialty metals is continues to increase at a rapid pace.

[Luke Folta:]

Okay, alright. And have you seen any improvement just in general flat-rolled distribution margins over the course of the last quarter?

[Rick Marabito:]

Margins as opposed to – we are in a difficult pricing environment, Luke, there is no question. And the expectation of almost the entire universe is that the prices are more likely to go down than up. So, I would tell you that is not necessarily a positive aspect of margin improvement. But again, we are going to continue to focus on the things that we are doing well to mitigate that margin degradation by providing more value-added services and deploy more of our efforts into the pipe and tube and into the white goods.

[Luke Folta:]

Okay, alright. And then I guess just on the LIFO, I think Rick you touched on this and I might have missed it, but what exactly is the out of period LIFO adjustment?

[Rick Marabito:]

Yeah. So, quite simply, so the amount was $1.9 million. Technically under the accounting rules, we should have recorded that in the fourth quarter of last year. It was deemed not material to our results. We recorded it in the first quarter of this year. So, I think you know a portion of CTI’s pipe and tube inventory is on LIFO. We have not had any LIFO impacts since this first quarter since the acquisition. So, the out-of-period piece was it should have been recorded in the fourth quarter last year it was recorded in the first quarter this year.

[Luke Folta:]

Okay, alright. And then just one last one regarding the Gary, Temper Mill can you give us some sense of kind of how utilizations ramping there and I guess how is it going on placing that tonnage as you ramp the facility up?

[David Wolfort:]

Thank you, Luke. David here again it’s going quite well complete 180 degrees from quarter-to-quarter from first quarter of ’12 to first quarter of ’13. Of course, in the first quarter of ’12 we are in a start up phase having just commissioned that Temper Mill in December of ’11 and running at about 80%-85% of capacity we’ve expanded it second shift fortuitously that mill was up and running at full – at almost full speed here in January as we required its services to help bridge the deficit with our Cleveland Temper Mill repair issue. So, it’s about 80%, 85% right now.

[Luke Folta:]

Okay, alright guys, well congrats on the results. Thank you.

[David Wolfort:]

Thank you.

[Operator:]

Your next question is from Aldo Mazzaferro with Macquarie. Go ahead.

[Aldo Mazzaferro:]

Yes, hi, good morning, can you hear me, alright?

[Michael Siegal:]

That’s fine, Aldo. Thank you.

[Aldo Mazzaferro:]

Good, I’m – I just had a two quick questions, I’m looking at your comments that you made, I think Rick made a comment that you are working to reduce your inventory in the second quarter. Would that be reflective of your view of the market pricing for example?

[David Wolfort:]

Of course, it would Aldo. It is reflective of our view of the market. We’ve reduced inventory on a quarter-over-quarter basis, fourth quarter through first quarter and atypically this is atypical for us but we are taking the inventory down in the second quarter and we’ve already been successful in doing so.

[Aldo Mazzaferro:]

So, Dave, do you think your shipping volume would be lower in the second quarter than the first?

[David Wolfort:]

That I don’t know, that I don’t know, right now, we are in pretty good shape. But we see shorter lead times Aldo, so the mills are able to respond to our needs quicker. We’re little bit uncertain about the prices going into the summer months. So, we want to keep this smaller inventory.

[Aldo Mazzaferro:]

Right and then the final one I had is probably for Rick, could you explain the shelf filing that you did, Rick.

[Rick Marabito:]

Sure, you may or may not recall three years ago, we did a universal shelf, which allows for over three year period pre-registration for debt or equity public offerings. The term of that previous shelf just expired and we just renewed it. So, that’s all that was Aldo, is just a basically a renewal of what we already had in place. And it’s obviously done as a public company to give us maximum flexibility in terms of capital structure.

[Aldo Mazzaferro:]

Great. So, we do - say Mike would you think that this is a climate where it becomes more favorable to do acquisitions of well-financed companies like yourselves?

[Michael Siegal:]

It’s always the question of willing buyer and willing seller and so as a willing buyer Aldo, I can tell you willing seller means somebody who is willing to sell at an appropriate price. So, we – I don’t know that the market changes drastically in terms of the expectation of the seller, in terms of the value that they want for their business. So, we don’t know, I mean, the answer is we remain active in the pursuit as a willing buyer and really 50% of the equation.

[Aldo Mazzaferro:]

Okay, thanks very much, Mike. I’ll turn it over.

[Michael Siegal:]

I like the parade noise in the background, Aldo.

[Operator:]

Our next question is from Chris Haberlin with Davenport. Go ahead please.

[Chris Haberlin:]

Hi, good morning.

[Michael Siegal:]

Good morning, Chris.

[Chris Haberlin:]

You talked about taking inventories down. Can you give us any idea I mean it looks like you generated about $50 million in cash from inventories in the first quarter. Is that a good kind of run rate going forward through the end of the year? Would you expect that pace to pickup or slowdown?

[Rick Marabito:]

I’d expect us to reduce some more inventory, so a number of – Chris, a number of reasons for that. One, again as I said remark to Aldo, shorter lead times, price sensitivity and then as we continue to make room in our current facilities for some of our other products. We are able to reallocate tonnage especially in our six new facilities and some of our legacy facilities as we bring Chicago Tube & Iron’s product to different marketplaces.

[Michael Siegal:]

Yeah, let me just kind of, Chris its Mike. Rick’s comment in his notes, were our present inventory turnover is about 4.2, we target 5. So, irrespective of the market we would expect to reduce inventory.

[Rick Marabito:]

Right. And then the last thing I did add Chris, its Rick is, we have talked last quarter on this call about going from four to five inventory turns and it was likely take us through the entire calendar year to get there. So, obviously in the first quarter we made good progress, we just talked about the second quarter where we expect to make like progress and then the back half of the year obviously as Michael said we’d like to hit our goal and it will depend on what the market and volumes and lead times are doing as well. But certainly for the second quarter we’re on target to do likewise what we did in the first quarter.

[Chris Haberlin:]

Okay, thanks, it’s helpful. And then in terms of end markets there are some indexes that are out there that suggested maybe manufacturing activity is starting to slow and listening to Caterpillar and so forth are you looking about destocking. What are you all seeing from your customer base and I guess in light of short lead times at the mills are you seeing slowing activity there?

[David Wolfort:]

Chris we see some slowing activity and some customers particularly as they relate to mining you get Caterpillar. And then we have some of our customer base that are really robust in non-residential construction and construction marketplaces that supply equipment to both of those. And so we have really an unbalanced approach there, but some of our customers are significantly busier than we expected and some have curtailed their operations particularly as they relate to mining.

[Chris Haberlin:]

And you had talked about short lead time at the mills and it’s pretty clear that the markets over supplied. Are you all starting to see any increased discipline from the mills, it might support a recovery in prices or what in your view is it going to take for prices to turnaround here?

[David Wolfort:]

Well, I think Chris, I think it’s just as simple as supply and demand. There is just too much supply globally and that is spilling out around the world its affecting us, it affects steel marketplace whether it’s in raw materials or whether its in finished product coming into this country or squeezing into other countries. We see some of the noise a lot of capacity out there we haven’t even cracked the 80% capacity level here domestically and demand re-forecasted I know about 2.8% growth for this year principally in the second half. So, we’re not any different than anybody else in that regard.

[Michael Siegal:]

Let me just comment your disciplined question. I wish we were more disciplined at Olympic Steels. So it doesn’t reflect well that I should speak about anybody else’s discipline.

[Chris Haberlin:]

Sure that’s fair. And then just last one from me David I think you’ve mentioned on efforts to reduce commodity price impact on the financial results. Is that just about diversifying the product mix, are there any specific steps that you are taking to try to insulate from commodity price movements.

[David Wolfort:]

Chris it’s really all the above it is about our migration to value-added as we continue to add and we have a very – had a very robust capital expenditure program, it’s now been completed. A lot of equipment contour to specific customer basis that we continue to supply that have multiple steps in it that add value at each one of those steps. That doesn’t preclude us from continuing to do business and our traditional business, but it does less in the percentage of that participation as we use our Temper Mills to cut product and then laser it, bend it, weld it, shaft last it, paint it, fabricate it and so forth.

[Chris Haberlin:]

Okay thanks very much. I appreciate your comments. Congrats on the quarter.

[Michael Siegal:]

Thank you.

[David Wolfort:]

Thank you.

[Operator:]

Our next question is from Mark Parr with KeyBanc Capital Markets.

[Jason Brocious:]

Hi this is actually Jason Brocious in for Mark. Good morning guys.

[David Wolfort:]

Hi Jason.

[Michael Siegal:]

Good morning Jason.

[Jason Brocious:]

I was just wondering if you said that the new – your new facility additions were accretive over the last two quarters and I was just wondering if you can give us an idea of how much volume or operating profit they might have added against say 1Q ‘12?

[Rick Marabito:]

Jason, its Rick, we’re not going to breakout profitability by individual operating unit. So, I think over the last four quarters, we have talked about our progress. Obviously, the two biggest startup locations of the six are the specialty metals location in Streetsboro, Ohio and then the Gary, Indiana Temper Mill. David gave you some color around those two. They are performing quite well. David talked about last year Gary being in its initial startup period. So, it was obviously a cost drag item, negative cash flow, and both of those operations are performing well and contributing so…

[Jason Brocious:]

Okay. So, given the new footprint or the expanded footprint you guys have and the products that you are in now, what would you – if we assume that steel pricing was remained flat from here. What kind of gross profit per ton or gross margins would you expect to get out of the flat product segment as it is now?

[David Wolfort:]

I expect them to be consistent with our first quarter. If pricing was consistent I would expect it to be consistent. We have this additional capacity for variety of reasons. One, as we go down the value-added stream, but in addition to that, post-great recession current recovery is that we have added a lot of new accounts to our portfolio of customers as our older customers continue to rekindle their participation. We need the additional space and capacity to be able to bear the way of all this participation and we expect that all that participation to comeback to us and retain the new business that we have. Hence we have another 550,000 square feet under roof and that’s plus Chicago Tube & Iron’s efforts of nearly a million square feet.

[Jason Brocious:]

Okay. And do you guys have any kind of debt reduction target for this year that we could start thinking about is the one with the cash flow you guys anticipate?

[David Wolfort:]

Yeah, what we have talked about is we haven’t given specific guidance on debt nor cash flow, but what we have clearly talked about is the working capital reduction primarily coming from the inventory. So, we covered that a little bit earlier in the call and we obviously year-over-year will look for continued improvements in profitability. So, those will be the two streams. We certainly anticipate that, that to continue to go down as we work through the year.

[Jason Brocious:]

Alright, thank you guys.

[Operator:]

Our next question is from Sal Tharani with Goldman Sachs. Go ahead.

[Sal Tharani:]

Good morning guys.

[Michael Siegal:]

Good morning.

[Sal Tharani:]

Couple of things. You alluded to the software prices obviously that’s not surprising now what’s going on in the marketplace or supply some people complain on imports, but one thing I want to ask you is that starting at least until recently, it seems very strong macro data in the U.S. ISM and other numbers is very strong, but talking to the steel buyers they were all complaining about demand and you obviously didn’t mention much about, you mentioned about the software price which makes sense that we have oversupply, but in terms of demand, what are you seeing aside from the rush to buy steel which was last year more of a restocking, but underlying demand how do you see that?

[Michael Siegal:]

I think as David indicated earlier, Sal, its market-by-market. We have seen defense slowdown a little bit. We have seen as David indicated the mining market slowdown a little bit. We see relatively consistent automotive demand. David talked about increased demand in residential and non-residential construction and the equipment builders accordingly. Obviously, the service center business that we have, which is a spot market remains historically reduced, the lead times remained short at the mills. But by and large, I would tell you from what we have seen in the first quarter and what we have seen so far to-date into the second quarter, the overall demand is not the problem. It just is the anticipation of what demand will be and what the price will be, but the facts are not necessarily reflecting the perception. The reality is it’s probably a little bit better than people think, but it doesn’t look like anybody has got great deal of confidence that it’s sustainable.

[David Wolfort:]

Sal, we have Don McNeeley with us today, which is special for us as we have our Annual Meeting. Don can give you a little bit of color on Chicago Tube & Iron side of the equation.

[Don McNeeley:]

Good morning, gentlemen. We are a little further downstream than the traditional Olympic product, which is why we compliment their product offering so well. Looking forward what we see is what has already been mentioned on the conference first of all, we are seeing a distinct and definite turnaround in the automotive industry. Now, well Chicago Tube & Iron does not directly service the automotive industry that will consume capacity in the industry, which is a leading indicator to some stabilization of pricing down the line. We also see a distinct turn in housing. And with housing comes appliances, the consumption of flat-roll washers, dryers, stoves, refrigerators, those all bode positively for the future. But those are quickly tempered by the significant reduction in the defense industry, which we in fact serve in the mining industry as well. So, I think as the year goes on we are hoping to find some stability. We are not terribly optimistic for price increases, but we are encouraged by the revised upward GDP numbers in the first quarter and with each success of quarter this year, we will get a little smarter hopefully.

[Sal Tharani:]

Thanks. Also the cross-selling you are achieving in between the driven pipe and the flat-rolled division how far you can go there, you think you have achieved most of it or there is lot more room to grow over there?

[David Wolfort:]

Sal, I will take that and Don can further comment on that. We are enormously proud of our effort. We started that effort 30 days after the acquisition of Chicago Tube & Iron we call it, our commercial integration team. We are integrating sales management from both sides, flat-rolled and tubing. And there really is no end insight for us. It has really picked up enormous momentum. We have been able to introduce Chicago Tube & Iron. And tube and iron has been able to introduce Olympic Steel to customers that we could not penetrate independently, and we have secured a great deal of that business. Complementary to that is also our growing participation in Monterrey Mexico, where we are bringing all of our products flat-rolled, tubing, and specialty metals to bear in servicing actually North American customers, but they are really headquartered in the purchasing is done, some of it done here in the U.S., and some was done in Mexico. We are very excited about that. We are excited about integrating Chicago Tube & Iron’s products and process in some of our facilities as I outlined. So, Mount Sterling, Cleveland, and Monterrey and there will be more. Don, you have any?

[Don McNeeley:]

David, I think those are spot on those comments. I have got very little to add other than Chicago Tube & Iron is in a niche product line why we carry it, an outstanding brand in that particular sector. We pretty much run below the radar outside of our particular sector. And by now partnering with Olympic, there is certainly a presence in the volume there that puts us on radars other than our traditional markets. A couple of nutshell anecdotal examples is, we now have tubing, servicing some major accounts down in Mount Sterling. We would never have had the critical mass to opening the Mount Sterling by ourselves. So, we relocate part of our operations out of Indianapolis to Mount Sterling, which in turn now opens up capacity for growth in Indianapolis without adding to brick and mortar without in anyway burdening our CapEx budget. We are going to be launching in Cleveland as Mr. Wolfort said. We hope to target that around July 1. That’s a very cost effective efficient way to enter a new market there as well. We already have books on the ground and some traction in Mexico out of Monterrey. We would not have been able to achieve that without the criticality of the volume that Olympic brings to the table. Specifically, to the comments about the cross fertilization of our customers, I would say to-date as David had mentioned, we have already had a number of successes, but I think today, we have taken advantage of a low hanging fruit. And I do agree with my colleague that it is unlimited. I think the business to come will be even more specific, more focused in higher margin business, and you’ve got to remember gentlemen, we have only been together 20 months and some of the introductions that we have made for one another are in accounts that have existing incumbent contracts. So, the opportunity is going to present itself when those one or two year contracts expire, so all good.

[Michael Siegal:]

Sal?

[Sal Tharani:]

Yeah, one more question please.

[Michael Siegal:]

Yeah.

[Sal Tharani:]

The investments you have done Mike over the last couple of years, which you obviously are in a position not to take advantage of. I was just wondering if we were to go back into a pre-financial crisis pricing environment which was sort of 550 average hot rolled coil versus 600 plus we’ve been seeing since 2010, ’11 and until now may be reflection of lower iron ore prices if market is the right or analysts are right and always going to 90%, coking coal is going down and you may see 550. Do you think in terms of the tons your calculations that when you open these facilities or you are investing in them. It will still be a decent return on these investments.

[Michael Siegal:]

Absolutely, yes. Absolutely, we took on all of these ventures at the end of beginning of 2010, I mean, they were – this is post recession and if you remember pricing reached its bottom in October of 2010 and we were making these decisions at the beginning of 2010. So, in fact we did it in the same arena that you are talking about.

[David Wolfort:]

Your question was if we look at the market before the recession and the answer if you look at our results before the recession we now literally have the ability to double our normalized earnings over that period of time with all the investments that we’ve organically along with the acquisition of CTI that’s the objective regardless of market.

[Sal Tharani:]

Great, thank you very much.

[Operator:]

Our next question is from Charles Bradford with Bradford Research. Go ahead.

[Charles Bradford:]

Good morning.

[Michael Siegal:]

Hi, Chuck.

[David Wolfort:]

Hi, Chuck.

[Charles Bradford:]

Have you seen any impact at all from the Lake Erie lock out?

[Michael Siegal:]

No, no, none at all. I think a lot of that was slab production, but we’ve seen absolutely nothing in it, not even a week old anyhow.

[Charles Bradford:]

Okay. We should be hearing I guess pretty soon who the winner might be in the auction of the ThyssenKrupp Alabama plant. Obviously I have no idea what that might be, but do you see a difference in the U.S. market if it’s someone who is already operating here significantly versus let’s say a Brazilian company?

[Michael Siegal:]

First of all, you characterized the person who owns it as the winner, so that’s the first point that we might may argument with.

[Charles Bradford:]

I agree.

[Michael Siegal:]

So, the answer is you are asking the hypothetical we have no idea anymore than you do obviously in the ThyssenKrupp has entered the market and has created great disruption from a pricing prospective regardless of loan that I don’t know the that’s going to improve dramatically without the basic dynamics and more demand and much supply. So, I don’t think the ownership matters a great deal.

[Charles Bradford:]

One of the current rumors, it’s just a rumor is it far from a middle and it’s partner may were to get it, they may end up being forced to close their Cleveland via the Department of Justice, that might have more of an impact I would assume?

[David Wolfort:]

We don’t have an army, so if the Department of Justice wants to do it. They are going to do it.

[Michael Siegal:]

We only care about the owner of the Browns football team. So, the answer is there is a lot of speculation and that’s all it is at the moment.

[Charles Bradford:]

Tenaris this morning or it maybe was yesterday, I only saw this morning made some pretty negative comments about the outlook for tubular in the U.S. They didn’t mention, however, all the new capacity that’s been announced and some of which is starting up. What do you see in that area as far as new supply?

[Michael Siegal:]

Well, most of the new supply that we see coming forth has attracted the OCTG market and we are insulated having the zero footprint in that regard while the market is attractive to us, there is capital distribution already. Greenfield site for us is somewhat unlikely and in prudent. But for right now I see a lot of the new capacity being focused towards the energy sector.

[Charles Bradford:]

There has been a lot of talk in the industry about the impact of imports, which were down about little over 10% on the first quarter. We’ve been kind of worried about Europe where the markets are pretty week, where are you seeing the impact, is it Europe, is it china or somebody else?

[Michael Siegal:]

Chuck, you are relating this to imports into the U.S.?

[Charles Bradford:]

Yes.

[Michael Siegal:]

I think that you have the hard, I think you’ve touched on it, Europe is in our austerity programs, so it’s very weak overproduction of steel in China, you and I know about that. So, we see some product, some product being offered into the U.S., little bit of a pickup on foreign offerings into the U.S. from usual suspects.

[Charles Bradford:]

Thank you very much.

[Michael Siegal:]

Thank you.

[Operator:]

Our next question is from Edward Marshall with Sidoti & Company. Go ahead please.

[Edward Marshall:]

Good morning gentlemen.

[Michael Siegal:]

Good morning.

[Edward Marshall:]

I apologize I jumped in late and I missed a tonnage, sorry to ask you for, but can you repeat the tonnage number for the quarter?

[Rick Marabito:]

Sure. Find it. Okay, so for the flat-rolled segment, volume was 292,000 tons.

[Edward Marshall:]

Okay. And the other question I wanted to discuss and you may have touched on it, but I guess last week or so, there was a shell filed, I am curious what your thoughts with the shelf, is it a recap placed into the balance sheet, did you think you have acquisitions or is it just a matter of your previous shelf war out, and you just needed to kind of re-out?

[Rick Marabito:]

The latter what you just said, the previous expired and we just renewed it.

[Edward Marshall:]

Okay, thanks guys. Good quarter.

[Rick Marabito:]

Thank you.

[Operator:]

(Operator Instructions) We have a follow-up question from Luke Folta with Jefferies.

[Luke Folta:]

Hi guys. Thanks for taking all my questions. Last one, Rick, can you quantify what the impact of the business interruption insurance benefit was? And I know you said it had been a pretty much of an pure offset as far as how much earnings you have probably lost from the capacity being down, but I imagine that amount kind of had an impact in your gross margin percentage as the way you have calculated the way to flow through?

[Rick Marabito:]

Yeah. So, the answer is the amount of insurance recovery receivable that we booked in the first quarter was $872,000 that was split. The majority of it hit in three categories, it hit in cost of goods sold, delivery expense, and warehouse expense. So, it wasn’t – I would not call it a significant impact or driver in terms of the amount of the adjustment on gross profit. We actually that amount that we came up with is net of insurance deductibles, and we have got a little more cost as David said the piece of equipment went backup in here in the first week in May. So, we will have some spilling into the second quarter likewise.

[Luke Folta:]

Okay, okay. And then just lastly the percentage of your sales that were specialty metals this quarter?

[Michael Siegal:]

Good question. Hold on.

[Rick Marabito:]

You know what, Luke, we can get back to you on that specifically.

[Luke Folta:]

Okay.

[Rick Marabito:]

Okay, readily, we just don’t have it readily handy at the moment.

[Luke Folta:]

Okay, alright guys. Well, thank you.

[Michael Siegal:]

Thanks Luke. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Siegal for any closing remarks.

[Michael Siegal:]

Thank you. And I would like to take it from here. So, once again, we thank you for your participation on this morning’s conference call, your interest in Olympic Steel. We look forward to sharing our second quarter and first half results with you in August. Thank you all. Bye-bye.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation and please disconnect your lines.