David Wolfort - President Michael Siegal - Chairman & Chief Executive Officer Richard Marabito - Chief Financial Officer Andrew Greiff - Executive Vice President and Chief Operating Officer.

Seth Rosenfeld - Jefferies Tyler Kenyon - KeyBanc Capital Markets.

Good morning, and welcome to the Olympic Steel 2017 Third Quarter Results Call. [Operator Instructions] 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 and 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 release 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 your host for today's call, Olympic Steel's Chairman and Chief Executive Officer, Michael Siegal. Please go ahead, Mr. Siegal..

Thank you, operator. Good morning, and thank you all for joining us to discuss Olympic Steel's 2017 financial performance in both the third quarter and the first nine months.

On the call with me this morning are Olympic Steel's President, David Wolfort; Chief Financial Officer, Rick Marabito; President of our Chicago Tube and Iron business, Don McNeeley; and Executive Vice President and Chief Operating Officer, Andrew Greiff.

Since late last year our metal consuming markets have been recovering nicely and our customers expect strong demand to continue into 2018. With that we are pleased to announce our continued progress on profitable growth.

Olympic Steel's performance this year is the direct result of our historic and ongoing investments in equipment, facilities, products and people. Regardless of market conditions, strong capital management and execution in customer service has been essential for our growth strategies to be successful.

As expected, all three of our reporting segments, carbon flat, specialty metals and pipe and tube, generated growth in shipping volumes and sales in the third quarter. Consolidated operating income improved in both the quarter and the first nine months of the year.

Much of our growth, much of the current growth has been driven by our carbon flat product divisions. Shipping volume of carbon flat products was up 14% for Olympic Steel in both the quarter and the year-to-date periods. This was well ahead of the 3% growth in overall industry shipments as per the MSDI data.

Specialty metals also outpaced the industry average with our shipments increasing more than 7% in the quarter and more than 9% in the first nine months. Sales of our pipe and tubular products also rose sharply increasing 18% in both the third quarter and for the nine months period. Resulting from both strong shipping volumes and higher selling prices.

Looking ahead to 2018, we have many reasons to be optimistic. Our philosophy has always been to manage the aspects of the business within our control and we have. Now the macroeconomic picture supported by GDP growth appears to be turning in our favor.

For example, it was announced last week that the Chicago PMI rose to 66.2 in October, up from a bullish 65.2 reading in September. This was the highest level since the March of 2011. In the same report, order backlogs which have been trending higher since the beginning of the second quarter, reached their highest level in 43 years.

That came just after setting a 29 year record in September. The manufacturers and fabricators we serve in the heavy machinery and industrial equipment sectors echo this positive outlook.

It is also noteworthy that all of this happening in absence of any clarity or certainty around the potential tax reform legislation or concrete plans for future infrastructure spending.

Anything constructive coming out of Washington would stimulate further demand and as we support fair trade, we expect the 232 issue to be resolved sometime next year favorably. So in the industry response to the increase in production, U.S. manufacturing firms expanded their work forces at the highest rate since June of 2015.

Now many manufacturers are concerned about their ability to hire enough skilled workers to meet the growing demand. I will note that Olympic Steel has consistently attracted and retained high quality employees. We believe this is because we continuously manage the company for long-term value.

In addition, we have a history of providing genuine career advancement opportunities. We also pride ourselves in providing a safe working environment and a socially responsible culture. For all these reasons and more, we are continuing to invest in future value initiatives and believe M&A opportunities are available.

David will cover some of these growth initiatives in his comments. Entering the final quarter of 2017, we would anticipate typical seasonality and some sequential softness around the holidays. That being said, the outlook for pricing and demand in early 2018 is promising.

Additionally, this morning, we announced that board of directors approved regular quarterly dividend of $0.02 per share payable on December 15 to shareholders of record on December 1. And with that I will turn the call over to Rick Marabito to share the financial highlights for the quarter and year-to-date..

Thank you, Michael. Good morning, everyone. So consistent with our experience in the first half of the year, we realized 13% higher year-over-year shipping volumes in the third quarter and each of our three reporting segments earned record highs in market share. In addition, higher average selling prices have contributed to our sales growth.

As such, our consolidated net sales in the third quarter totaled $331 million and that’s up 24% from the same quarter of last year. Year-to-date, our net sales improved 28% to just over $1 billion, and that’s up versus $800 million in 2016's nine month period.

The most significant sales increase was in our carbon flat product segment where net sales increased 27% in the quarter and jumped 33% for the nine months. For this segment, shipping tonnage was up 14% for both the quarter and the year-to-date period and our growth in carbon flake was particularly [indiscernible].

Year-over-year average prices of carbon flat products rose 11% in the third quarter and 17% in the nine months period. Sequentially, our third quarter average sell prices were flat, carbon products also increased 1% from the second quarter.

Net sales of our specialty metals products increased 16% compared to last year's third quarter on 8% higher shipping volume. For the nine months, net sales increased by 20% on 9% more volume. Our pipe and tube segment net sales increased over last year by 18% for both the third quarter and the year-to-date periods.

Consolidated gross margin was 19.9% in the third quarter. That’s down from 21.3% in 2016's third quarter and that’s primarily due to consistent gross margin dollars per ton earned on a higher average selling price. In our flat products segment, year-to-date gross margin per ton actually increased compared with last year.

Total consolidated gross profit dollars grew by 15.5% in the third quarter and they were up by 17% in the nine months compared to last year's periods. We recorded LIFO expense of $700,000 in the third quarter, increasing our 2017 year-to-date LIFO expense to $1.5 million.

This reduced our reported third quarter net income by $0.04 per share and it lowered our nine months net income by $0.08 per share. Last year we recorded $700,000 of LIFO income in the third quarter and nine months periods and that increased EPS in those prior periods by $0.04.

Ongoing cost cutting and continuous improvement initiatives helped us control operating expenses. Our operating expenses increased 6.3% in the quarter and 8.2% for the year-to-date period and that was well below the 13% increases in shipping volumes.

Our ability to aggressively manage expense while significantly increasing our sales volume resulted in operating income increasing to $5.3 million in the third quarter compared with essentially breakeven in last year's third quarter.

For the nine months, operating income reached [$26 million] [ph] which was more than three times higher than our operating income of $8.4 million in the same period of 2016.

Interest expense was higher in the third quarter at $2 million compared with $1.3 million last year and that’s due to higher average borrowings to fund working capital requirements and higher based LIBOR rates in 2017. Year-to-date interest expenses increased from $3.9 million last year to $5.4 million in the first three quarters of this year.

Year-to-date, our effective borrowing rate was 3% and that compares with 2.4% last year. We recorded an income tax provision of 30.9% in the third quarter and that benefitted from higher than previously estimated tax credits.

And also you may recall in the first quarter of this year, our income tax was reduced by $1.9 million and that was related to one of our employee retirement plans. Together these added $0.19 per diluted share to net income in the nine months period.

Last year, our tax rate was unusually high because of a valuation allowance recorded to reduce certain state deferred tax assets. Moving ahead, we would expect our effective tax rate will normalize in 2018 in the 37% to 39% range. And that would be subject to any tax legislation that may take effect.

Third quarter 2017 net income was $2.3 million, or $0.20 per diluted share and that compares to a third quarter net loss of $1.8 million or $0.16 per share last year. For the first nine months, we reported net income of $14.8 million and that’s a $1.30 per diluted share compared with net income of $1 million or $0.09 per diluted share in 2016.

Now let's turn to the balance sheet. Accounts receivable declined from the end of the second quarter to $151 million at September 30. The quality of our receivables is excellent with average day sales outstanding at 39.7 days for the nine months period this year.

Due to this year's strong sales volume and higher pricing, working capital increased by $14 million in the third quarter and that was primarily to fund higher inventory and accounts receivable. Inventory increased by $17 million in the third quarter to $280 million. Since the beginning of the year, inventory has grown by $26 million.

Year-to-date inventory turnover for our flat product segments totaled 4.6 times, that’s just slightly below the 4.7 turns we averaged in 2016. Total debt at the end of the third quarter increased to $221 million and we had $110 million of availability under our asset based lending agreement.

In the last nine months of 2017, we experienced strong operational cash flow of $27 million and that was deployed in to the increased working capital that I spoke of a minute ago. We used $47 million in cash to fund operating activities and year-to-date our capital expenditures totaled $6.5 million.

Most of which was deployed for processing equipment for our growing specialty metals business. Finally, shareholders equity increased to $268 million or $24.47 per share at the end of September and our tangible book value increased to $22.36 per share.

We plan to file our 10-Q this afternoon and it will provide additional details on the quarter's results. With that I will now turn the call over to David for this operating review..

Thank you, Rick. On our call in early August, we stated our future outlook was bright and that was before the exceptionally high ISM readings posted in September and October by Chicago PMI, which with the exception of July followed a strong manufacturing PMI in June as U.S.

industrial production had risen five consecutive months in the first half of the year. This promising economic backdrop extends well beyond the United States in the domestic markets. Higher industrial production in Asia, particularly in China and Euro zone has created meaningful demand for metals.

As a result, that demand is supporting global prices, lifting pricing from a small trough in late June to a stronger finish by the end of September. Moreover, the rebound in global activity is benefitting a number of our customers that export machinery and industrial equipment. On top of that, the value of the U.S. dollar has declined resulting in U.S.

manufactured products becoming more attractive to foreign buyers and we are benefitting from both of those catalysts. This enhanced business climate fits well for Olympic Steel as we look to finish this year strong, our best year in more than five years and anticipate continued success in 2018.

We have completed or are currently concluding discussions for 2018 business renewals with many of our customers and we like what we are hearing.

All of the major industries we support, such as heavy equipment, lifting equipment, food services and agriculture, just to name a few, are projecting that healthy demand will continue in 2018 and we are winning new business as our performance over the last three quarters demonstrates and in particular this third quarter.

The auto sector, although shy of last year's record levels, has been strong for Olympic Steel. The outlook there remains tempered. However, specialty metals products and capabilities align well with the ongoing, light weighting trends in automotive and we are anticipating stronger volumes in 2018 and 2019.

Year-to-date, tonnage in our two flat rolled product segments has grown by 114,000 tons which is 13% higher than in the first nine months of last year. This would not be possible without the capital investments we have made exiting the recession and the solid execution by all of our business segments.

As we have pointed out on previous calls, one of our primary initiatives has been expanding our professional sales teams across all of our business segments. Combined with providing customers with high touch level of service that is unmatched in our industry, these efforts are reflected in the volume gains we are now generating.

We continue to gain traction cross-selling tubular and pipe products from our existing flat rolled facilities. As mentioned at the top of the call, shipments of these products have increased in 2017 and prices for these products typically lag flat-rolled by a quarter or two in price action. Our total processing business has also been brisk.

Year-to-date total processing has increased more than 14% compared to last year. From an operating standpoint, there were some minor pressure related to higher distribution cost. This was an industry-wide occurrence as demand for 18-wheelers increased to assist with hurricane relief efforts.

We use contract carriers to supplement our proprietary fleet and this short term demand spike added to transportation costs. We have a few capital projects underway to satisfy strategic areas of profitable growth in specific products and geographies.

Our Schaumburg facility has been bursting at the seams primarily due to higher shipments of specialty metals products. As a result, we are adding 42,000 square feet for existing facility to house a new cut-to-length line dedicated to stainless steel and aluminum products. We will maintain running the current line for cold rolled products.

We are also refurbishing and repurposing the carbon slitter for stainless processing, which will be installed in our operations in Streetsboro, Ohio. That’s expected to come on line in the middle of 2018.

Overall, we are pleased with our accomplishments and financial results thus far in 2017 and we are optimistic that the macro-economic and market conditions are in place to benefit Olympic steel and domestic steel consumption over the next year. With that, operator, let's open the call for questions..

[Operator Instructions] We will go first to Seth Rosenfeld with Jefferies..

I just had a couple of questions on your carbon flat business please. I know that in the past you have commented that some of the outsized volume growth there was going to shipments to third party distributors.

Can you just comment on how that strategy progresses now looking forward? Are you seeing any change in behavior by your peers that would basically imply higher inventory to the supply chain but an inability for you to ship in this manner? And then secondly, you commented earlier that you saw particularly strong shipments of carbon plate.

That’s interesting given the weakness you have seen in carbon plate pricing of late. Can you just talk a little bit about the market dynamics for that product and where you see demand conditions as present? Thank you..

Sure, Seth. Dave, Wolfort, I will take a swing at part one and part two and Rick can add a little bit of color. Our spot business has grown. Our business to business with other service centers has grown, up I think from 7% to 10% this year.

It's a combination of having access to material and our willingness to respond to our smaller strategic partners in the service center business that are allowing us to penetrate deeper into a market place. So that business continues to prosper. That’s been a strategy that we have had in place now for 34 years and it's continuing to work well for us.

I thank you for the second part question on plate. It has been enormously beneficial for Olympic Steel. We have had an emphasis on value addition and then we have reemphasized some of our as is plate distribution strategies which coupled with my answer to part one of your question. And so that business continues to roar forward.

We picked up, according to the [MSCI MAR] [ph] report, we have gone from roughly 4% to service center participation to 5% service center participation.

This year, needless to say, 25% growth is enormous and our prospects for continuing that look very very strong as we continue to operate what we call a business within a business in a number of our flat-rolled facilities which also service plates..

Thank you. Just on the last point. When it comes to the business to business side of things, I know that has grown from 7% to 10% you say. I guess is there any change given expectations for higher prices going into 2018.

Are you sensing that some of those customers are more proactively trying to build inventories or do you still think, like you commented that the onus here, that it's just a very very lean and therefore players like yourself who are willing to sit on a bit more inventory but more flexible volume, can take this massive share. Thank you..

Yes. I think very little has changed in that regard, Seth. The industry continues to be plagued with concern. So at this time last year, as we talked on the national election day a year ago, there was dramatic concern and people were winding inventories down. That changed immediately the following day.

Whether you characterize it as the Trump pump or whatever, the reality is that our manufacturing businesses that we supply really got significantly stronger and we hard market position.

So [those] [ph] positions, we have positioned ourselves post great recession to not only absorb additional business that we recruited over the last seven years, but to welcome back our old accounts to their fullest extent in these years. And we are seeing all of that.

From our competitive perspective, we do see a reluctance to hold inventory and so we are prospering as the market continues to move forward..

[Operator Instructions] We will go next to Tyler Kenyon with KeyBanc Capital Markets..

I was just wondering if maybe you could provide a little bit more color just on daily demand momentum through October versus that of September. And then just kind of parse that out by what you might have seen in October, kind of across the end markets..

It's Michael. I would tell you that from January -- from the beginning of the year, literally from January to the beginning of October, we have seen almost consistent daily demand.

Clearly with price reductions on the CRU and in the marketplace in October, people when they see those kinds of significant reductions in price, kind of hold back on their purchases. So we have seen a reduction on the daily shipment in October which we are seeing a recovery on in November.

So we think it's to some degree an anomaly as people were looking to see where the bottom of the market is. So the daily shipments in October were down somewhat but we do anticipate that they will be coming back during the course of the rest of this year relative to the days that are missing because of the holidays.

But we are seeing some daily shipment recovery already..

And then, Tyler, I would say and David mentioned it, I think for 2018 we are quite optimistic that those daily rates are going to be higher on a year-over-year basis. So, obviously, you got the fourth quarter with less shipping days and as Michael described, the October low. But we are very optimistic going into '18..

Okay. Thank you. And then Michael, do you sense kind of the noise around Section 232 had any impact on buying behavior just in the market. Perhaps maybe eliciting a little bit of pre-buying or hedge buying from some customers out there..

Yes. Maybe in the second quarter, when we were expecting maybe some kind of activity on June but since that, it has no impact at the moment, really. We only saw some pre-buying maybe in June but you saw that basically being chewed up through the third quarter.

So at this point, if it comes in some fashion, I don’t think anybody is really paying much attention to it in 232 other than the steel mills. I mean obviously my business, my customer's business will be impacted if 232 comes about but we are not seeing any of that in terms of behavior at all at this point..

Okay. And then I notice, you know the specialty flat rolled volume grew counter-seasonally quarter over quarter, quite strong and above typical seasonality. You have talked in the past about growing efforts to further penetrate the aluminum market, particularly in automotive.

Is some of that coming through now or would you we expect to see some of that volume more or less coming through in 2018..

Tyler, this is Andrew Greiff. We have started to see that. We started that a year or two ago. It [pressed] [ph] nicely in 2017 and 2018 and beyond will continue to see growth in that area..

Okay. Great. Thank you. And then, Rick, just a question for you. Any change to the CapEx budget for 2017 and any help you could provide us with an early look on '18 would be appreciated..

Yes. So '17, we don’t see much change from the numbers that we have provided. 2018, obviously David highlighted the expenditure in Schaumburg and we are going through our planning right now for budgeting capital expenditures for next year.

My preliminary guidance would be subject to an update next quarter, but my preliminary guidance will be around our depreciation level for next year which is around $19 million..

Got it. And then just one final one from me, if I may. Just noticed the inventories increased here on a nominal basis quarter-over-quarter. Just curious if you could walk through some of the moving pieces of that quarter-over-quarter uplift for us..

Yes. I think, look, the problem with a snapshot as opposed to a moving picture is you only get one day to look at the trend of the company and that it gets three pictures over the course of the year. So it is our expectation that the inventory will be down at the end of the year in all of our sectors.

And so you just caught a snapshot at the end of the third quarter where the inventory was a little bit higher than we would have liked. But we would still tell you that the indication relative to where we want to be is a lower inventory position..

And that ends today's question-and-answer session. I would like to turn the conference back over to Mr. Siegal for any additional or closing remarks..

Great. Thank you, operator. Both Rick and I will be in New York City later this month at the Goldman Sachs Metals and Mining Conference on November 29 and we will also be attending the Cowen and Company's Energy and Natural Resource Conference on December 5. So we hope to see some of you there.

And once again we thank you all for joining us this morning and thank you for your interest in Olympic Steel. Our fourth quarter full year results next year will be released sometime in February. So thank you all..

And that does conclude today's conference. Thank you for your participation and you may now disconnect..