Michael Siegal - Chairman and Chief Executive Officer Richard Marabito - Chief Financial Officer David Wolfort - President.

Martin Englert - Jefferies LLC Aldo Mazzaferro - Mazzaferro Research LLC.

Good morning and welcome to the Olympic Steel 2018 Second Quarter and First-Half Earnings Conference Call. Today's conference is being recorded. All participants are in a listen-only mode. Following the presentation there will be a question-and-answer session.

[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 on the company's reports on Form 10-K and 10-Q, and press releases filed with the Securities and Exchange Commission. Today's call will be archived and available for replay on Olympic Steel's website.

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

one, market share gains; two, increase revenue per ton in all of our product lines; and three, the recent acquisition of Berlin Metals. Our second quarter year-over-year operating income rose 152% to over $24 million. And for the first-half, operating income rose by 77%.

Most importantly, we see no change in the strong business conditions as we enter the third quarter and our outstanding balance sheet is creating additional opportunities to further penetrate markets we serve.

Net income of $15.8 million in the second quarter or $1.39 per diluted share more than tripled last year's second quarter earnings of $4.8 million or $0.42 per share. As highlighted in the reconciliation table included in this morning's earning release, EPS was $1.49 per share in the second quarter, excluding LIFO expense.

This was our most profitable quarter and first-half period in a decade. Let me point out that the strengthening economy is increasing the competition for skilled labor and intensifying freight availability, indicating that recent cost pressures will persist in the second-half of the year.

We have instituted initiatives to better manage these pressures as we move forward. We are also anticipating rising interest rates and are planning to reduce our inventory to mitigate the impact of increased rates on the income statement. Our position in the economy is growing across all sectors we serve.

And we have the experience to manage growth effectively and profitably. Contract business [Technical Difficulty] performance as we continue to add organically value-added equipment to our existing facilities for margin enhancement and productivity improvements. We are engaging in a robust M&A marketplace.

Recently, we announced that our Detroit facility earned an [Technical Difficulty] automotive quality recognition certificate. We have been increasing our participation in the auto sector with specialty-grade carbon, aluminum and stainless steel products.

This technical specification recognizes our ability to satisfy stringent sector-specific automotive standards. Olympics Steel is ideally positioned to continue supporting the industry's move toward lighter [Technical Difficulty] and component outsourcing.

This morning, we also announced the Board of Directors declared our fifth consecutive quarterly cash dividend. The regular cash dividend [Technical Difficulty] per share will be paid on September 17, to holders of record on September 4. With that, I will turn the call over to Rick Marabito for the financial review..

Thank you, Michael, and good morning, everyone. The second quarter started strong, which we discussed on our call in early May. That strength was sustained throughout the quarter and the industry [Technical Difficulty] remained robust heading into the summer, notwithstanding the normal summer seasonality of July.

Second quarter shipping volume in [Technical Difficulty] flat roll product segments increased 6% sequentially from the first quarter and 4% versus last year. The year-over-year increase was driven by higher sales volume of Specialty Metals Flat products. You may recall, we closed the facility in North Carolina in the second-half of last year.

And we've strategically moved away from international brokerage sale [Technical Difficulty] 2018. Together, this [Technical Difficulty] for the decline in the carbon flat tons sold.

In fact, on a same-store basis, our shipments grew 5.7% in the first-half compared with last year, outpacing industry shipping growth rate of 4.4% according to the MSCI [ph] Metals Activity Report.

Our market share for stainless steel [ph] and coil reached an all-time high at 6.7% [ph] in the first-half, which does not yet include sales from Berlin Metals. Our first half stainless steel shipments increased by 22% year-over-year, well above the industry growth rate of 5.4% [ph] again, according to the MSCI.

The performance of Chicago Tube & Iron in 2018 [Technical Difficulty] exceptional. Sales increased over last year by 25% in the second quarter and by more than 20% in [Technical Difficulty] half.

While sales grew, operating expenses were lower in 2018, resulting in a 94% rise in operating income for pipe [Technical Difficulty] in the second quarter and an 82% improvement in the first-half even after absorbing [ph] $2 million of LIFO expense.

Consolidated net sales increased 27% in the second [ph] quarter to $453 million [Technical Difficulty] from $356 million last year. For the first half, net sales reached $829 million, 20% higher than last year. Both of these figures are record highs. Net sales of carbon flat products increased 18% in the quarter and 15% for the half versus last year.

While specialty metals net sales were up 67% in the quarter and 40% year-to-date. Finally, pipe [Technical Difficulty] revenue was up 25% for the second quarter, pushing [Technical Difficulty] growth just over 20%. Gross margin in the second [Technical Difficulty] expanded to 21.4% of net sales [Technical Difficulty] 20.5% last year.

Gross profit dollars grew by 32% to $97 million in the quarter that [Technical Difficulty] $75 million last year. For the first half, consolidated margins contracted slightly to 21.4% of net sales versus [Technical Difficulty] last year, while total gross margin dollars increased 19% to [$178 million] [ph] in the first half of 2018.

That's up from $150 million last year. On a per ton basis, gross profit increased 26% to [Technical Difficulty] per ton in the quarter and by [Technical Difficulty] to $248 per ton in the [Technical Difficulty]. We recorded LIFO expense of $1.5 million in the second quarter and that brought our year-to-date LIFO [ph] expense to $2 million.

That's up from LIFO expense of $400,000 and $775,000, respectively in the second quarter and [Technical Difficulty] last year. Current year earnings were reduced by $0.10 [per diluted] [ph] share in the quarter and by $0.13 per diluted share in the first half as a result of LIFO.

Compared with last year, operating expense [Technical Difficulty] 14% in the second quarter and by 9% in the first half of 2018. Expenses include the addition of Berlin Metals, ongoing [Technical Difficulty] freight and labor that Michael talked about and higher performance-based incentives.

[Technical Difficulty] increased 27% in the second [Technical Difficulty] and 22% in the half. Our fleet of [Technical Difficulty] deliver at significant portion of our shipments and having a proprietary fleet is proving to be a wise decision in today's environment. Moving forward, we plan to strategically expand our fleet.

As Michael mentioned, second quarter operating income was $24.3 million. That's nearly double last year's operating profit and it totaled 5.4% of sales.

Interest expense [Technical Difficulty] in the quarter to $2.7 million from $1.8 million [Technical Difficulty] year, due to [Technical Difficulty] average borrowings to fund working capital and the Berlin [Technical Difficulty] acquisition combined with higher interest rates. Our average borrowing rate in the [Technical Difficulty] was 3.4%.

Compared with 2017, pre-tax earnings grew 176% in the [Technical Difficulty], and by 85% in the [Technical Difficulty]. Our effective rate was 26% - our effective tax rate was 26.5% in the second quarter and 26.3% for the first half of 2018. The recent tax legislation has reduced our effective tax rate by approximately 12%.

Net income in the second quarter of 2018 improved to $15.8 million or $1.39 [Technical Difficulty] share. Last year, in the second quarter, we reported net income of [$4.8 million] [ph] or $0.42 per diluted share. For the first half, we achieved net [Technical Difficulty] $23.5 million, that's $2.06 per diluted share.

That was up 88% from $12.5 million or $1.10 per diluted share generated in the first half of last year.

As highlighted in the reconciliation table included with this morning's press release, the pre-LIFO EPS comparison for the second quarter is $1.49 per diluted share this year versus [$0.44 per] [ph] diluted share last year, and then the comparison for that [Technical Difficulty].

And the half also excluded a onetime [Technical Difficulty] tax benefit in the first quarter of last year. So that comparison is adjusted net income more than doubled to $2.19 per diluted share in 2018 from $0.98 per share last year. [Technical Difficulty] the balance sheet.

Working capital is up $97 million from last year-end, and that's from growing demand [Technical Difficulty] price environment. During the quarter, accounts receivable increased by $30 million and inventory, despite a decrease in tonnage since the end of March, was up $45 million [Technical Difficulty] at the end of June.

The quality of our receivables remains excellent. Our days sales outstanding [Technical Difficulty] is less than 42 days in the second quarter.

Our annualized flat products inventory [Technical Difficulty] based on tonnage was 4.3 turns in the first half, and we do [Technical Difficulty] to reduce inventory and improve our turnover rate in the second half of the year. At quarter [Technical Difficulty] total debt was $298 million.

That is $49 million higher than at the end of March and up $101 million since the start of the year. This directly correlates with the increase in working capital and the April purchase of Berlin Metals. As of June 30, we had approximately $99 million of availability on our credit facility.

Capital expenditures in the first half of 2018 totaled $13.8 million [Technical Difficulty] to fund the growth and value-add initiatives that Michael spoke about and that David will comment more on shortly. For the year, our forecast for capital expenditures remains at approximately $25 million.

And the first half depreciation expense was [Technical Difficulty] million. Shareholder's equity increased [$297 million] [ph]. That equates to $26.96 per share at the end of June. Finally, we plan to file our 10-Q later today, which will provide [Technical Difficulty] details on our operating results for the quarter.

I'll now turn the call over to David for his operating review..

Thank you, Rick, and good morning to everyone. Let me echo [Technical Difficulty] of both Michael and Rick as we noted in [Technical Difficulty] earlier this year the conclusion of our first quarter, when we said the table is set for a strong second quarter. Sitting here today, we are bullish on the third quarter and 2018 as a whole.

Lead times for [Technical Difficulty] continue to reflect a strong market and our plate business continues to [Technical Difficulty] to the overall strength and demand from our OEMs.

Again, [Technical Difficulty] filling orders and compared to - with the sharp escalation experienced in the first quarter, prices rose more modestly in the second quarter. In June, after the Section 232 exemptions were rescinded, price increases increased to a 52-week high.

Looking ahead, we continue to manage inventory careful [Technical Difficulty] while ensuring customers higher demand. Our inventory and open order status reflects our [Technical Difficulty] prescription for success. Here, we aggressively grew our market share over recent years, and we have maintained those gains throughout 2018.

The tonnage sold from our North Carolina facility [Technical Difficulty] in 2017, as Rick just mentioned, [Technical Difficulty] tonnage from our international trading office has been [Technical Difficulty] reallocated to more profitable businesses [Technical Difficulty] as we have successfully responded to the increasing tonnage requirements of our manufacturing customer base.

The new laser at our pipe and tubular products facility in Romeoville is up and running and reaching capacity. I'd like to add on to what Rick [Technical Difficulty] about the [Technical Difficulty] by our tubular and pipe product segment at Chicago Tube & Iron.

Particularly noteworthy was the expense control that [Technical Difficulty] McNeeley and his team have demonstrated during the surge in business activity. The segment's contribution to our improved financial results reinforces the prudence of that transformative acquisition in 2011.

CT&I, which represents 8% [ph] of our consolidated sales, is on track [Technical Difficulty] potentially have the best year in its 100-plus-year history. In fact, the post-recession acquisitions, greenfield facilities that we've undertaken and the repurposing of assets within the organization have made strong contributions to our current results.

We continue with the inclusion of [Technical Difficulty] Metals acquisition. Sales from our [Technical Difficulty] segment have eclipsed 20% of our consolidated [Technical Difficulty]. Carbon flat products still make up 60% of our net sales and represent the bulk of this year's improvement in our bottom line result.

Operating income per carbon segment was more than $18 million, up by more than $11 million or 153% over the same quarter last year. In addition to the new laser equipment, which I just mentioned in Romeoville, numerous other internal growth [Technical Difficulty] projects all remain on target.

Our [Technical Difficulty] stainless steel slitting line in Streetsboro, Ohio became operational during the second quarter. Installation of a new [Technical Difficulty] on our temper mill in Iowa will be completed this month. And the expansion of our Schaumburg facility is on plan and construction nearing completion.

A new stainless steel cut-to-length line there is scheduled to begin early in the fourth quarter. [Technical Difficulty] our inventory position heading into the second half is well positioned, [ph] setting the table once again for a strong third quarter business conditions.

Shipping volume is [Technical Difficulty] to remain brisk with lead times already pushing [Technical Difficulty] seasonally slower summer months. Overall, our optimism around third quarter performance is high. Operator, with that, let's open the call for questions..

Absolutely. [Operator Instructions] Our first question comes from Martin Englert from Jefferies. Please go ahead..

Hi, good morning, everyone..

Good morning..

How [ph] was the inventory cost base during 2Q and maybe what was the potential impact on the gross margins, and if you could discuss [Technical Difficulty] into 3Q here?.

So, Martin, we don't really disclose the cost basis of the inventory. But what I would tell you is I'd echo what Michael and David commented on. First, we'll talk about the volume piece, and then, we'll talk about how the inventory is positioned in terms of gross margins. Our inventory tonnage was slightly lower in the second quarter.

Our view going into the third and then into the fourth quarter is that we'll have lower tonnage sequentially in each of those two quarters. I would tell you, we would anticipate getting pretty close to 5 inventory turns as we move into the [Technical Difficulty] quarter. So that's the volume piece.

In terms of the question on the cost and the gross margin, our view is, is moving into the third quarter our inventory is [Technical Difficulty] positioned from a cost standpoint where strong margins continuing in to the beginning of the third quarter..

Thank you.

[Technical Difficulty] And any expectations on the overall working capital [Technical Difficulty] in the back half of the year?.

Yeah. [Technical Difficulty] with the inventory down, as I just commented, as well as pricing in the market place, our view is, is that we're here and getting near the top here. I would anticipate we'd start to have some cash flow coming back into the organization from the working capital piece.

I think you'll see more of that cash flow in the fourth quarter than the third quarter. But we're already starting to see a bit of that as we move through the third quarter..

Okay. Thanks for the detail there.

And if you could comment, what were the volumes for Berlin in 2017? How much did that contribute to the specialty tons sold? And how was that year-over-year change in 2Q for Berlin?.

Yeah, so, Martin, we have not and aren't going to [Technical Difficulty] Berlin. Berlin is part of the specialty metals segment. You will see some basic information on Berlin in the 10-Q when we file it later today. But, yeah, we're not breaking out the individual components of Berlin..

And lastly there, you mentioned [Technical Difficulty] further acquisitive growth.

Can you discuss the types of businesses you're focused on? Is this more growth [Technical Difficulty] specialty? Or you're looking beyond that?.

Yeah, Martin, it's Michael. I would say we're looking for things accretive to our margin. And so, there's a potpourri of opportunities out there, most of which, and many of which we will probably [Technical Difficulty] participate in the auctions that are out there.

But in essence, ours is looking for [Technical Difficulty] kind of margin expansion in terms of being accretive to the core base of the products that we handle. So we're moving more downstream, and we kind of like where that's going to take us..

Can you give any - more specific examples when you speak about moving further downstream as to that, I guess, [Technical Difficulty]?.

Well, clearly, when we look at our overall mix of business as we [Technical Difficulty] fabrication over our base commodities, the enhancement of margin to those kinds of opportunities for us continue to drive better overall profitability.

So we would look at using our skills in commodity purchasing and [Technical Difficulty] looking at our abilities to [Technical Difficulty] fabrication to our OEMs; and then looking [Technical Difficulty] our fabrication skills and maybe private [Technical Difficulty] some products, so all the above..

And any type of, I guess, goal posts when we think about how much of your product that being sold today would be comprised of fabricated product?.

It's probably about 15%..

15%, Martin..

Okay.

And do you have a sense of how that changed over the past, maybe 5 years or so?.

Marginally, more. Again, it's a question of - again, we're coming out of a recession. I think a lot of our customers who outsourced their manufacturing during the recession, in-housed a lot of that fabrication.

As we're starting to see a robust economy, start to take accelerated scenarios, we're seeing more of those opportunities than we did maybe 1.5 years ago, but - go ahead, David..

Yes, Martin. David Wolfort, here. All of our business segments are firing on all cylinders. And so, as I noted with the Chicago Tube & Iron now, of 18% of our business [Technical Difficulty] going to add value-added. On the specialty metals side, we're up to 20% there. And we haven't lost any traction on the carbon side.

And within every one of those elements is value-added participation. We are much more selective today about who we service to make sure that the production is moving through our facilities in the most appropriate manner and to get more tonnage through every one of these facilities.

And as I mentioned earlier, we've taken a look at and [Technical Difficulty] a number of facilities to accommodate that growth, both in [Technical Difficulty] and in distribution..

Excellent. Thank you for all the detail, and congratulations on the strong results..

Thank you..

[Operator Instructions] Our next question comes from Aldo Mazzaferro from Mazzaferro Research. Please go ahead..

Hey, good morning, everyone..

Hi, Aldo..

Congratulations on a strong quarter, I could say at least. The question I had was on the volume in carbon.

I'm wondering, can you tell us a little about the trends in terms of capacity utilization and where you are in terms of your ability to put out more tonnage? I noticed, the one thing that stands out in the strong quarter is that the volume in carbon was flat, slightly down [Technical Difficulty] a year.

I'm just wondering, whether that's a function of you trying to be [Technical Difficulty] whether it's a function of capacity utilization being [Technical Difficulty] out or what might be the [Technical Difficulty] Thanks..

Aldo, it's Rick. Good morning..

Good morning..

We highlighted - so let's [Technical Difficulty] talk about, in total, the carbon flat tonnage. While you look at the face of [Technical Difficulty] statement and see that, that tonnage is down [Technical Difficulty] did close the North Carolina operation last year and that was predominantly, if not all, carbon.

And then second, we've really [Technical Difficulty] size the international brokerage business that [Technical Difficulty] and we had quite a bit of volume and that was all business as well last year.

So when you [Technical Difficulty] that back and you look at our same store, if you will, same operational tonnage year-over-year, we're actually up, and we're actually outpacing the growth rate in the industry..

And Aldo, also we have - our temper mill in Iowa has been down for the quarter as we're replacing the share [Technical Difficulty] replacements, so tonnage has backed off [Technical Difficulty] facility, because of the temper mill shut. Hopefully, we'll have that up and running late this quarter..

But [Technical Difficulty] what I want you to takeaway is our business in carbon is up. Our customers are busy. We're shipping more. And to then answer the second part of your [Technical Difficulty] we do have the ability to continue to grow with our core existing asset base in the carbon flat business.

So we do have some additional [Technical Difficulty] today. And we're excited about that, because we do see a pretty strong marketplace and our customers are indicating some pretty strong backlog [Technical Difficulty] all the way into 2019..

Great. On a slightly different topic, some of the issues about the slab imports are starting to get a little bit of difficult U.S. steel, just saying this morning on their call that they're in the market merchant slabs, installing merchant slabs and really ready, willing and able.

I'm wondering, does that open opportunities for you or for service centers in general anywhere or if you have customers that maybe - or you yourselves might be seeing less availability from some of the mills that were previously importing slabs? Is there ways that you could pick up additional business by maybe contracting to [Zero Slabs] [ph] or anything like that? I just wonder how this might work out for service centers?.

Aldo, that is really not our business. We looked at - we did a little bit of that back in the 1990s. It really hasn't beneficial for Olympic Steel.

What I [Technical Difficulty] to you is that, our performance with our supply [Technical Difficulty] which are the preponderance of the [Technical Difficulty] domestic suppliers is strong, and while periodically we might not get as much steel as we want, we get significantly - we get enough steel to continue to grow our market shares.

We have to be a little bit nimble. But by and large, we're participating well there..

Yeah.

So Dave, In general terms, as we come out of the summer into the kind of back-to-school season, do you see the market and supply-demand turns being are tighter, September, October, than where we are right now would you say?.

Aldo, I will tell you that our customer base is very strong. That third quarter is one of the stronger third quarters that we've seen. There's no abatement there. Our large OEMs are - have a deep order book that goes well [in 2019] [ph]. And again, we are busy filling orders for them.

So we [Technical Difficulty] very strong demand cycle all the way through third and fourth quarter..

Okay. Well, congratulations [Technical Difficulty] really great to see the recent acquisitions [Technical Difficulty] and in tubing coming in, in terms of the earnings contribution..

Thank you, Aldo..

Thanks..

At this time, I'd like to turn the conference back to Mr. Siegal for any additional or closing remarks..

Yes. Thank you, operator. Next Tuesday, on August 7, Rick Marabito and I will be attending the [Technical Difficulty] Industrial Conference in New York. We hope we will see many of you there. Again, thank you for joining us this morning and for your [Technical Difficulty] Steel..

This does conclude our conference for today. Thank you for your participation. You may disconnect..