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

Martin Englert - Jefferies Phil Gibbs - KeyBanc Capital Markets Aldo Mazzaferro - Mazzaferro Research Jon Evans - SG Capital.

Good morning, and welcome to the Olympic Steel 2017 Full year and Fourth Quarter Results Conference 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, 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.

During today's discussion we will reference adjusted net income per dilute share which is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to the most directly comparable GAAP financial measure is provided in the press release that was issued this morning.

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 Steels' improved 2017 fourth quarter and full year results.

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

Olympic Steel had a very successful year in 2017 with all three of our reporting segments posting improved results. Dedicated execution by all our teams and sales management and operations resulted in our most profitable year since 2011, and we intend to build on our success in 2018.

We are well positioned in our markets with diversified products, superior customer service and an energized management team to capitalize on improving market conditions. Our balance sheet remains exceptionally strong with the inventory on hand and access to domestically produced metal to fully participate in an escalating price market.

In December, we refinanced our credit agreement to provide increased borrowing capacity at more favorable and flexible terms for the next five years. The new agreement provides us with the necessary availability to grow our business and fund rapidly rising working capital levels.

During 2017 our shipping volume of flat products increased 12% or by 129,000 tons. According to the MSCI metals activity report, that was three times faster than the industry's average volume increase of 4%, the higher volume, combined with higher prices which consolidated net sales higher by 26%. So $1.3 billion in 2017 versus $1.1 billion in 2016.

Year-over-year sales in our carbon flat products segment grew by 30% while our other two segments, tubular and pipe products and specialty metals flat products, each generated net sales increases of 20%. Operating income improved to $24 million in 2017, up from $5.7 million in 2016, and was our highest level of operating income in six years.

The improved financial performance in 2017 was helped by rising demand. Manufacturing activities strengthened in most sectors we serve, construction, defense, agriculture, transportation equipment, and white goods such as appliances and food service equipment, all improved in 2017 and are expected to grow in 2018.

Our specialty metals segment had another record year in 2017. We shipped record tonnage of both stainless steel and aluminum products while generating operating income during the year – record operating as we would like to say, driven primarily by organic growth. Our market share for stainless steel sheet and coil is now approaching 6%.

The pipe and tube business cycle lags flat products by a few quarters generally. We are optimistic that the industry dynamics currently aiding our flat product segments should make a positive impact on this sector's financial results in 2018 and we are already seeing that take place.

On the demand side, recent tax legislation is encouraging capital investments. This should boost real GDP growth further, which is bullish for Olympic Steel. The seasonally adjusted flash U.S. manufacturing PMI rose to 55.9 in February of 2018. This was the fastest acceleration in overall business conditions since October 2014.

February's PMI improved from a surge in new orders setting the stage for higher production in the near term. Longer term, any progress on infrastructure rebuilding will provide even more industry momentum.

On the supply side, strong demand, rising raw material prices, disciplined production levels at the mills, lower imports due to higher consumption abroad, and yesterday's tariffs announcement of 25% on imported steel, and 10% on imported aluminum, all are factors supporting higher prices. Subsequent to the year end, we announced the nomination of Dr.

Idie Kesner to serve as an Independent Director of the company's Board of Directors. Dr. Kesner is the Dean at Indiana University's Kelley School of Business and she is an expert in corporate governance and M&A.

We look forward to her leadership and contributions on joining our Board, soon to shareholder vote and election at our upcoming annual meeting in May. Her election would increase the number of independent board members to six. We expect 2018 will be another prosperous year for Olympic Steel.

Internally, we are making strategic facility and equipment investments in areas where we can increase our returns. Externally, we continue to assess potential acquisitions that align with our long-term growth strategy. Also last month, we announced the Board of Directors declared a regular cash dividend of $0.02 per share.

The dividend is payable on March 15, 2018 to holders of record yesterday March 1. And with that I will turn the call over to Rick for the quarterly financial review..

Thank you, Michael and good morning, everyone. Shipping volume in all three of our segments was strong in 2017. There was a shipping early in the fourth quarter, however year-over-year shipments still accelerated over 2016's fourth quarter.

Industry shipments were higher on a year-over-year basis in every quarter of 2017 and our growth outpaced the industry in each quarter during the year. Consolidated net sales in the fourth quarter increased 21% to $308 million and that’s up from $255 million in the final quarter of 2016.

Our full year net sales increased to $1.3 billion which was 26% higher than 2016. According to the MSCI metals activity report, service center shipments increased 4% in 2017, following back to back years of lower industry shipments in 2015 and 2016.

The positive demand trend in 2017 was a welcome boost, even though service center shipment activity still remains well below historical peak levels. Compared with 2016, shipments from our largest segment, the carbon flat products segment, grew by 5% in the fourth quarter of 2017 and by 12% for the year.

Compounding the volume increases, average selling prices for carbon flat products were 14% higher in the fourth quarter and 16% higher in the year, both compared to the prior periods. This drove net sales for the carbon flat segment up by 20% in the fourth quarter and up by 30% for all of 2017.

Our specialty metals volume grew 11% in the fourth quarter of 2017 and by 10% during the year compared with 2016. Average selling prices in this segment were 6% higher in the fourth quarter and up 9% for the year. This resulted in specialty metals net sales increasing by 19% in 2017's fourth quarter and by 20% for the year.

Net sales in our pipe and tube products segment grew by 28% in the fourth quarter and by 20% for the year compared with last year. Gross margin as a percentage of sales declined in each of our segment and consolidated gross margin totaled 20.7% in 2017 compared to 22.3% in 2016.

This primarily reflects the effects of LIFO expense and higher absolute selling prices for our products as gross profit dollars per ton were actually higher in both of our flat products segment. Gross profit per ton grew 11% in carbon flat products to $153 in 2017 compared with $138 per ton in 2016.

Likewise, year-over-year gross profit per ton rose to $366 in our specialty metals segment and that’s compared with $361 per ton in 2016. Gross margin for pipe and tube products totaled 28.5% of sales in 2017 compared to 32.6% in 2016.

We recorded LIFO expense of $1.2 million in the fourth quarter, that’s a $2 million swing from LIFO income of $800,000 in the fourth quarter of 2016. LIFO expense for the year of 2017 was $2.7 million compared with LIFO income of $1.5 million last year.

This $4.2 million swing between years reduced the year-over-year improvement in our net income by $0.23 per diluted share. We successfully continued to control our expenses in 2017. Operating expense increases were held in the single digits for all segments and that’s compared to double digit volume and sales growth.

This resulted in consolidated operating income more than quadrupling in 2017 to $24 million, up from $5.7 million in 2016. Interest expense increased to $7.5 million in 2017 versus $5.3 million in 2016. This was due to higher average borrowings in 2017 to support higher working capital also due to higher LIBOR borrowing rate.

Our borrowing rate averaged 3% in 2017, up from 2.4% in 2016 and finally the write-off of $200,000 of deferred financial fees associated with our December refinancing. And as Michael indicated, our new loan agreement increased our borrowing capacity from $365 million to $400 million, with the potential to expand up to $600 million.

And it extended our maturity to December of 2022. Our borrowing rate remains at LIBOR plus 150 basis points but that could be reduced to LIBOR plus 125 basis points if certain conditions are met. Our effective tax rate in 2017 was impacted by two significant onetime items.

You may recall in the first quarter of 2017, we recorded a $1.9 million deferred tax adjustment related to one of our retirement plan, and that $0.16 per diluted share to net income. In the fourth quarter we also recorded a $6.2 million revaluation of our deferred tax liability associated with the Tax Cuts and Jobs Act which was passed in December.

As a result we earned $16.4 million of pretax income in 2017 yet we recorded a net tax benefit of $2.6 million. Based on our initial assessment of the new tax law, we anticipate our effective tax rate will be in the range of 27% to 28% moving forward.

This is a significant reduction, about 11% compared to the 38% to 39% rate, we were paying prior under the old tax structure. Since 2017's results included several unusual items, we did provide a reconciliation table in our press release that shows the respective impact of each item on our net results.

To enhance transparency we reported adjusted earnings per diluted share, which is a non-GAAP financial measure. This provides clarity around our continuing operating performance and facilitates year to year comparison. Please refer to the reconciliation we included in this morning's press release which is also available on our Web site.

The largest reconciling item was the deferred tax liability adjustment which added $0.54 per diluted share to our net results in the fourth quarter of 2017 and the full year period. LIFO expense reduced 2017's results by $0.07 per share in the fourth quarter and by $0.15 per share for the year.

We also settled the commercial dispute which negatively impacted fourth quarter and full year net income by $0.06 per share and finally the write off of the deferred financing fees on our refinancing had a $0.01 impact on 2017's per share results in the quarter and the year.

Adjusting for these 2017 items and the LIFO income in 2016, our fourth quarter adjusted net loss was $0.04 per share compared with an adjusted net loss of $0.23 per share in the fourth quarter of 2016. Full year 2017 adjusted net income was $1.18 per diluted share and that’s up from 2016's adjusted net loss of $0.18 per share.

Now let's turn to the balance sheet. Year-end 2017 accounts receivable and inventory were both seasonally down when compared with the end of the third quarter, although both were higher versus the end of 2016. Receivables were you $31 million for the year and inventory was up $21 million.

These year-over-year increases were due to higher shipments and a higher pricing level. The quality of our receivables remains excellent. Days sales outstanding in 2017 averaged less than 40 days, and our average flat products inventory turnover based on tonnage was 4.5 times in 2017 and that was down slightly from 4.5 turns in 2016.

At year-end total debt was $197 million, that’s down $24 million from the end of the third quarter but $31 million higher than the end of 2016 as working capital increased by $46 million during 2017. We ended 2017 with $129 million of availability which provides us plenty of capital in this accelerating market.

Shareholders' equity increased to $272.6 million or $24.80 per share at the end of '17, and tangible book value was $22.71 per share. Capital expenditures totaled $10.2 million in 2017, that’s up from $7.3 million in 2016. We are forecasting our capital expenditures in 2018 to grow to approximately $25 million.

And this will be first year since 2012 that we are budgeting more CapEx than annual depreciation. Total depreciation was $16.6 million in 2017. The most significant investment in 2018 is a 40,000 square foot building expansion which will house a new stainless cut to length line in our Schaumburg, Illinois facility.

And lastly, we plan to file our Form 10-K later today which will provide additional details on our operating results. I will now turn the call over to David for his operating review..

Thank you, Rick. Following two consecutive years of lackluster market conditions, our improved profitability in 2017 was well earned. Despite un-cooperative markets in both 2015 and '16, we persisted in making investments to enhance our geographic presence as we continue to grow all of our business segments.

Now with our markets forecasting an even stronger recovery, we are seeing the positive results of those efforts reflected in much better bottom line results. We began 2017 ready for the recovery and economic activity as business confidence improved and as pro-business administration was taking the reins in Washington DC.

We intentionally increased inventory prior to entering the year in anticipation of growing customer demand and business confidence. There was a genuine and sustained recovery and demand during 2017, the first year-over-year shipping increase experienced by our industry in more than two years.

Moreover, honest enforcement of existing trade laws and a synchronized recovery overseas reduced the volume of unfairly traded imports which stabilized pricing for much of the year.

After the run up in the first quarter, steel prices traded in a relatively narrow range throughout 2017, generally hovering just over $600 a ton for hot-rolled coil according to the CRU.

Early in the fourth quarter, prices eased a bit due to legislative uncertainty and specific concern regarding the Section 232 delayed action with a softening of raw material prices and rising inventories.

However, the dip below $600 a ton and in October that was around $578 to $598 was short lived and by the end of fourth quarter lead times were extending raw material prices removing higher in business optimism was accelerating around the new tax legislation.

On February 16, bringing us into this year -- on February 16, Secretary of Commerce, Wilbur Ross, released his report on the U.S. Department of Commerce investigation into the impact of steel and aluminum products imports.

The highly anticipated report concluded that quantities and circumstances of steel and aluminum imports 'threatened to impair the national security' as defined by section 232. Disclosures of the report's conclusions compounded already strong market dynamics and prices are surging higher.

This week the CRU for hot rolled coil hit a 52-week high of $752 a ton, which is 18% higher than the end of December. And as Michael mentioned, yesterday the President announced his decision to impose tariffs on steel and aluminum imports with more details forthcoming next week.

Olympic Steel's long-standing and strong relationships as a performing partner with our domestic supply base continues to afford our enterprise the ability to grow all of our market segments.

Our team has done a superb job of quickly flexing our inventory, up in 2018, for increased customer demand as many of our customers are indicating double digit growth for this year. We are also prepared for customer growth with new processing capabilities.

In addition to the new cut the length line that Rick mentioned, which is scheduled to come on line at the end of this year. A second slitter dedicated to our growing stainless steel business in Streetsboro, Ohio, will begin operations in the second quarter 2018.

We are also investing in new flat and tube laser cutting equipment to meet higher demand for those services. Our long-term vision is demonstrated by the quality, strength and depth of our management team and is validated by improving financial results.

We are recruiting, training and empowering the leaders of our company to achieve even greater success. Last month marked my 34th year with Olympic Steel and I can personally attest that in recent years our managers at every level have become more energized and better equipped to grow our business.

Echoing Michael's 2018 outlook, we are optimistic and look forward to building upon our recent accomplishments. With our strong balance sheet and the right people in place, we are equipped to take full advantage of a rejuvenated and growing manufacturing based that is currently benefiting from real GDP growth both home and abroad.

Beyond the immediate horizon, the impacts of Section 232 tariffs and potential infrastructure rebuilding initiatives bode well for Olympic Steel's future. Now, operator, with that let's open the call for questions..

[Operator Instructions] And we will take our first question from Martin Englert with Jefferies..

Maybe if you can talk a little bit on your market share gains.

Do you expect anything incremental in 2018 due to potential contract wins in any markets there?.

David, why don’t you take that one?.

Thank you, Michael. Martin we had, as Rick outlined, some of our statistics, we had some significant growth in 2017 and again we expect growth in 2018, as I referenced just a moment ago.

Many of our customers are predicting double digit growth, has been a little sluggish January because of weather and some trucking issues and we shared that pain with many people, but we are seeing the market place move up. Our strong presence with our domestic suppliers puts us in excellent shape to continue that and we see a robust year in 2018..

Thanks for the color there. Maybe if you can touch on the tubular profitability that stepped down there, even when accounting for the LIFO expense. Can you provide a little bit of color on the margin trends there and volumes in the business since the beginning of 2018..

Donald, I will let you answer that one..

Yes. Don McNeeley at Chicago Tube and Iron, great question. We saw momentum pickup ironically as the year unfolded. We don’t report tonnage because it's rather inconsequential, everything we sell has a hole in it. But notwithstanding that, our tons year-over-year were up 7% but in the fourth quarter over prior fourth quarter, it was up 13.3%.

Again, suggesting some momentum. Sales year-over-year were up 20.4% but in Q4 they were up 28% over prior year. Average selling price for Q4 was up 13% as it was for the year.

We have some fade on gross margin and that was anticipated as we decided to adopt a strategy to really focus on some top line growth, and to do that we are focusing on contract business, which by its very nature of having greater volume would have a more modest margin.

So notwithstanding all those metrics, we had a modest margin fade which was anticipated in our pursuit of market share..

So is this a similar type of margin run rate that we should be expecting on a go forward basis in future periods or was there something going on with the input cost that was also pressuring things..

No, pretty much it can all be attributed to the market share gains. We certainly don’t want to make any forward forecast on margins but I do have a degree of confidence in our ability to maintain that margin going forward. One of the things that we do track very closely with our margin and sales growth is as Mr.

Marabito mentioned earlier, through our industry trade association we have a MAR report which identifies market share gain or loss. So if we look at some compression on margins, there ought to be a compensation for that with your market share growing greater than the industry and that in fact has been the case.

So going forward, I would suspect us to be able to maintain our market share or improve it while maintaining margins. We are pretty confident we will be able to do that..

Okay. Thanks. That’s helpful. And maybe if you could talk a little bit about anticipated SG&A run rate. If there is any inflationary factors that we should be anticipating as we move this through 2018 here..

Yes. I think, Martin, there are certain -- some inflation as it relates to wages. Wages overall for the last number of years have been relatively flat.

Now that we are seeing business conditions improving there is certainly any number of employees that are particularly looking for some kind of benefit to the rising market as well as just the financial results of the company.

We are also seeing a significant amount of increases in freight, as David mentioned, the difficulty not only of weather, the difficulty I think everybody across the sector is having is finding truck drivers.

In an environment where we are seeing more retail establishment shift as it relates to the Amazons using their and now beginning their own trucking, we are seeing UPS and FedEx basically targeting long haul drivers and offering a pretty robust package. So we are seeing inflation on freight and we are seeing some wage inflation as well..

On the freight side of things, can you remind us how much of your transportational logistics is internal trucking and delivery for assets and drivers that are under the Olympic Steel company versus external..

Probaby about half..

50:50, okay. And one last question if I could, there. In light of 232, what is the downstream customers talking about for the potential implications and the thoughts on their businesses.

Any kind of feedback from the customer base in industrial or elsewhere?.

Yes. There’s significant impact. Let's say this, I think everybody is surprised.

Certainly there is a fear of not just pricing but availability and as this plays out, it is our desire to take care of those customers in the best way possible, but there is no question that we are having robust discussions as we have been, we have been trying to inform our customer base since November, but clearly in the last weeks, the amount of activity by the customers concerns has risen appreciably..

And we will take our next question from Phil Gibbs with KeyBanc Capital Markets..

Rick, I know you have done seemingly a lot with the balance sheet as you mentioned earlier in the call. But where does the -- is the liquidity position of the company sand right now I am just trying to measure, call it capital availability given the fact that as you mentioned a couple of times on the call that networking capital needs a rising.

And then you have also mentioned that you clearly want to spend on growth avenues..

Yes. So, Phil, we ended the year with about $129 million of availability under our credit facility. So one of the benefits of our refinance in December was we did expand the availability. We not only upsized the agreement but we got some increased availability off of it.

And as we model out, inclusive of the $25 million planned CapEx spend, we are anticipating well north of $90 million to $100 million of consistent availability through the year. So we are in really good shape there..

So you are saying with the changes and on the pickup in the net working capital that that’s what we should think about as sort of a typical liquidity for the year and average liquidity for the year as you move through the year.

Is that right?.

Yes. We are probably at a little bit of higher point at year-end at 129. So we can easily see during periods of time a use of that availability. But keep in mind because we have the size on our credit agreement is the working capital needs go up, our availability flexes up with that.

You will certainly see our debt go up a little bit but we are very comfortable and confident that availability spread will remain pretty consistent. I think we are in pretty good shape there..

And Michael maybe just maybe kind of a state of the union from you in terms of strategy of the company moving forward. You have obviously put yourself in good position with the existing asset base and the existing customer base to pickup share.

But how are you looking at the future and what may you need beyond this, call it cut the length line, to sort of fulfill that vision. I am just trying to figure out how you are looking at the business moving forward..

There is two facets. There is internal growth and external. So you have seen over the last number of years Olympic has been much -- Olympic much more focused on internal growth. Internal growth maybe a new cut to length line there and a new splitter over there. That’s going to be driven by increased custom demand in the specific and/or geography.

We are not looking for a lot of internal growth as it relates to invest in long term capital projects. What you would see probably Olympic moving forward is in a much more aggressive M&A side. I think that we have got very successful group of young, as David indicated, of younger managers.

When we say younger, they are all in their late 30s, early 40s, not to diminish people who are in there 50s or 60s but we have got a great group of young aggressive managers that want us to grow and want to have the same opportunity that we had. So we have got pretty aggressive outlook for more M&A activity..

Speaking of that, what's your appetite on the balance sheet metrics for that if you were to -- you are targeting sort of a net debt to EBITDA or net debt to cap or something along those lines. Where are you comfortable potentially taking it..

Yes. Look, I mean we have been very aggressive over our history and less aggressive over the last short period of time. As you see we have been managing the balance sheet exceedingly well.

We also have a fairly advantageous banking agreement that we don’t particularly look at blowing up given that there is really no body exceptionally doing all that better than anybody else.

So when you look at sort of why would you blow up your capital structure for something that isn't materially different, stronger, better than where the whole market is not just yourself.

So I think what you would see is probably not larger transactions but medium to smaller transactions that can tuck in within our current credit agreements on the heavy asset base kind of scenario..

Okay. I appreciate that. And then last question for David. Just in terms of maybe anything specifically you are seeing by end market.

Obviously a lot of heavy equipment in here but anything along the different end markets that you could perhaps comment on and what's the tone or tenure in terms of people thinking whether we may or may not have an infrastructure package sometime over the next couple of years..

Well, Phil, thank you for the question. I think that -- or we think that that’s a third leg of the stool. There was a legislative impasse.

As we looked at the President's policies going into early fourth quarter and that gave people some consternation and that as we sort of move through October which was a pause in the market place, I think everyone started to understand that 232 was complicated and it was for real. And that tax reform was obviously for real.

I think that the infrastructure program although it's design is still fluid, I think is the third leg of that stool.

So what we have seen is the tax reform and certainly it has enough incentive as Rick is going through the benefits for Olympic Steel, but certainly has enough incentives for people to growth their businesses and we see that they are growing their businesses.

Obviously, that’s enormously beneficial to Olympic Steel, who does virtually all of its business here with the exception of some in Mexico. And then 232, we heard from the President yesterday. We were waiting for him at 11 o'clock and he snuck up on us at 1 or whatever period of time it was.

And we will get some clarification there but clearly the legislative agenda that this President has outlined, he is fulfilling. And I think that infrastructure will very much be embraced and very much needed. [indiscernible] they are filling and tell you that, we are very involved with construction equipment, as you will know.

And with support features of equipment, equipment that supports construction. And all of our customers are forecasting some very strong growth. So we look at 2018 and we think it's better than 2017. We will deal all the legislative changes and we will deal with Section 232.

Olympic Steel has been in business for 64 years and we think we are a great partners with our supply chain both on the supply side and then on the customer side. And I think we are in terrific shape and we are very optimistic about this year..

And we will take our next question from Aldo Mazzaferro with Mazzaferro Research..

On the outlook that you mentioned the pricing being up about 17% or 18% from where it was at the end of the year. and volume of some of your customers being up, likely to be up 10% year to year.

I think the market is real surprised with the results in the fourth quarter but I know that’s a very different quarter than what you are looking at right now for the first quarter. I am just wondering, could you expand a little bit on that pricing comment, Dave.

You were saying that the trailing price, 752 or so I think you mentioned, but what's the current ask price at the mills for orders, would you say?.

I think the current ask price, Aldo, is very well publicized. And its' publicized on a spot basis and it's north of 800. So you had Wednesday's CRU published at 752. The CRU ended the year at 673 and the high watermark April 6, 2017 was 660. I mean you start to look at these dynamics, the cash required. They are fairly significant, needless to say.

I mean here we are March 2, we are a month shy of the high watermark of 660 of last year and we are close to $100 a ton over that with section 232 looming tomorrow and a spot price that you and I know and we all collectively know being published in anywhere from 800 to commentary of 840 on the hot rolled side.

We think the plate side is very dynamic today. Particularly as we embrace infrastructure. As we noted to Phil just a moment ago, and again here is a dynamic that’s moving up, that’s moved up over $100 a ton since the end of the year. You have to have some good capital structure to be able to enjoy the benefits of this market place..

Yes. I remember in the past you guys have taken advantage of some of the credit issues in other service centers. But would you say your trading between service centers is higher than average right now..

Good morning, Aldo. It's Rick. I would tell you, the last year we have been trading at higher levels of service center sales. Had a little bit of a lull towards the end part of the year and maybe the opening of this year.

But our expectation is just what you said, with the credit constraints and the rise in working capital needs, our believe is that that service center trading business, if you will, is going to accelerate and we believe we will be participating in that..

Could I ask one more other question, kind of a big picture question? So where do you think your greatest risk is of customers being hurt by retaliation.

If you were to say, your customers had exports, say farm equipment, is that something overly concerning to you or what kind of view are you taking on your customers and the risk that they might be taking of being retaliated against..

Yes. I don’t want to sound [flipping] here. Aldo, we have a hard enough time trying to figure out ourselves, let alone what our customers. I mean to some I am sure it's going to be quickly and to some it will be much longer. But it's so speculative, if you are trying to save, how this is going to impact the customers.

I just think certainly there is tremendous noise, there is tremendous impact and we will just deal with our customers individually with their specific needs..

Great. And then one final thing.

Rick, where was the LIFO charge? What segment did it pop into, was it stainless?.

No. Aldo, we have only have a segment of our inventory that’s on LIFO, and that only segment is in our pipe and tube segment. So the other two segments are not on LIFO..

So that was in the gross margin then?.

Correct..

And we will take our next question from Jon Evans with SG Capital..

Can you just help us understand, you guys have talked a lot about over the last couple of years as once the market gets better, you guys have got a lot of leverage through the model. And I guess what I am trying to really understand or maybe you can unpack for all of us because I think it's why your stock is getting drilled.

Is if you look at your flat business, in your operating expenses year-over-year they are 13.25% and tons were only up 5.3%. So why did it cost you so much more in operating expenses to basically get those additional 5.3% growth in tons.

Is there any kind of one time in there?.

I have to go through those. Those numbers aren't exactly comporting with I have. Our volume in our segments went up greater than what the expense increases were..

Yes, because of price increases. But price increases aren't tons, so you incur expenses when you move tons, right..

No, I am saying the volume, the tonnage. I am agreeing....

Why don’t we take this offline? Can I just suggest we take this -- if you really want to walk through this segment....

Yes. Okay. That will be great. Can I ask you another question then? Relative to the tubular and pipe, I understand that you are in for market share, totally get that etcetera. But most people when they give a price for market share, they think they are going to drive more dollars to the gross profit.

You guys drove less dollars and your expenses increased. So you drove all this market share but you lost money year-over-year.

Why is that a good strategy?.

Donald?.

So, what's happening is transactional business where your average order is 2500 bucks is always going to carry a higher margin. But the reality is to grow top line, you need to do it organic. There is two contributions to organic. One, the transactional business, and, two, contract. We do have significant increases in market share.

But contracts by their very nature as it becomes a bigger percentage of your business, they drive top line growth, it's going to have implications on margins. I will mention though, according to benchmarking through industry association, the gross margins in the pipe and tube segment still perform in the upper quartile of the sector..

Right. I get that. That’s all great. But at the end of the day, aren't you trying to make more money to the bottom line and you lost money year-over-year by growing market share..

No, that was LIFO..

Yes, I think you are referring to LIFO. I mean....

So if we pick out LIFO -- if you took out the LIFO expense in there, you would have made money in that division?.

So let me just give you, again the LIFO numbers -- this is Rick. We have a $4.2 million swing in LIFO year-over-year. So in the current....

And that’s all in the tubular, correct, in the fourth quarter?.

That’s all tubular. So for the year it's $2.7 million, the full year all on pipe and tube. $2.7 million of expense this year. $1.5 million of income last year. For the fourth quarter, it was $1.2 million of expense this year and $800,000 of income last year. So certainly the LIFO swings are a part of it.

As I indicated, you can look in our press release, where we did a reconciliation of the EPS impact of that. But, yes, keep in mind that it is 100% related to the pipe and tube segment..

Got it. And then the last question is just relative to the specialty.

In the specialty you don’t have an LIFO, correct? It's just pure, correct?.

Correct..

Okay.

So can you just help us understand, you had great growth there but what's going on in the gross margins?.

Well, what I would tell you is, its business segment have grown. There is a combination of stainless and aluminum.

As Don talked about from a contract and a spot perspective, our specialty metals business is probably similar to the other segments when it comes to spot and contract but the margins were, I would say, consistent with what our anticipated growth was for the year. So we really weren't surprised with what we saw..

But I guess in the fourth quarter....

Let me just -- sorry, let me just -- I want to make sure you are looking at the right numbers. Our specialty metals flat business for the year earned $11.3 million of operating income, that’s up from $9.8 million last year. So I don’t want to leave you with the impression that it went down, it didn’t. Our profit....

Yes. But, I guess I am focused on the fourth quarter and your sales in the fourth quarter were up 18.6% and your gross profit dollars were up 59 basis points. So you grew the top line almost 19% and you didn’t even get 1% of the gross profit line..

Right, in the fourth quarter, and David had talked a little bit in our prepared comments. In the fourth quarter there was certainly a pullback and a lull in the market place in terms of creating some margin pressure..

We don’t view that as a trend. That trend is kind of looking in a snapshot of one quarter. We would anticipate a much more profitable year on the specialty side. And so if you are looking at the one quarter, yes, there are some aspects in terms of the markets, certain circumstances internally.

We do not consider the trend of growing the market share to not make money as the direction that we are moving. And we would anticipate both the building and the specialty metals side to have very significant profitable years this year..

Got it.

So just as we go into this year, you think that you are going to margin on both the top -- on the gross profit and the operating margins? You are going to get margin expansion?.

Yes.

Rick?.

Yes..

My answer would be yes.

Rick?.

Yes. Absolutely..

Pipe and tube, yes..

It's what we are planning for..

It appears there are no further questions at this time. Mr. Siegal, I would like to turn the conference back to you for any additional or closing remark..

Sure. I would love to do that as soon as I get to my closing remarks. But thank you, operator, and I would like to thank everybody for being on the call. Obviously, we are anticipating an interesting year given the external circumstances. So we look forward to issuing our first quarter results sometime in the spring and we wish everybody a terrific day.

Thank you..

This concludes today's call. Thank you for your participation. You may disconnect..