Michael Siegal - Chairman and Chief Executive Officer David Wolfort - President and Chief Operating Officer Rick Marabito - Chief Financial Officer Don McNeeley - President and Chief Executive Officer, Chicago Tube and Iron.

Luke Folta - Jeffries Edward Marshall - Sidoti and Company Aldo Mazzaferra - Macquarie Phil Gibbs - Keybanc Capital Markets.

Good morning and welcome to the Olympic Steel Third Quarter 2014 Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

Some statements made on today’s call will be predictive and are intended to be made as forward-looking within the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995 and may not reflect actual results.

The company does not undertake to update such statements, changes in assumptions or changes in other factors affecting such forward-looking statements.

Important assumptions, risks, uncertainties and other factors that could cause actual results to differ materially are set forth in the company’s reports on forms 10-K and 10-Q and press releases filed with the Securities and Exchange Commission. Today’s live broadcast will be archived and available for replay on Olympic Steel’s Web site.

At this time, I’d like to introduce to your host today's call, Olympic Steel’s Chairman and Chief Executive Officer, Michael Siegal. Please go ahead, Mr. Siegal..

Thank you, operator. We are on a first name basis, it's okay. Good morning and thank you for joining us to discuss our 2014 third quarter and nine-month results.

David Wolfort, President, Chief Operating Officer; Rick Marabito, Chief Financial Officer; and Don McNeeley, President of our Chicago Tube and Iron business are also with me on the call this morning. Net sales grew 24% in the third quarter to $377 million compared with $304 million last year.

Year-over-year sales have grown in each of the first three quarters of this year and the $377 million we reported this morning was a new third quarter sales record for all Olympic Steel. This was primarily driven by higher sales volumes in all categories including carbon, pipe and tubular products and specialty metals.

Net income increased 16% during the quarter to $1.6 million or $0.14 per diluted share, up from $1.3 million or $0.12 per diluted share in last year's third quarter. Average selling prices were slightly higher in both the third quarter and nine-month periods.

However, market prices peaked during the third quarter after increasing consistently since the beginning of the year. Recovery in demand and domestic supply issues in the first half of the year pushed the premium for North American steel to more than $200 per ton over world export prices.

This resulted in a surge imports which have hit record levels this year and are putting downward pressure on the current steel price market. Majority of our end markets remain healthy exhibiting good demand and resulting in higher volumes.

Mining, as we all know has not fully recovered and it appears that there is some weakness now in the agricultural equipment manufactures. However, our overall customer demand is actually in good shape. Net sales of tubular and pipe products increased by 15% in the quarter.

However, lower LIFO margins and higher operating expenses resulted in a year-over-year decline in operating income for this segment. Our growing specialty metals product line was another bright spot in the quarter and for the entire year. Tonnage, revenue and gross profit, all increased for both the quarter and year to date periods.

According to the MSCI metals activity report, our market share of the United States stainless steel market increased to 5% through the first nine months of the year. With our growing participation in the auto sector we have successfully increased our share of the aluminum sheet and coil market.

Net sales of specialty metals which included stainless steel and aluminum products increased more than 40% in the quarter and more than 30% for the year to date period. During the quarter we promoted Andy Markowitz to Vice President of Sales and Marketing for specialty metals.

Andy founded Integrity Stainless and served as its President since our 2010 acquisition of the company. In this new corporate level role Andy will be working throughout the organization to capture more opportunities in the specialty metal markets.

And then lastly, this morning we also announced that our Board of Directors declared regular cash dividend of $0.02 per share payable on December 15, 2014 to the holders of record on December 1, 2014. So now I will turn the call over to Mr. Marabito for the financial review..

Thanks, Michael and good morning everyone. Year-over-year growth in shipping volume has accelerated in each quarter this year. As a reminder, we only report tonnage in our flat product segment which also includes the specialty metals product line. During the third quarter we shipped 324,000 tons and that's compared with 265,000 tons last year.

This is a 22% increase and this follows on the 17% year-over-year volume increase we saw in the second quarter ending June. Compounding our volume increase, we saw modestly higher pricing and that pushed net sales for the flat product segment up 26% to $313 million compared to $248 million in last year's third quarter.

Year to date flat products volume increased approximately 14% to 954,000 tons. Consolidated average prices have also been slightly ahead of last year and this drove nine-month flat product sales up 16% to $919 million compared with $792 million in the 2013 nine-month period.

Net sales increased 15% for the tubular and pipe products segment in the quarter and were up 5% in the year to date period. This was the result of higher volume which was partially offset by lower average prices compared with last year.

This resulted in consolidated net sales growing 24% to $377 million which as Michael just noted, is a third quarter company record. Year to date consolidated revenue increased 14% to $1.1 billion, up from $973 million in the same period last year.

Gross margins declined in the quarter and nine month periods due to the competitive pressures and a greater proportion of flat product sales relative to tubular and pipe products. In addition, lower margins in the pipe and tube products segments negatively impacted the consolidated gross margins in 2014.

Reported gross margin for the third quarter was 19%, down from 20.7% last year. The third quarter LIFO adjustment was an expense this year of $200,000, which compares with income last year for LIFO, of $188,000. So that equates to a net swing of approximately $0.02 per diluted share.

For the nine-month period reported gross margins were 19.6% versus 21% last year. This year we recorded a LIFO expense of $600,000 for the nine months and that compares to LIFO income last year of $2.5 million. So before LIFO, consolidated margins for the nine-month period were 19.7% in 2014 and 20.7% in 2013.

Operating expenses increased 15% on the 24% increase in net sales during the quarter. Higher distribution costs associated with the well-publicized inflation and transportation and increased warehouse expenses were the biggest drivers. As a percentage of sales operating expenses improved to 17.9% versus 19.3% of sales in the third quarter of 2013.

This offset most of the compression we experienced in gross margin and resulted in operating income of $4.1 million in the quarter versus $4.2 million last year. Similarly, year to date operating expenses increased 9% on a 14% increase in sales. Again, as a percentage of sales operating expenses improved from 19% of sales last year to 18% this year.

Reported operating income for the nine months was $17.5 million versus $19.8 million in last year's comparable period. However, before LIFO operating income increased year-over-year for both the third quarter and the nine-month periods of 2014. Interest expense was $1.6 million in the quarter. That was down from $1.7 million last year.

This was due to lower interest rates partially offset by higher borrowing levels. And as you may recall, in June we have replaced our asset-based credit facility with a new facility that increased the credit line by $50 million, extended maturity to 2019 and lowered our interest rate by 25 basis points to LIBOR plus 150.

Interest expense for both year's nine-month periods was $5.1 million. Pretax income was unchanged in the third quarter compared to last year at $2.5 million. Our provision for income taxes was lower this year and the rate is expected to be in the 36% to 38% range.

This resulted in net income for the quarter increasing to $1.6 million or $0.14 per diluted share, up from $1.3 million or $0.12 per diluted share last year. For the 2014 nine-month period, net income was $7.8 million or $0.70 per diluted share, that compares with $9 million or $0.82 per diluted share last year.

Again, the net unfavorable year-over-year swing from LIFO adjustments was $0.02 per share in the third quarter and it was $0.17 per diluted share for the nine months. Shifting to the balance sheet. Working capital increased as accounts receivables jumped up 32% on the higher net sales and inventory increase.

The quality of our receivables remains excellent with an average year to date days sales outstanding of 39.1 days that compares with 39.5 days last year. Net inventory increased approximately $43 million since the beginning of the year.

Despite the higher sales volume the related inventory increase did result in our year-to-date turn slowing to 4.3 times compared with 4.4 times at the end of the first of half. Since third quarter end, inventory however has already been reduced by approximately $9 million.

Reducing inventory is a primary focus for us and you can expect to see further decline. Due to the higher working capital needs, our debt increased to $273 million at the end of September, that compares with $237 million at the end of the second quarter.

As a result of reducing the inventory levels, we anticipate increased future cash flows and corresponding declines in debt. Since quarter end, our debt has already been reduced by $18 million to $255 million. We invested $7.2 million in CapEx through September of this year and that compares with depreciation of $15.3 million.

We remain committed to holding capital expenditures below depreciation and intend to use the related increasing cash flows to reduce debt and further strengthen our balance sheet. Finally a quarter end, shareholders equity stood at $308 million or $28.03 per share, that's up from $299 million or $27.24 per share at the end of 2013.

So, now I will turn the call over to David for the operating review..

Thank you, Rick. Despite the normal seasonal slowdowns associated with plant shutdowns and model year turnovers, industry shipping volume remains strong in the third quarter. As Rick mentioned, we shipped 324,000 tons of flat product which was within 2% of our record June quarter.

Spot prices declined from the highs of late July and early August, primarily due to a record levels of imports. Around the same time that supply was swelling, a [backdrop] (ph) of world events contributed uncertainty and to a pause in the momentum experienced in the first half of the year.

Hot rolled coil has come down between 5% and 6% from a high watermark of 680 per ton range, sliding to 640 a ton by the end of October. And as Michael stated earlier, the premium on U.S. steel prices reached a level that was unsustainable and market forces have answered that spread with higher imports.

Additionally, nickel prices have also retreated from their previous highs. Despite this price elasticity, there are encouraging structural changes in the North American market place, including consolidation at the mills and the fact that some supply has been taken off-line and I referred to the RG Steel last year 2013.

During the quarter, we enhanced coordination with our key vendors to better manage inbound freights. For example, by better synchronizing deliveries from steel mills situated closest to our facilities, we will reduce delivery lead times as well as take further advantage of our geographic positioning.

At the same time, we assure ourselves of access to appropriate material supply while continuing to invest in our supply relationships. This is particularly important, given the level of consolidation in the steel industry.

In just past two years, the top five steel producers in North America have increased their share of the market from less than two-thirds to more than 85% of the flat rolled market. Our long-standing relationships and strong customer performance ensure that we have the raw materials we need, when we need it and where we need it.

Perhaps the greatest structural improvement, however, is that the underlying demand in North America is genuinely good. Market conditions, while not overly robust, remain healthy. Non-residential construction continues to improve steadily and remains well below peak levels leaving substantial upside as we move forward.

In 2014, Olympics Steel's growth has outpaced that of the industry in every one of our main product categories. From carbon and tubular and pipe products, to stainless and aluminum.

We have successfully filled new capacity from previous investments and are now focused on improving our mix of business while operating efficiencies to improve margins and our inventory turnover. There always remains room for internal improvement.

Operating weakness in just a few markets can weigh heavily on consolidated performance and it did during the third quarter. We identified specific areas where we can perform much better and promptly made managerial changes to bring underperforming facilities up to plan. We are committed to continual improvement and better execution.

Operator, let's open the call for questions now..

(Operator Instructions) Our first question is from Luke Folta from Jeffries. Please go ahead..

I guess first question, just on the gross margin dynamic. And obviously we are seeing continued sort of sustained mill pricing power beyond what we have sort of expected heading into this year. And of course there is reasons for that, now with demand strong as it is.

But the relationship between distributor margins and mill margins which were largely sort of correlated in the last cycle, have sort of reversed. And I just was hoping to get some additional color in terms of why margins -- what's driving the market to be as competitive as it is in distribution.

Is it more imports, you are competing with folks that are buying more imports than you are and at lower cost, or is it just -- any color there would be helpful..

I will give two things and David could chime in as well, Luke. I think to a degree when you look at Olympic specifically, it's also a combination of mix. So as we increase our stainless participation, we have lower margins. And as David indicated and I mentioned both, clearly imports have surged. You saw the October numbers.

The accessibility to imports on a spot basis to anybody clearly in the spot market has created some margin erosion. I don't think it's fundamental, it is the mills have yet had as big an impact as you may have inferred.

But I think as we go forward, as David indicated, this consolidation has a big opportunity to put some pricing power back to the mills not only to distribution but to the end-users..

Luke, I will just give you a little bit more color and echo what Mike has said. But first of all I would tell you that I think the mills have done an outstanding job and continue to do a great job. We have to compete in the service center field though and in a lot of for non-public contemporaries.

Their approach to the market, especially as we got through July, was very aggressive of course supported by some imports.

And so there is a little bit of a, I think, that some of our competitors and (indiscernible) in August and September, you know just the general climate in the world with everything going on, got very competitive and we saw a little bit of price compression. But we generally see that in Q3..

Great.

But I guess as it pertains to the imports specifically, is the issue on margins more so that others are buying imports at lower prices which lowers their cost and their margins are probably in relatively decent shape relative to those who are not importing? Or is it more a function of, there is an import, there is a [glut] of supply somewhere, in certain pockets in the channel and that’s sort of bleeding out and that’s just depressing the entire margin in distribution..

I think the latter is certainly true. I think a lot of imports came in, you know the paper this morning started to nominate the statistics as we all already knew them to be. And of course that's exacerbated when a marketplace gets concerned. And so, we don't get a clear view of the profit and loss of private companies that we compete with.

So it's difficult to comment on the former, but on the latter I think you are hundred percent correct..

Okay. And then just one more on expenses. You noted they are above where you like them to be. We did see some leverage, an operating leverage year on year just as the percentage fell.

But can you give us maybe some more, just color on which areas you are targeting to really you can, maybe have the most success in terms of some of the initiatives that you are doing there internally.

And maybe what we should think about is sort of a -- if you could put out some, something that could resemble a target in terms of what your expectation is longer-term..

Well, let's start -- first, looking on in inbound freights. So we expect -- although it will not be the expense line, but clearly I think freight got away from almost everybody and everybody had the same excuse, which is a shortage of truck drivers or it's this or it's that.

So I think as we have particularly focused on reducing freight, we will see some significant advantages there, number one. Number two, clearly there is always headcount issues, right. And are you right sized for the business that you have and right sized for the business that you expect to have.

So I think we will probably see some headcount reductions. But we have yet to put a target on what we are trying to achieve from just a odd number SG&A kind of reduction but we are dealing with that right now. And so we don't have -- we don't have a number for you at this moment. But it will be lower..

Our next question is from Edward Marshall from Sidoti. Please go ahead..

So you mentioned automotive and I wanted to kind of give you an opportunity to maybe to talk about some of the benefits you have been seeing there.

Maybe you could talk about what the percentage of the business is right now and where you ultimately anticipate that line to go?.

Our automotive sector is probably about 8% of our overall sales, give or take. It's 8, it's 9, a little bit less. So it's right around in the 8% level. We would expect that to be about the same. A lot of our other segments of our business are growing as we as we move into other areas of pipe and tube and stainless, particularly.

But on the aluminum side which is yet to take off in a subset of since other then potential, we find ourselves availing ourselves of the opportunity to sell more to automotive in the aluminum side. And so we are not sure exactly where that's going to go but it clearly is better..

Okay. You mentioned that almost in conjunction with the market share gains and I was curious if that's where you are picking up the share.

Could you kind of maybe elaborate on where you think shares -- is it regionally focused, because you have been expanding regionally or where's the share actually being coming from?.

That's across the board, Ed. We really have grown dramatically on the flat rolled side of the equation. Our specialty metals under Andrew Greiff has really done an outstanding job and Mike Siegal talked about some of the other promotions, Andrew Markowitz and so forth.

And that business now represents 5% of the MSCI total distribution of what we call specialty metals and we measure that in stainless and aluminum. And part of that participation in aluminum is, as Mike well says, is in automotive. We have taken full advantage of that. We continue to grow that.

We continue to bring more of -- more stainless and ferritic grade of stainless on board that support of our business in specific locations. Automotive is just one of those locations. Our plate business continues to grow as did our pipe and tube business. Chicago Tube and Irons business grew also.

So across the board, and I would tell you most regions we have seen a nice push. Where we haven't seen -- where we have not seen that same growth, we have a focus on that reason. In fact, the reason we have made some managerial changes where we think we have been deficient on growth. And we have talked about that in the past..

And I just want to be clear that gains have nothing, I know pricings to challenging environment, but you are not giving up price necessarily to gain share?.

No. That's a no in situation we are at. We don't do that. But that doesn't mean we don't have competitive pressures..

Yes. That doesn't mean the customers don't want price reductions including value enhancements. Price reductions is always a discussion that somehow comes up..

When you are talking to Luke about kind of the reductions on the operating cost.

I just want to make sure you weren't ready to quantify maybe some of the savings that you anticipate over the next year or two?.

That’s correct. We are not..

And then finally, Rick, you mentioned something about inventories coming down, I am wondering though if you would take a stab at kind of maybe year-end, that what you would anticipate over the next year as well..

Yes. Sure thing. So we talk about our inventory since the end of the quarter, it's already down in October, $9 million or $10 million. We have a target to beat, roughly $20 million lower by the end of the year. So another 15 to go in November and December.

And then we would envision as we work through the first quarter of next year, to still see our inventory yet lower again and have another target potentially in the first quarter, another $25 million reduction. So pretty sizable there. We are looking at $50 million in total over six months. And like I said, we are well on our way here even in October..

And that’s just a -- from our perspective, a better understanding of how to manage our new facilities that are on board and as Michael alluded to earlier, as we redistribute the inventory to better service our customers, we expect lower inbound freights and quite frankly we expect lower outbound freights.

So they are going to directly impact our margins..

Did you mean to say that there was a level of safety stock maybe built in as you kind of got a feel for these new division or is it just that you got caught with a little extra inventory?.

No. You are right, on the former. There is a better understanding. There was some safety stock. We had some -- just some better understanding of how we can operate more efficiently and we have that understanding. But, yes, you are correct..

Our next question is from Aldo Mazzaferra from Macquarie. Please go ahead..

I wonder if I could just get a little more detail on the numbers.

First, Rick, would you be able to give us the totaling versus direct on the flat roll?.

Sure. Bear with me one second, I will get that for you. You can go to your next question..

Yes, sure. I was wondering if you could describe, on the pricing trends you mentioned in the quarter you saw, I don't think there was too much in carbon, but could you talk about the impact that maybe changing prices in stainless may have had or aluminum? If we kind of describe it in margin pressure..

Aldo, David here. Obviously, we are always subjected to price elasticity of nickel and then of course as we continue to grow the market, we are bringing on more ferritic grades and so there is no nickel involved in that. So there is a lot of things going on at the same time. But we like the specialty business a lot. We continue to grow that.

We continue to earn market share with significant end use customers. And we like all those brands that we are servicing. But I don't think the competitive pressure is on nickel are any different for us than they are for anybody else..

Great.

I mean relative to carbon, is stainless hurting you more price wise right now?.

I am sorry, what is that....

From a margin perspective, is nickel hurt more than carbon?.

No, not really. I think we have the right expertise under the right senior management on specialty metals and they navigate that and I guess you could take this however you want to interpret is, as well as we navigate the flat rolls. As those words come out, you always wonder about that.

But I think we do a reasonable job on both sides of the equation, Aldo..

Right. So, David, do you respond to this market by trying to buy imports yourself or how do you address the situation you described with a lot of import material around hurting margins. But at the same time, you are dealing with this consolidated domestic base that might be getting more pricing power.

Is there a situation where you might see yourself buying more imports?.

I think Aldo we have a measured approach to supply. We are cognizant of the global issues and all the offerings that are out there. Our goal is to have the most efficient cost of goods in-house and to have a reliable source, multiple sources.

The problem with foreign, quite frankly, Aldo, as we like to say and as we have said for 30 to 40 years, is that foreign product, it comes in on time, it comes in late and it comes in early and it all comes on the same boat. And so it's very hard to manage an inventory if you are going to be very heavy on the foreign side.

So I think we have a respectable amount of foreign participation. But our heavy reliance is really with our domestic partners..

Great. If I could ask just one more on the market, Dave.

Is the pending actions of the Russian hard rolled coil and coil plate, is that going to have a significant impact on the competitive pressures in the marketplace you think?.

I don’t. I think it's the appropriate action to take but I think the economy of the rest of the world is equally -- is of equal concern and there is other people who will fill that breach as you will no. So if the Russians go out, others come in and we see that. But I think it's the right move..

And Rick has the data for the first question, Aldo..

Yes. Thanks, Mike..

So here you go, Aldo. So total income sold in the third quarter were $29,000 tons this year versus 20,00 tons last year. So for the year-to-date totaling tons are 81,000 this year and there is 61,000 tons last year..

Thanks. And Rick, do you breakout those stainless, carbon and aluminum volumes by each year..

No, we don’t. So we have two segments. So we have pipe and tube segment and then the flat rolled segment, flat products segment. The flat product segment include both product lines of carbon and then stainless and aluminum. So it's not broken out..

(Operator Instructions) Our next question is from Phil Gibbs from Keybanc Capital Markets. Please go ahead..

I just had a question on the end demand for construction, mining and ag. Any way to give us a view on how those markets, maybe from a growth perspective, have changed year-over-year.

Meaning how much do you see construction up, how much do you see ag of, I guess, is what I have heard from your earlier commentary on how much mining maybe off? Just trying to get a view of those moving pieces..

Phil, I would tell you I am not trying to duck the question but I think we are mutually disadvantaged along with everybody else. So the ag business ticks down for us and particularly to some of the well known brands that have specific colors that everybody recognizes. And that’s well publicized. That affects us.

The mining business has been on its tail for a while. But we have managed to grow our participation even in the way of those marketplaces declining. Mining for a long time and obviously iron ore prices are a great indicator of that, as is coal and so forth. And then the ag business, a great harvest.

They can't move the product on rail and so we have been backing off. And then some of the exports are being truncated by the government and so forth. So I don’t think we are -- we are not disproportionate in recognizing the diminution of participation from both of these sides. But we are pushing very hard for a larger slice of a small pie..

So, without again being specific, Phil, two major factors that are occurring. One is the strength of the dollar. You can easily say that’s part of the increase of imports as well as maybe some challenges to exports which are parts of those markets.

So that’s fairly significant in terms of -- if we anticipate the strengthening of the dollar, we are going to be doing in sort of the same market for a little bit of time. Let along government policies. And then you have got geopolitical scenarios around the world that do impact the universe.

But on the non-res stuff, I mean clearly, as you drive around the population areas of Florida and Texas and California, there is a lot more activity that's going on. Quantifying it, better experts than us can tell you how much that's up. But it's clearly up.

And on-shoring aspect of bringing production back to the United States, we think will have a significant impact in terms of growth in demand in the next year or two. And let Rick give you some specifics here..

Yes. So, Phil, just to give you an idea. Last year ag sales were a little over 5% of our sales mix. And by the third quarter of this year it went down to about 3.8%. So it's clearly, for us the ag is clearly going down. Obviously as David talked about, we have seen the strength in terms of volume across all of our locations and all of our product lines.

So that was one of the areas that softened..

Okay. I really appreciate the specifics there. Anything you could give us as far as a view on stainless in maybe the first half heading into the second half of this year.

We were trying to get a sense of how much restocking was going on because of the rise in nickel and how much of the pop in the first half of the year do you guys attribute to that versus underlying demand?.

Well, we would clearly tell you what everybody knows. Commodities are depressed and nickel is depressed of its high. It's not depressed depressed, it's off its high. And all these things are obviously dollar monetized and as the dollar remains strong, we would expect those commodities to be weaker than they were.

But we do expect some strengthening in the first quarter. Our participation in specialty, specialty models, particularly stainless and aluminum, but as you asked about, stainless continues to grow. We continue to on board more customers and we continue to broaden our reach in various grades going from nickel and chrome to ferritic grades.

And we are winning business and we are occupying time on our equipment with those wins..

Thank you. And Michael you mentioned that there is maybe some things you can do on the side of freight to mitigate some of the headwinds.

How do you do that specifically?.

Well I think David mentioned in his comments, one is we buy more from the close mills to where you are located. And, two, I think there is always this desire to see how far you can go with your sales when in fact sometimes you bypass the guidance right next door to you.

So I think to some degree you are mitigated by enhancing your sales efforts in a more local universe then maybe going to the peripheries of your reach.

And so I think you will see us focusing, and as David indicated, partnering with mills that are close to our locations and to trying to canvas much more close market then we may have done in the past..

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

Yes. So let me just, obviously we are pleased about the market share growth but it's not about growth without profitability. So let me just say, as Rick indicated we are committed to lowering our inventories and increasing our inventory turns which will then again decrease our debt along with spending less CapEx in depreciation.

We are really focused and we did talk a lot about enhancing our operating efficiencies. And we are in the throes of looking at pretty significant expense reductions.

So with that, let me just say that later this month, Rick will be meeting investors at the Midwest Investment Conference in Cleveland and I will be attending the Goldman Sachs Global Metals Conference in New York. We hope to see any of you who are interested and continue to be interested in Olympic Steel there.

And if not, we hope everybody has a very safe and happy holiday season and thank you for joining us this morning and for your interest in Olympic Steel..

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