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

Martin Englert - Jefferies Michael Leshock - KeyBanc Capital Markets Aldo Mazzaferro - Mazzaferro Research Chris Sakai - Singular Research.

Good morning and welcome to the Olympic Steel 2018 Third Quarter and First Half Earnings Conference Call. [Operator Instructions] As a reminder, this call 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 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..

Thank you, operator. Good morning and thank you all for joining us to discuss for the second consecutive quarter in a row of Olympic Steels’ record breaking sales and strong earnings performance.

On the call with me this morning are Olympic Steel’s President, David Wolfort; Chief Financial Officer, Rick Marabito; Executive Vice President and Chief Operating Officer, Andrew Greiff; and President of our Chicago Tube & Iron Business, Dr. Don McNeeley. We reported record net sales of $457 million in the third quarter.

This surpassed our previous quarterly sales record that was just set in the second quarter of this year. Higher average selling prices for our products contributed to the sequential improvement compared with last year third quarter net sales grew by 38%.

Strong demand, combined with excellent execution by our commercial teams led to higher year-over-year shipping volume and additional market share gains. Year-to-date sales of $1.3 billion are essentially what we generated in all of 2017.

All three of our operating segments increased net sales by more than 30% in the third quarter and more than 19% year-to-date compared with last year. In addition to the strong top line growth, our operating teams have performed exceptionally well.

Despite cost pressures associated with the shortage of industrial labor and growing freight costs, we managed to ship record volume for the first 9 months of 2018. Operating income reached $18.6 million in the third quarter, which more than tripled last year’s third quarter.

Year-to-date operating income has grown to $55.3 million more than double that of the same period last year. Reported net income rose to $11.6 million or $1.01 per diluted share and was more than 5x our net income of $2.3 million or $0.20 per share in last year’s third quarter.

This brought our 9-month net income up to $31.5 million or $3.07 per diluted share compared with $14.8 million or $1.30 per share last year. The integration of Berlin Metals, which we acquired in April of this year has now been successfully tucked into our specialty metals business according to plan.

As expected, the business has been accretive to our results and Berlin now has wider distribution opportunities within our customer base. We continue to seek accretive acquisitions and have some potential downstream products in our pipeline.

Based on the results of this week selection, we are optimistic that our nation’s pro growth agenda remains on track and that the industrial sector’s recovery will continue to compound as both Democrats and Republicans have advocated for an early infrastructure bill.

Our growth initiatives are concentrated in areas that will benefit from strong GDP performance and the strategy serves us well in the expanding economic environment. This morning, we also announced the company’s Board of Directors declared our 54th consecutive quarterly cash dividend.

The regular cash dividend of $0.02 per share will be paid on December 17 to holders of record on December 3. And for me, personally, this is my 98th and final quarterly earnings call as CEO of Olympic Steel.

I want to thank all the friends and family of Olympic Steel for the opportunity to present this great company for the past 24.5 years to all of you. And with that, I will turn the call over to Rick Marabito for the financial review..

Thank you, Michael and good morning everyone. As Michael just highlighted, we experienced strong third quarter financial performance. Compared with last year’s third quarter, shipping volume of flat products rose more than 5% to 318,000 tons in the quarter, that’s up from 301,000 tons in 2017 third quarter.

Year-to-date, flat products shipping volumes increased 2.6% to 983,000 tons and that’s compared with 959,000 tons in the 2017 9-month period. These figures include the contribution from Berlin Metals in our specialty metal segment. And as a reminder, we do not report volume for the pipe and tube segment.

In the second quarter of this year, we exited our unprofitable international brokerage sales and also you may recall last year we closed the facility in North Carolina.

Excluding sales from these closed locations, our market share increased in all product categories in 2018 with flat products shipping volume growing more than 6% over 2017 and this outpaced the industry shipping growth rate of 5.2% according to the MSCI Metals Activity Report.

Higher average prices and strong shipping volume resulted in third quarter net sales increasing to a new quarterly record of $457 million topping the prior records in the second quarter. Compared with last year’s $331 million, net sales rose 38% in the third quarter.

Year-to-date, sales have increased 26% to a record $1.3 billion in 2018, versus $1 billion in 2017. Reflecting the success of our diversification efforts, our specialty metals and pipe and tube segments are both running at record sales and record operating income levels.

And our core carbon flat products business has experienced strong growth in both sales and profitability. Specialty metals year-over-year net sales were up 60% in the quarter, and up 47% year-to-date.

Pipe and tube revenue was up 41% for the third quarter and 27% for the 9 months resulting in all-time highs for market share in pipe and tube and stainless steel products. Year-over-year, net sales of carbon flat products increased 31% in the quarter and by 20% in the 9 months.

Consolidated gross margin as a percentage of net sales was consistent between years at 20% in the third quarter, compared with 19.9% in 2017 same quarter, and for the 9 months consolidated gross margin percentage was 20.9% versus 21.1% in 2017. Gross profit dollars, however, grew 39% to $92 million in the quarter, up from $66 million last year.

And for the 9 months, gross profit dollars rose 25% to $269 million up from $216 million in 2017. This improvement was driven by a 29% increase in gross profit per ton, which rose to $266 in the quarter and year-to-date gross profit was $254 per ton which was 20% higher than last year.

Our results do include LIFO expense for the pipe and tube segment of $2.7 million in the third quarter, and that brought our year-to-date LIFO expense to $4.7 million. This was up significantly from LIFO expense of $700,000 and $1.5 million respectively for the 3- and 9-month periods of 2017.

LIFO reduced net income by $0.18 per diluted share in the third quarter of this year and by $0.30 per share for the 9 months this year. We included a reconciliation table in this morning’s press release breaking out both years LIFO impacts. We are experiencing inflation in operating expenses particularly in labor and transportation.

In addition variable performance based incentive compensation is higher than last year, but as a percentage of sales operating expenses have improved to 16% in the third quarter versus 18.3% last year and improved to 16.6% year-to-date versus 18.6% last year.

As Michael highlighted, operating income more than tripled to $18.6 million in the third quarter, and year-to-date operating income more than doubled to $55.3 million versus the 2017 period.

Interest expense rose to $2.9 million in the third quarter and that’s up from $2 million last year, this was due to higher average borrowings to fund working capital and the Berlin Metal’s acquisition. In addition, our asset based loan borrowing rate is primarily based on LIBOR, which is increased since last year.

Our average borrowing rate was 3.6% through the first 9 months of 2018. Pre-tax income rose to $15.7 million in the quarter, that’s compared with $3.3 million last year, and rose to $47.6 million in the 9 months compared to $20.5 million last year. Our effective tax rate was 26.2% in the third quarter and 26.3% for the 9 months this year.

Third quarter net income improved to $11.6 million or $1.01 per diluted share in 2018, this is up sharply from net income of $2.3 million or $0.20 per diluted share reported in last year’s third quarter.

Year-to-date, net income more than doubled to $35.1 million, or $3.07 per diluted share that’s compared with net income of $14.8 million or $1.30 per diluted share in 2017 same period.

As highlighted in the reconciliation table included in this morning’s press release, the before LIFO EPS comparison for the quarter is $1.19 per share – diluted share this year versus $0.24 per diluted share last year.

For the 9 months, which also includes a onetime deferred tax benefit last year, adjusted net income rose substantially to $3.37 per diluted share in 2018 compared to $1.21 per share last year. So now, let’s turn to the balance sheet. Working capital remained elevated in the third quarter due to increase shipping volumes and higher metal prices.

Since the start of this year, accounts receivable increased $81 million and inventories increased by $91 million. Our inventory tonnage actually declined in the third quarter, however, given price increases inventory evaluation grew slightly to $366 million during the third quarter.

We expect our inventory tonnage to further decline in the fourth quarter. Our day sales outstanding for receivables average less than 42 days in the third quarter and that is unchanged from the second quarter. Our annualized flat products inventory turnover, which is based on tons, was 4.2 turns in the third quarter.

Our inventory tonnage peaked in June prior to the steel prices peaking in July. Heading into year end, as I commented, we are managing inventory lower, which will also increase cash generation and lower debt. During the third quarter, our total debt increased by $7 million to $304 million and that’s up $107 million since the start of 2018.

This directly correlates with the increases in working capital that I just spoke of and the April purchase of Berlin Metals. As of September 30, we had approximately $93 million of availability on our low cost credit facility. Capital expenditures for the year-to-date totaled $20.4 million.

For the full year, our forecast for CapEx still remains at approximately $25 million. And as David will highlight in a few moments, our capital investments are focused on growth initiatives with higher EBITDA margins.

Shareholder’s equity increased to $308 million and that’s $28.01 per share at the end of the third quarter and the tangible book value stood at $25.51 per share. And finally, we did file our 10-Q earlier this morning and that provides additional details on our operating results for the third quarter.

With that, I will now turn the call over to David for his operating review..

Thank you, Rick and good morning to everyone. This has been an exciting quarter and year. Our capital investments and acquisitions throughout the recovery have allowed our enterprise to increase participation in targeted market sectors and increase market share gains.

Our healthy balance sheet has allowed us to capture the rewards of an improving industrial sector as well as to continue invest in exciting growth opportunities.

These deliberate efforts to diversify our products and geographies, while not losing sight of our long-term objectives for profitable growth, have resulted in better financial and operating performance. Our investments in specialty metals and pipe and tube are paying consistent dividends.

All segments are growing respective market share and making significant contributions to the consolidated results of Olympic Steel. Complementing this growth, investments in our carbon steel franchise have resulted in sustained market share gains and improved financial results.

While inflation has perked up this year, the shortages of skilled labor and truck drivers have been a national challenge. We preempted these challenges by growing our proprietary truck fleet, adding in-house drivers and increasing average wages for our employees who deserve to be rewarded for their hard work.

We are pleased to share the prosperity associated with better market conditions and lower tax rates as all three business segments envision market share growth and new geographic expansion.

These actions have also improved productivity and enhanced operating performance to better serve customers who are also enjoying elevated business activity allowing us to grow our shipping volume and produced record results as both Mike and Rick have detailed.

Our view is that we are fully – we are getting near plateau on freight rates and entering 2019 and we will continue to focus on controlling expenses. To satisfy growing demand, we continue to invest in the future. Several key growth projects are either near completed or in their final phase. The new shear on our temper mill in Iowa is operational.

Our second stainless steel sweater is now in production in Streetsboro, Ohio facility. We have completed the installation of our new Herr-Voss cut-to-length line which is house in our newly constructed facility expansion in Schaumburg, Illinois. This new line is dedicated to white metals and is expected to be fully operational this quarter.

It will provide needed capacity for our growing stainless steel and aluminum business, which has been running full tilt and outstripping existing production capabilities. Looking ahead, aside from the typical fourth quarter seasonal market price pressure, we anticipate a strong finish to the year and our customers remain bullish on next year.

We have been digesting the growing demand of our customers and most are projecting year-over-year growth in 2019. This sentiment is backed by the macro data with last week Chicago PMI reading of 58.4 showing expansion signals for new orders, order backlogs, inventory production and deliveries. This reinforces what we are seeing on the ground.

Finally, we will welcome the much anticipated infrastructure plan next year and believe the nation has taken a step forward now that the elections are behind us. Our nation’s infrastructure needs to be rejuvenated and Olympic Steel is ideally positioned to play an important role in that effort. Now, operator, let’s open the call for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Martin Englert with Jefferies. Please proceed with your question..

Hi, good morning everyone..

Good morning..

Carbon flat margins remained relatively strong in 3Q despite the price headwinds that were kind of persisting there.

Can you remind us how much of your mix is based on lagging contract prices? And then any thoughts as to the margins and carbon flats in the 4Q there relative to 3Q?.

Hi, Martin. It’s Rick. We are about a mix of about two-thirds, one-third contractual spot on carbon flat. The majority of those contracts have some lag to them and so that would certainly did allow for strong margins to continue into the third quarter.

And then the second part of your question, I’m sorry?.

Just thoughts on carbon flat margins fourth quarter versus the third quarter because of the price declines and some of the contracts rolling there, if I guess how significant of a decline should we maybe anticipate?.

Well, not significant Martin this is what I would say. Certainly, there will be much some margin pressure as it relates to the trail, but we don’t know where this ends. And certainly, we think that with the robust demand by what we are hearing from our customers, it’s kind of a dead cat bounce that we are expecting.

So we probably will see some margin compression, not significant in the fourth quarter, but we expect that to recover in the beginning of first half of next year..

Okay, thanks for that detail.

And within tubular, SG&A cost stepped up about $3 million over the previous quarter, can you discuss what contributed to that increase there? And I guess that’s sustained or how we should think about our run-rate?.

This is Don McNeeley. So, we had some increases in operating expenses and SG&A, primarily some of the reasons that David outlined earlier, most of our commercial staff is in Senate on commissions. So with the increase pump we are having in sales and success, obviously, commissions are going up.

I might point out though notwithstanding the increase in expenses, operating expenses, SG&A expenses as a percent of revenue have fallen from 20% to 18% of revenue. So we are happy with that trend, the challenge in the fourth quarter will be to maintain that..

And we had significant growth margin in the pipe and tube business, so we commented on that earlier, but really strong increases in sales which obviously as the sales move up the variable component of the expenses moves up as well..

Thanks. And if I could one last one there in the release and then also in the call you spoke about demand expectations amongst your customers in 4Q and then also touched into 2019.

Can you provide a little bit more granular color from amongst your key end-markets there as far as maybe what they are anticipating heading into 2019?.

Thank you, Martin. Dave Wolfort here. Our OEM customer base has been experiencing a very strong and robust year for all three quarters. Their expectations going into fourth quarter is a continuation of that product pull. And then additionally we have had no signals of backing off for the first 6 months of 2019.

So we continue to run at a robust schedule at all of our facilities, particularly on value-added equipment and that has pushed a little bit on the labor side as we continue to keep up with the demand of our OEM customers..

Do you have any sense or feeling that the OEMs are constrained with what they can do to labor shortages, do you think demand will be on the higher level?.

Yes, that’s right Martin. I don’t think anybody is immune to that. I think it’s a national issue, as I have mentioned before, same as transportation is a national issue, but the customer base that we are addressing, which is a profound amount of our business has had double-digit growth and continue to see that double-digit growth..

Great. Excellent. Thanks for all the color and congrats on the strong results there..

Thank you..

Thank you. Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Please proceed with your question..

Hey, guys. Good morning.

So first question, just end-market demand looked pretty strong, and I am just wondering, is there any end-market at all that’s been disappointing that you are a bit more cautious about going forward into next quarter in 2019?.

The only market, there is a lot being written about automotive. So clearly, we are a very small player in the overall schematic automotive, so we probably feel less impact. That’s probably the only sector we are seeing any kind of noise around maybe not being as robust. Every other capital market is very strong, very strong..

Okay.

And you touched on this a bit, but could you breakout at all the impact of rising labor costs and freight costs and just whether you are anticipating those higher costs to continue into the next quarter in 2019 as well?.

So Michael, this is Rick. I think that as we commented, we are getting near at the top of the sequential increases.

So our plans and the way we are thinking about it is we were near the peak and so transportation and labor costs, fourth quarter going into first quarter will probably be at a pretty steady run rates to what they were just in this recent third quarter..

Okay.

Did – do you think that will maintain throughout 2019?.

Our view – yes, today we would say yes, because we think that as we just commented there is going to continue to be a pretty robust industrial economy. And I think as long as we have that we are going to have inflationary pressures in labor and transportation..

But Michael, we really – Dave Wolfort here, we have not been shy about controlling our own destiny when it comes down to transportation, so not only outbound, but also on the inbound side from our producing mills.

We continued to – we continue to grow our fleet and the quality of that fleet, which is extraordinary as we continue to control more and more of our own freight..

Okay, great. Thanks. That’s it for me..

[Operator Instructions] Our next question comes from the line of Aldo Mazzaferro with Mazzaferro Research. Please proceed with your question..

Hi, good morning..

Good morning..

And Michael, so I just wanted – I want to congratulate you Michael on your tremendous career as CEO and congratulate Rick on getting a chance to be CEO going forward. And I think it’s really a testament to your long-term success in the industry. But I do have a couple of questions on the….

Thanks for calling me old, Aldo. I appreciated. I think I am older than you..

I don’t know.

But in terms of the supply side, David are you expecting the domestic mills to increase their production rates between now and year end or do you think they will kind of stay around this 80% that they are at?.

Well, I think Aldo, I don’t control that, but there seems to be more products coming out into the marketplace. October is always interesting. It has been interesting for the last 3 years or 4 years. We saw a lot more capacity coming on. We expect that capacity to continue to come on and abate imports.

But the production is being absorbed in the marketplace. So I would expect that, that capital being deployed by our producing mills is warranted and really supports the long-term interests of this nation and the steel industry..

Right.

Would you be able to say Mike or Jay, would you be able to say if you think your volume – shipping volume in tons might be sideways or flat in the fourth quarter versus third or do you think you will get a seasonal drop?.

Well, I think Aldo it will reflect kind of consistent tons per day. The issue is how many shipping days do we lose in the fourth quarter relative to the holidays. Obviously Thanksgiving is early, does that impact the next week and obviously, the last two weeks of December are always kind of unknown until you get into them.

But clearly, in the fourth quarter it is less shipping days. And I don’t think if you look at it from a pure quarter-on-quarter, it’s not a fair analysis. You have to look at sort of the shipping days over shipping days. And we expect our tonnage over the – maybe the last two weeks of December to probably stay on a per day basis relatively flat..

Right.

And finally just two quick ones on the capacity utilization rate, I know you guys – it’s kind of hard to measure, but it sounded like what you said you are pretty flat out in the specialty side, I am wondering if you can comment on what kind of rate you think might be at capacity wise on the carbon side?.

Aldo, we are busy..

And we are open for business. By the way our customers are open for business..

Okay..

We are extremely busy at all of our facilities that has challenge just on the labor side as we remark, but we found resolved there. Its challenge just across the board, but it’s also a challenge for our customers as previous questioners have asked. But we are busy..

Okay.

And final quick one for Rick, as you look at the 2019 outlook, you are probably going to see more stability and therefore maybe less demands for working capital and maybe some freeing up of working capital, I am wondering with the $300 million in debt and the stock buyback program authorized, would you be able to prioritize the uses of free cash flow in 2019?.

Sure. I will do that. You are correct, I think going into next year, given lower working capital levels, we are going to see a pay down in debt. As always, our priorities are to consider all things including stock buybacks. As you know, we have done those in the past.

And I think we even – we have an open authorization to do that, so we will certainly consider that. And then David has already outlined some of the CapEx and some of the growth initiatives that we have. And we also commented on our desire to continue to make niche acquisitions, so we are considering all of those things Aldo.

But I think you are right, the first step will be as we move through 2019 to start to see that debt proceed and we are certainly planning on that..

Great, alright. Thank you very much guys..

Thanks Aldo..

Our next question comes from the line of Chris Sakai with Singular Research. Please proceed with your question..

Hi, good morning..

Good morning..

Just wanted a little more color, I guess for 2019 what sort of acquisitions do you guys see and then what sector would you possibly target?.

So certainly as I just commented what we are strategically looking at doing is smaller niche acquisitions, it could certainly be in any three of our existing business segments.

And looking to utilize our existing platform of what we do in terms of three different product groups and all the processing capabilities to bring that to bear in terms of higher margin type acquisitions of not only intensive end products of steel and metal.

So that’s the objective and as we commented earlier today, we are certainly optimistic that we will be able to execute on that next year..

How are the evaluations of potential acquisitions, I mean it seems like the whole industry is growing really well?.

I would tell you the multiples have held pretty steady over time. As you probably know, the five to seven type multiples for the things that we are looking at seems to be the typical range and I would say those are holding pretty true going into ‘19 as well..

Okay. Thanks and good quarter..

Thank you..

Thank you. Mr. Siegal there are no further question at this time. I will turn the floor back to you for any final comments..

Well, thank you, operator. Rick Marabito and I myself will be at the Goldman Sachs Metals and Mining conference on November 28 in New York City. The following week Olympic will be meeting with investors at Cowen and Company’s Energy and Natural Resources Conference on December 5. We hope to see you at least one of those, if not both of those.

And once again, thank you for joining us this morning and for your interest in Olympic Steel..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..