Reliance Steel & Aluminum Co.
Q3 2008 Earnings Call Transcript

Published: 16 Oct 2008

Operator:

Good morning, ladies and gentlemen and welcome to the Reliance Steel & Aluminum sponsored 2008 Third Quarter Financial Results Conference Call. At this time, all participants have been placed in a listen-only mode and we'll open the floor for your questions or comments following the presentation. It is now my pleasure to turn the floor over to your host, David Hannah. Sir, the floor is yours.
David Hannah:

Great, thank you. Good morning and thanks to all of you for taking the time to listen to our conference call for the third quarter and nine months ended September 30th of 2008. Gregg Mollins, our President and Chief Operating Officer and Karla Lewis, our Executive Vice President and Chief Financial Officer are also here with me today. This conference call may contain forward-looking statements relating to future financial results. Actual results may differ materially as a result of factors over which Reliance Steel & Aluminum Co. has no control. These risk factors and additional information are included in the company's Annual Report on Form 10-K for the year ended December 31, 2007 and other reports on file with the Securities & Exchange Commission. After the completion of this conference call, a printed transcript including Regulation G Reconciliation will be posted on our web site at http
Gregg Mollins:

Thank you, Dave, and good morning. We're very pleased with our record sales in the third quarter. Our Gulf Coast companies made it through hurricane Gustav and Ike with minimal damage to our plants. More importantly, our employees remain safe. As expected, the market was and continues to be a very competitive one but we believe our managers are reacting well through changing conditions. We're also pleased with the results of our most recent acquisition, the PNA Group, and its individual companies that make it up. Their profits were very close to our expectations and we believe their performance will improve as they become more familiar with our operating model. Our internal growth initiatives in the Midwest, Northeast, and Southern regions are progressing well and we are excited about those continuing opportunities. Our biggest challenge in the quarter from an operational standpoint is managing our gross profit margins. Prices on most of the products that we sell fell during the quarter. As a result, service centers scrambled to reduce their inventories, which obviously has an impact on gross profit margins and it did. Our inventory turned four times when we included the PNA Group. On a same-store basis, we are slightly below our first half churn levels, but are confident that PNA and the rest of our operations can improve their churns. From a demand point of view, things pretty much played out as we expected with no real surprises. Our major end-use markets, which include energy, wind towers, ship and barge building, mining, railcar, non-residential and industrial construction, agricultural equipment, as well as infrastructure and aerospace are relatively strong. Year-to-date, tons sold on a same-store basis are down slightly over 2% compared to the first three quarters of 2007. The weakest industries continue to be domestic auto producers, appliance makers and residential construction where we have very little exposure. As for what lies ahead, that's very difficult to predict. We estimate that the North American carbon steel flat-rolled producers have taken three to four million tons of production out of the system in the fourth quarter. We also believe they have the discipline to continue reducing production going forward in flat and other products as well. These same producers have lowered their prices enough to keep in a competitive range with foreign offerings, thus, eliminating the need to buy offshore. Even with the recent rounds of price discounting, prices on carbon products are still at relatively high levels. As for aluminum, Midwest spot ingot began the year at $1.14 a pound, peaked at $1.54 a pound and will likely end the year near that $1.14 a pound level. Aerospace play continues to be a relatively stable product from a price perspective. Stainless surcharges continue to be volatile and have been for some time, and we see no reason for this to change. To sum it up, we believe the fourth quarter and the first quarter of 2009 will continue to be challenging. My view of industrial America is not nearly as pessimistic as what I read in the papers or see in the news. We have navigated our way through much more difficult markets than the one we are in now. Remember, our results during the 2001 through the 2003 timeframe when industrial America was truly in a prolonged recession. Now I'll turn the program over to Karla to review our financial statements. Karla?
Karla Lewis:

Thanks, Gregg, and good morning. Consolidated sales for the quarter were a record $2.57 billion, an increase of 42% from our 2007 third quarter sales. Our consolidated year-to-date sales of $6.58 billion were also a record and were 18.5% higher than in the 2007 nine-month period. Our 2008 consolidated sales include $421 million of sales from the TNA companies that we acquired on August 1, 2008. Same-store sales which exclude the sales of our 2008 and 2007 acquisitions were $1.98 billion in the 2008 third quarter, up 18.6% from the 2007 third quarter with a 4.4% decrease in our tons sold and a 25.2% increase in our average selling price per tons sold. For the 2008 nine months period, our same-store sales were $5.7 billion, up 9.3% from 2007 with a 2.1% decrease in our tons sold and a 12.2% increase in our average selling price per tons sold. And our 2008 third quarter same-store sales increased 2.5% from our 2008 second quarter with tons sold down 7.3% and our average selling price up 11%. The decline in our tons sold in the third quarter as compared to the second quarter was in line with our expectations, which factored in the normal seasonal slowness along with general slowing in all markets. Our same-store average selling price has increased significantly throughout the year, mainly because of increased costs for carbon steel products with the most significant increases in the 2008 second quarter. Our selling prices for most of our aluminum products have also been higher in 2008 because of increased costs. Stainless steel prices and costs have been lower in 2008 compared to 2007. Our 2008 third quarter gross profit was $624 million or 24.3% as a percentage of sales, the same as in the 2007 third quarter, but down from 28.0% in the 2008 second quarter. For the 2008 nine months period, our gross profit margin was 25.9%, up from 25.4% in the 2007 nine-month period. Our 2008 third quarter gross profit percentage was significantly impacted by our LIFO adjustment, which I will discuss in a minute. Overall, our gross profit margins narrowed in the third quarter as compared to the second quarter, which is typical for us in the current environment. During the second quarter of 2008, when the carbon steel mills were announcing significant price increases for carbon products, we were able to increase our selling prices to our customers before we received the higher cost metal into our inventory. This allowed us to expand our gross profit margins. During the third quarter, we continued to receive higher cost material into our inventory that increased our average cost and lowered our gross profit margin from the second quarter level. In addition, because of the uncertain economy, and because carbon steel prices started to decline, competitive pressures also caused us to narrow our gross profit margins somewhat from second quarter levels. Our gross profit margin was further impacted by our acquisition of PNA on August 1. Historically, the PNA companies have operated at lower gross profit levels than the Reliance companies. Excluding the PNA companies from the 2008 third quarter would have resulted in a gross profit margin of 25.7%, 1.4% higher than our consolidated margin of 24.3%. Our 2008 third quarter LIFO expense, which is included in our cost of sale and in our calculation of gross profit, was $79 million or $0.67 per diluted share. This amount includes $24 million or $0.20 per diluted share of LIFO expense for the PNA companies. At the end of the second quarter, we had anticipated annual LIFO expense excluding the PNA companies of [$115] million for 2008 or $28.75 million in the third quarter. We've increased this estimate to $150 million for the 2008 year plus an additional $60 million of LIFO expense related to the PNA companies for a total estimated 2008 LIFO expense of $210 million. This results in an estimate of $73.5 million of LIFO expense for the 2008 fourth quarter. We increased our LIFO estimates mostly because of the acquisition of PNA. The PNA companies currently carry higher inventory levels and turn their inventory more slowly than we typically do at Reliance. We also increased our LIFO estimate excluding PNA, because carbon pricing stayed higher longer into the third quarter especially for plate and heavy structural products, which will cause our year end average cost in inventory to be a bit higher than we had previously expected. LIFO expense in the 2007 third quarter was $12.5 million, or $0.10 per diluted share. And in the 2008 nine month period, we recorded LIFO expense of $136.5 million, or $1.15 per diluted share compared to $45 million, or $0.37 per diluted share in 2007. Our 2008 warehouse, delivery, selling, general and administrative expenses have increased $135.6 million, or 17.6% in the year-to-date period. The increase is mainly due to our acquisition of PNA. As a percent of sales, our 2008 third quarter expenses were 12.8% compared to 13.9% in the 2007 third quarter and for the 2008 nine months period, or 13.8% compared to 13.9% in the 2007 period. The acquisition of the PNA companies favorably impacted our SG&A expenses as percentage of sales as they have operated at a lower historical expense level than the Reliance Company. Our 2008 depreciation and amortization expense increased $12.4 million over 2007 in the nine months period mainly because of our 2007 and 2008 acquisitions. The purchase price allocation for the PNA companies is preliminary at this point, which may impact our depreciation and amortization expenses assumptions going forward as we finalize the valuation. Operating profit for the 2008 third quarter was $268.6 million, or 10.4% compared to $168.2 million, or 9.3% in the 2007 third quarter. The improvement was mainly because of the higher carbon steel pricing and because of our lower expense levels as a percentage of sales in 2008. However, our operating profit margin is down from 12.8% in the 2008 second quarter because of our lower gross profit margins discussed earlier. Interest expense for the 2008 nine months was 5.9% lower than in the 2007 nine months period because of lower outstanding borrowings and lower interest rate during most of the 2008 period as compared to 2007. However, due to our $1.1 billion acquisition of PNA on August 1st, our borrowing levels have increased significantly. Our interest expense in the 2008 third quarter was 47.9% higher than in the 2008 second quarter. Borrowing costs also increased during the 2008 third quarter. I'll discuss our debt levels and costs more in just a minute. Our 2008 effective income tax rate was 37.7% consistent with our 2007 effective tax rate for the year, although we booked at a rate of 37.5% during the first nine months of the 2007 year. The acquisition of PNA was accretive to our earnings in the 2008 third quarter adding $0.12 to earnings per diluted share for the two months period ending September 30, 2008. Net of acquisitions, our accounts receivable balance increased $230.2 million and our inventory levels increased $294.2 million at September 30, 2008 from our year end 2007 amount. Our accounts receivable day sales outstanding rate was approximately 41 days for the 2008 year-to-date period, up slightly from 40 days earlier this year. This is impacted somewhat by certain of the PNA companies that have a higher DSO rate. We continue to closely monitor our receivables and are cautious given the tight credit conditions and economic uncertainty. However, we have not seen any meaningful changes in the credit quality or payment ability of our customers at this time. Our inventory turn rate including the PNA companies was 4.0 times at the end of the 2008 third quarter. Excluding the PNA companies, our inventory turn rate was 4.3 times, down somewhat from 4.4 times in 2007 and 4.5 times at the end of the 2008 second quarter. Excluding the PNA companies, our inventory quantities declined by about 2% as of September 30th, compared to June 30th, which was at a lower rate than the 7% at which our shipping levels declined during the quarter. We are currently very focused on meaningful reductions in inventory levels, especially given the demand uncertainty of our customers. Although our working capital needs have increased during 2008, our solid profit levels provided net cash flow from operations of $115.4 million in the 2008 nine months. However, operating cash flow in the 2008 third quarter was a negative $13 million, because of the working capital increases from the PNA companies during the quarter. We expect to generate significant cash flow from operations in the 2008 fourth quarter as our working capital declined due to reduced inventories and the normal seasonal slowness. Our outstanding debt at September 30, 2008 was $2.28 billion. On August 1st, we increased our borrowings by $1.1 billion to purchase PNA. We funded this with $500 million from a new term loan and with borrowings under our credit facility. As of September 30, 2008, we had $915 million borrowed on our $1.1 billion syndicated credit facility. Our net debt-to-total capital ratio was 48.1% at September 30th, up from our year end 2007 rate of 32.4%. The $1.1 billion transaction value for the purchase of PNA included the refinancing of $725.3 million of their outstanding debt at closing. This included a secured credit facility as well as $250 million of 10.75% outstanding fixed rate notes and $170 million of outstanding floating rate notes at LIBOR plus 700 basis points. Our debt cost during the 2008 third quarter under our credit facility was LIBOR plus 55 basis points and the cost of our new $500 million term loan was LIBOR plus 225 basis points for a weighted average cost of 4.3% during the quarter. Although LIBOR rates increased in the 2008 third quarter, we experienced significant savings by tendering for the PNA notes and refinancing PNA's debt. In the 2008 nine months, we used our borrowings and cash flow to fund our increased working capital needs, capital expenditures of $119.5 million, acquisitions of $329.4 million, excluding the debt of sales and stock repurchases of $114.8 million. On September 30th, we had $185 million undrawn on our syndicated credit facility. We are comfortable with this level of liquidity in light of our plans to significantly reduce working capital during the 2008 fourth quarter and beyond. Although, we believe the fundamentals of our business and our ability to generate cash flow are strong. Because of the global credit tightening, we are limiting our uses of cash to the most important capital expenditure items and maintaining dividends to our shareholders. Our free cash flow will be used to reduce debts. And our book value per share was $32.86 at September 30th, 2008, up from $28.12 per share at December 31, 2007. Thank you. And we will now open the discussion for questions. Operator
Brett Levy:

Pro forma for PNA. Can you guys talk about where you sit right now in terms of distribution, both on a revenue basis and talk a little bit about where you are in inventory right now, aluminum, stainless, carbon and then within carbon, kind of the percentages that you have that are exposed to sheet and other products.
David Hannah:

I think with respect to where we are in the industry, I think was the first part of your question. Does that mean like what percent of the total industry are we looking at?
Brett Levy:

No. What exactly what portion of revenue comes from aluminum, stainless and carbon.
Karla Lewis:

Okay.
Brett Levy:

And then also talk about your inventory positions in all of the above within a special focus in carbon where, I think you have very little in the way of sheet product.
David Hannah:

Our carbon steel for the third quarter and now, keep in mind, this has two months only of the PNA business which is a little more carbon. But our carbon sales in the first -- I mean in the third quarter were 60% of our revenue dollars; aluminum was 14%; stainless steel was 12%; alloys were 8%; and then toll processing was 2%; and the other 4% was miscellaneous, and that includes some titanium and some copper and brass. In terms of how much of that is carbon sheet, Karla's got that, I think.
Karla Lewis:

That's 12% per sheet with about 6% of that hot rolled, and then the rest in cold rolled.
Gregg Mollins:

Cold rolled and the government.
Brett Levy:

And then, how do you look going into the fourth quarter? Do you feel like your inventories are heavier than that or lighter than that as you position yourself?
Gregg Mollins:

I think our inventories are pretty much in proportion to where they should be. We've been talking, however, about reducing inventories and we fully expect that inventories will be reduced materially during the fourth quarter. That's a normal seasonal thing for us. We usually reduce inventories in the fourth quarter. But this year with the tail-off somewhat of business that we saw in September, we expect that to continue through the fourth quarter. Therefore, we expect inventories to come down even more than what we would bring them down normally. Overall, I think right today we have about 2.8 months of inventory on hand, somewhere in there, 2.7, 2.8. So we're not uncomfortable. We just want it lower.
David Hannah:

We have initiatives out there right now in the field with our people to reduce their inventories even quicker and by larger amounts than we have in a typical fourth quarter just because of some uncertainty that we have out there. We certainly, with all of the products' prices falling, in the last 60 to 75 days, we're going to take a very cautious approach to our inventories. So we expect that our operators in the field to get their inventories down.
Brett Levy:

Whatever you guys are going through, all your competitors have got it as well even worse. Can you talk about whether or not you've got opportunities to buy people at pennies on the dollar or you're seeing small guys go out of business, or on the other side of that, are they getting so desperate that they're making the pricing environment ridiculous?
David Hannah:

There is a lot of that conjecturing going on and speculation, and I think that's just what it is, Brett. It's just a bunch of people sitting around thinking about what could go wrong, and we don't see customers going up or competitors going out of business. Most of the people in the service center industry have pretty strong balance sheets because the market, in general, has been pretty strong since 2004. The earlier part of this year was very strong, not necessarily because of demand, but because pricing has been so strong for all of us. I think people are in pretty good shape. We don't see the opportunity to buy companies for pennies on the dollar. Usually what happens, as I said before, we've seen this kind of cycle in the past. Maybe the reasons were different, but we've seen down cycles in the past. Usually what happens is people just don't sell their businesses. The speculation that they have to sell is just that, I think, it's just unfounded speculation.
Brett Levy:

Got it. All right. Thanks very much, guys.
David Hannah:

Thank you.
Operator:

Thank you. We'll take the next question from Timna Tanners. Your line is live.
Timna Tanners:

Hi, good morning.
David Hannah:

How are you?
Karla Lewis:

Hi.
Timna Tanners:

Wanted to ask some questions about how you manage in a downturn to reduce your fixed costs, if you could talk to us about, and what your people in the field are doing given the uncertainty about where prices are. I think it's really telling on this dynamics call that we've heard that it's really hard to call where the price is right now. But can you qualitatively discuss how you're managing those two elements?
David Hannah:

Timna, before Gregg gives you a little detail, managing through pricing cycles is what we do. We, Reliance, and we the industry, we don't have the same concerns and the same challenges of the mills that present themselves. So we have, I think, much more variable costs, and about 55% of our operating costs are personnel-related. So that's usually the first place we look and Gregg can talk some more about that. But it's not an environment that we haven't seen before, maybe that the cause might be different but the actions are the same. We manage our business on a day-to-day basis really the same way through all market conditions. Now, certainly, when prices are going down, you want to skinny up a little bit more than normal on inventory, but we don't speculate on inventories when prices are going up. We don't try to outsmart the market and buy heavy when prices are rising because sure as hell it turns around and they go down and things happen like last year in the third quarter when nickel came crashing down and those of us that had stainless steel inventories didn't like that too much. So our message to our management teams in the field is consistent through all market conditions; maximize your profits and turn your inventories and collect your receivables. That's day in, day out what they hear from us. When we do get into environments where things are a little bit different, then we can attack some of our overhead expenses. So, Gregg?
Gregg Mollins:

We have initiatives out there and have for about the last six weeks on reducing our headcount in the field. Some of the companies, the recent companies that we acquired with the PNA Group, very honestly, had never had a layoff in their entire existence within their companies. They've taken action and responded to that. As Dave said, about 55% of our expenses are related to people, headcount in the field. And although we certainly don't enjoy laying people off, it's part of the business that we're in. And we do what we have to do. In 2000 through 2003, we eliminated about 24% of our workforce, okay, which is why we were profitable in all of those quarters throughout that very dismal period of time in our industry. So yes, what are we doing? We're doing what we need to do and that is we're taking some people out in the field, reducing our headcounts and our expenses, and we're watching every dime that we spend.
David Hannah:

And it's not an across the board edict where as we come up with some percent and expect people, you know, in all of our businesses to take X percent of the headcount out. It's really done by specific business. There are certain of our businesses that are doing well and expanding and there's really no need for them to reduce their headcount. Certain other businesses, the markets they're exposed to have gone down a little more.
Timna Tanners:

Okay. That's really helpful. The only other question I had is a lot of investors seem to be pretty concerned about the stainless and aluminum side in particular. Can you talk to us about how you're managing the conditions in those markets in particular?
David Hannah:

It's very simple actually. We're taking our inventories down as fast as we possibly can and we're trying to do it more on the buy side than the sell side. So we're cutting back our purchases rather dramatically. The prices in stainless and aluminum, I mean stainless surcharges have dropped incredibly. In June they were at about sub 67 a pound, and in December they're going to be somewhere around, in the 70s per pound. So that's like a $0.90 cent a pound, $1 a pound decrease. So what do you do in a market like that? You make sure you have very, very little inventory. Availability is not an issue, okay? You can get aluminum and stainless out of the depots very, very quickly and that's exactly what we're doing. So, in that particular case, the company with the least amount of inventory wins.
Gregg Mollins:

On the heat treat aluminum side, it's a different story out there. That's a stronger market. Despite what some people might think about aerospace, aerospace has been pretty good for us this year.
Timna Tanners:

Okay.
Gregg Mollins:

The problem with aerospace with Reliance that you have to understand is that about 50% of what we sell goes into defense and military in the aerospace market. So even though Boeing is going through their strike and they have issues on the commercial side, the defense and military side is very strong as well as regional jet manufacturing. So that's why that business is very strong with us.
Timna Tanners:

Okay. Thanks again very much. I appreciate it.
Gregg Mollins:

Thanks.
Operator:

Thank you. We'll take the next question from Mark Parr.
Mark Parr:

Yes, thanks very much.
Gregg Mollins:

Hi, Mark.
Mark Parr:

Good morning.
David Hannah:

Hi, Mark.
Mark Parr:

Welcome to the new reality.
David Hannah:

We've been here before. Maybe not with the stock price. That's a fun new thing to look at, but the economic challenges are none that we're rookies at.
Mark Parr:

I think it's a little less painful today thanks to the numbers you put up. So congrats on that.
David Hannah:

We got a long way to go.
Mark Parr:

I hear you. One of the things I was curious about and I've asked this question before. The relative out performance you guys seem to be experiencing on the volume side to the extent that there might, in fact, be a disconnect, actual volumes are somewhat weaker. Do you have a way of tracking how much traction you're getting with internal or organic growth initiatives or market share momentum? I mean, do you see that process accelerating over the next six months or how do you view your ability to counteract just a general macro miasma that we're in?
David Hannah:

Mark, we do expect that our internal growth would pickup during times like this, and I think that the concentration and the type of customer base we have, I think helps us. This year, even earlier in the year, I think it has helped us. Maybe customers have been limited in their abilities to purchase the quantities and materials they wanted by their credit lines. Again, they weren't experiencing problems, maybe more frustration that they couldn't buy as much at one time, so they had to buy smaller quantities more often. Actually, we think, we're pretty good at next day delivery. More than half of our business comes from people calling us today and wanting their processed metal delivered tomorrow. So when times tighten up like this, we do expect that we should be able to out perform. How that lays out in the whole scheme of things, we don't really know and it's probably not significant, very honestly, in the whole realm of what happens out there.
Karla Lewis:

Obviously, if we for instance open a new facility, we know what those numbers are because we track each location. But typically, we arrange a salesperson there and we were selling into there from another facility. So it is kind of hard, and like Dave said, it hasn't been material enough that we've tried to drill down and quantify it.
Gregg Mollins:

Mark, I think more importantly, what most people don't realize about our company is really the base, the fundamental industrial base that we service. I think they underestimate our involvement in energy, with oil tools, wind towers, okay. That's a very important business to us and we do extremely well. Aerospace, as I mentioned a minute ago, defense military, regional jets, that's a very good business for us. Ag equipment, through Deere and Cat and others, we do a lot of business, not necessarily direct, but certainly through subcontractors of theirs. Industrial construction, refineries, utilities, stadiums, that is supposed to be up 30% in 2009, okay, and we have a great deal of involvement in that. Infrastructure through bridges and mining and barge and shipbuilding, all those industries that we support are all doing reasonably well. I think people get caught up with automotive, with appliance, with residential construction, and they lose sight about the highly industrial portion of the business that Reliance is very much involved in. By design, I mean when we look at companies that we acquire, Dave and I and Karla, we look at the industries that they support and those industries that I just described, they're very, very important to us. I think they've served us well in the past and certainly our regional, our geographical footprint bodes well for that.
Karla Lewis:

Because we sell a lot to the job shop and people like that, if there are shifts within some of those industrial or other markets, typically the people we're selling to also shift to those. And so, that helps us stay in the strong market.
David Hannah:

The job shops are pretty versatile. And we've seen that, here in Southern California really, with some of the residential issues that have happened, maybe there's a slowdown and new gas stations next to these new communities, but the job shops that we're selling now they're working on school projects. So we've seen a tremendous amount of activity for schools and hospitals here in Southern California. Maybe less from the private projects standpoint, but more in the public project standpoint. So the customers are very versatile, and many times we don't have the visibility we wish we did so we can answer your questions better. But we just ship the fabricator or the job shop and we don't really know what project they are working on. We don't know if it is for a gas station or a school or a hospital or some industrial refinery or something.
Mark Parr:

Okay. That's really helpful. I had just one other question. Could you give us some color on how you feel your customers' inventory positions are? You're doing a lot to reduce your inventories, but what's kind of the field test about your customers' inventory base right now?
Gregg Mollins:

Mark, I can tell you this right now. Our customers are living hand-to-mouth, okay, which, as Dave pointed out a minute ago, really serves our company well. The typical order that a customer might place, okay, let's say it was $1,400 bucks, okay, now they're placing it on Monday, Wednesday, Friday and its $600 apiece. They are being very, very cautious. They are seeing steel prices go down, they are seeing aluminum prices go down, stainless prices go down, and they're looking at -- possibly although we haven't heard any negatives about customers with their credit situations, which is kind of unusual. You would expect that we would, but it's been very quiet on that side of the business. I talk to our guys all the time. I was talking to one of our fellows in the southeast yesterday morning, and he said, our [quoting] activity was poor in September, but it has picked up in October. But the situation is that the quantities are so small, okay? So they are doing just exactly what we're doing. They are buying as little as they possibly can, which with us we can process material and deliver it the next day. There's many companies that are out there that lead times are three to five days. So that falls pretty nicely into our lap.
Mark Parr:

Okay. Terrific. Great, guys. Thanks for all the color and good luck on the fourth quarter.
Gregg Mollins:

Thanks, Mark.
David Hannah:

Thanks, Mark.
Operator:

Thank you very much. We'll take the next question from Tony Rizzuto.
Tony Rizzuto:

Thanks very much. Very solid performance in a very challenging environment and certainly looks like it could get a little bit more challenging as we move ahead. The question I had is do you guys normally see in a leaner environment, in a tougher environment, somewhat along the lines of the question that Mark was asking, do you typically see a lot of your customer base seem to gravitate toward you versus the competition because of that very fact that you can get products even more quickly? So is that in some way maybe camouflaging, maybe some of the erosion, or maybe has in the past, some of the erosion from more of a macroeconomic standpoint? That's my first question.
Gregg Mollins:

Can we answer that one first, so we don't forget it?
Tony Rizzuto:

Sure.
Gregg Mollins:

Okay, Tony. I think the answer is no. Do we think that that helps us or at least helps our chances in the marketplace? Yes. Is that big enough to mask any erosion that's going on out there? No, I don't think so.
Tony Rizzuto:

Okay. And then the second question is if you look at those various markets, I mean you could argue that those markets have been pretty good, but we've really seen quite a sharp falloff in a wide range of commodities. I mean, oil has come down by more than one half since July, the rest of the commodities sector, Ag prices. There are increasing questions about the financial wherewithal of municipalities, state, local governments, the federal government. And I assume a lot of the folks that you -- the fabricators that the (at the moment) shops probably supply a lot of these different efforts. Could you kind of go over with us, you know, end market-by-end market, areas where you are seeing maybe a sharper deceleration or more pronounced changes on the margin versus say three months ago?
David Hannah:

First up, Tony, on the falloff in commodities, I'll ramble here for a minute, so Gregg can prepare an answer to that question.
Gregg Mollins:

Thanks, Dave.
David Hannah:

With regard to the falloff in commodities, you know, there's a lot of good stuff going on out there, too. Everybody is dwelling on the negative. And there is a million different reasons why things, it's like if this happens, things go to hell. If this happens, it's one after another of just negative opportunity. And what if that doesn't happen or what if only half of those bad things happen? You know, oil was going up and up and up and up. At one point, that was a bad thing because it was going to fuel inflation and slow everything down and kill projects. Well, now oil has come down. So, that must be a good thing. Maybe if it gets too low, it's not so good for some people. But energy costs are down, interest rates are down, other commodity prices are down. So, there the stage is set. If you look at it from a different angle and you know, we're trying to be realistic and see both sides, not just the negative side. But there are a lot of reasons why things shouldn't be as bad as people expect them to be and some of the changes that are happening out there can really set the stage for things to get better, maybe not tomorrow, or maybe not in the fourth quarter, but certainly better sooner than you might think.
Tony Rizzuto:

I appreciate that, Dave. That's helpful.
Gregg Mollins:

You know, Tony, probably, the biggest influence in the businesses that we're in is that, obviously the residential construction industry, when that slows up, it's going have, maybe eventually, it's going to get into the non-residential. We're going to see that in going forward, okay. I think it's actually predicted to go down to have negative growth in 2009, and which is no surprise to anybody. On the other side of that though, as I mentioned earlier, okay, the industrial construction, that's got pretty good legs. Now, the financing that you just brought up, okay, that's a good point. How that's going to affect us? I don't know. I don't think any of us know. I've asked our guys in the field. There has been one project that I can think of it was the Stadium in [Lansdale], Greenfield in Wisconsin which was put on hold. We actually had a sizable portion of that job at one of our operations. Will that be released? We'll fill that order.
David Hannah:

Some day.
Gregg Mollins:

Some day. Exactly. But overall, I think that business conditions where we're focused on, it's pretty healthy, okay. I think the customer base that we're doing business with, financially, they're pretty healthy.
David Hannah:

Maybe only the projects that should be financed, get financed going forward, that is the viable projects, and certainly there's going to be some of that don't happen, but maybe they shouldn't have happened in the first place.
Tony Rizzuto:

You guys I'm sure play with worst case scenarios. Assuming that there are no further acquisitions made, what kind of revenue declines do you typically forecast in these scenarios. You've mentioned on the call, I think certainly in the release about the 2001 or 2003 period, we know that was a very challenged period, very difficult period. Should we think along those lines? I mean is that kind of a worst case from a revenue standpoint topline?
David Hannah:

Tony, I think, keep in mind that we just acquired a company that was about 25% of our size. And that was done on August 1st. So, even in 2009, we're going to have seven months more of that company than we had this year.
Karla Lewis:

Plus our prices are still, if you look at '01 to '03, prices were significantly different then even if they continue to go down a little bit right now.
David Hannah:

So a smaller margin on a much higher level of pricing environment is to our benefit. So on a same-store basis, things can get a little more difficult. But that's one of the things that we like to point out is, we've got kind of a built-in increase in revenue for next year because of the PNA acquisition that we just did in August. We can't come up with a scenario where revenues would be down next year because we're going to have seven more months of PNA in there. It is such a significant company.
Gregg Mollins:

Tony, you recall, hot roll was at $240, $260 a ton in 2003. Demand, industrial America was definitely impacted in those three years more so than we had ever seen before
David Hannah:

And a lot worse than now.
Gregg Mollins:

It is not even close. (inaudible) unless something happens that we're not…
David Hannah:

We can't predict.
Gregg Mollins:

Right.
Karla Lewis:

That's quite honestly, I mean, we can sit here and run. I could run 50 different spreadsheets just like you can with different numbers in them, but the reason we're not putting guidance out right now is because we're not really sure what numbers to drop into those from the volume standpoint because we haven't seen the actual drop-off. We don't have the backlog and visibility based on our next day type of business. So, we're not sure what that number would be right now.
David Hannah:

Even the estimates that are out in the street now, there is a huge range in the estimates. So, it appears that there might be a little confusion at the analyst level as well. And we just don't know. So, hopefully, we can come up with some meaningful information as the quarter progresses and get that out to you. And what we do know, Tony, is that we know how to operate this business. It is what we do for a living. And we're going to do whatever it takes to make sure that we're as profitable as we possibly can be.
Gregg Mollins:

That's right.
Tony Rizzuto:

We continue to respect the way you guys manage the business and you continue to do a fabulous job. So, we're certainly are very cognizant. Thank you very much.
Gregg Mollins:

Thank you, Tony.
David Hannah:

Thank you, Tony.
Operator:

Thank you very much. We'll take the next question from John Tumazos.
John Tumazos:

Congratulations on all the progress.
David Hannah:

Thanks, John.
John Tumazos:

As strong as your controls are, some of your customers maybe inadvertently or too much inventory or here and there are not as tight as (inaudible) assures. Even if they run their businesses perfectly, many small businessmen have trouble getting credit today because of the banks losing money on mortgages and not having enough money to finance a normal small business. Are you modifying your credit practices at all to help long-standing customers that you've been with for a long time? Or are you moving material on consignment or doing anything like that sort of adapting to the time to keep the system falling?
Karla Lewis:

I think, John, the real change, if any, that has happened is just that we're kind of doing what Gregg and Dave alluded to earlier, where we are selling them more frequently in smaller quantities at a time, to make their cash flow a little more even and their inventory receipts. But, we're not becoming the bank for them. And we are continuing to monitor them. We're keeping our payment terms consistent.
David Hannah:

We're not embracing consignment.
Karla Lewis:

Yes.
David Hannah:

That's something that we don't really favor. The whole speculation -- I think that's another area, John, where there is a lot of reasons why it makes sense to think that small businesses are having a hard time getting credit. But, I think it's a way overblown. We haven't had customers come to us and say, "You know, that I can't get my bank line renewed or I can't -- you know, I can't get a bank line." We're just not aware of that. I think that that's just -- it's more gas out there to talk about and it's being way overblown. The good companies, you know, not everybody has a credit line that's renewing today. Certainly, we wouldn't like to be in the marketplace renewing our revolver any time in the last six months or going forward probably in the next six months. But it just doesn't seem to be the size of problem that it's being made out to be.
John Tumazos:

Thank you.
David Hannah:

Thanks, John.
Operator:

Thank you very much. We'll take the next question from [Jane Eyre].
Unidentified Analyst:

Thank you. Yes, I would like to talk about capital structure for just a little bit and I know that initially you planned to sell stock to help pay for the PNA acquisition, but it's not going to happen. It looks like your debt balances are much higher now. I wanted to know number one, can you estimate the free cash flow that it would generate in the fourth quarter from the sale of inventories to pay down that debt? Can you give us any kind of ballpark estimate in terms where your debt EBITDA ratio will come out at year end? Also, have you been in talks with any of the rating agencies? I know that Moody's has you on negative watch because they are concerned about this very issue that you're not able to raise the incremental equity that could put pressure on the ratings. So just want to get a sense of where, at the level of your leverage and issue from what the rating agencies are saying about this.
Karla Lewis:

Our capital structure, we're currently very comfortable with. We're at 48% debt-to-cap which is higher than where we've been earlier this year, but really not anything that we're uncomfortable with. We probably think about it a little more today just in light of what is going on within the financial markets. We are not prepared to give you any comments on where we think EBITDA or inventory or cash flow levels will be in the fourth quarter because of the uncertainty that's out there which is why we're not giving guidance. That all kind of follows each other. So, we're not ready to give you any numbers. We do continue to talk to the rating agencies. They understand, we believe, the fundamentals of our business and they understand that even if the economy does decline somewhat as working capital needs decline that does throw off more cash flow for us. We believe that they are watching and comfortable and that Moody's in particular is just going to watch our cash flow and watch us bring our debt levels down to a level. Probably, I think he likes to see us closer to about 40% debt-to-cap.
Unidentified Analyst:

Okay. Thank you very much.
Karla Lewis:

Welcome.
Operator:

Thank you very much. The next question is coming from Tim Hayes.
Tim Hayes:

Good morning.
David Hannah:

Hey, Tim.
Gregg Mollins:

Good morning.
Tim Hayes:

I had some questions on the aluminum plate market starting with the general engineering 6000 plate. I know those prices are coming down because primary aluminum prices have come down, but are they falling in price more than the drop in primary aluminum or are they declining less than that?
Gregg Mollins:

Primary aluminum meaning the Midwest spot?
Tim Hayes:

US Midwest price, benched off of the LME.
Gregg Mollins:

They're not falling anywhere as near as quickly as the Midwest spot has fallen, okay? The Midwest spot was, I guess, yesterday was somewhere near $1.02, okay? And 6061 plate is not falling anywhere near that extent at all.
Tim Hayes:

The demand conditions for that product remain pretty strong?
Gregg Mollins:

Yeah. Actually, I wouldn't say strong. I'd say reasonable, okay? Semiconductor business, which uses quite a bit of that, then you have the mold-making, okay. That gets into some of that commercial plate markets and primarily in the Detroit area and what not. So, mold plates down -- some of the semiconductor equipment manufacturers, their usage is down somewhat. So, it would be activity basically in commercial plate 61 being the major with that is not as robust as it was, say, the first half of the year or last year. It's not dismal by any means. But you know, prices on 61 plate, they might be down $0.15 compared to three months ago as opposed to what you've seen in ingot fall from a high of like a $1.54 down to today a $1.02 and not in very short order. So, you don't ever think that that any of the plate items fall nearly as quick as the Midwest spot. It just doesn't happen.
Tim Hayes:

Ok, very good. Thank you.
Operator:

Thank you. We'll take the next question from Bob Richard. .
Bob Richard:

Good morning and thanks for taking our call. You don't have much tolling business, but you inherited a little bit with PNA. Can you give us the state of that business? Is that pretty weak right now I would presume or can you provide any color on that?
Gregg Mollins:

I wouldn't say it's weak. I wouldn't say it's robust either, but we're pretty happy with that. The toll processing business that we have with the Feralloy Company does pretty well. And we do it in a number of different places as well. Mexico is strong. Our operations up in Oregon Steel are doing well than Midwest operations. We're doing okay. We do a number of different tolling arrangements whether it'd be slitting, cut-to-length or we're getting involved with pickling and things like that. We've got no complaints. Our operations in toll processing at Feralloy are -- we're very pleased with them.
David Hannah:

We do a lot more toll processing with Precision Strip, which is one of our subsidiaries. That's all they do. They don't sell any metals at all. And they are off some. A good portion of their business about 60% of their business or their abouts offshoots? is auto-related. The good thing there, if there is a good thing is that most of it relates to the new domestics or the transplants as opposed to the Big Three in Detroit. But they're still down and their volumes have come down, about what, Karla, 7, 8%?
Karla Lewis:

Yes, same as the rest of the companies.
David Hannah:

Consistent with us. What they have done, they have had a bigger drop-off in some of their auto-related business, but they've really done an outstanding job replacing that business with other things, so, other toll processing things. So, some related to auto that they didn't have before and some related to other industries. So, overall, it's pretty good. It's not the best. And this can probably be said for probably all of the phases of our business but for many, maybe the energy side, which has been very strong. Everything else is okay. It's not the best we've ever seen, but it's certainly not the worst. It's okay.
Bob Richard:

Well, thanks for that color. Do you think we're on a pricing trough -- have we hit the pricing trough on aluminum or stainless? Are we closer on either one of those commodities in your opinion? Which one maybe has more to go down?
Gregg Mollins:

Well.
Bob Richard:

That would be driven by the inventory levels, right?
Gregg Mollins:

Yes. On aluminum and with Midwest spot, somewhere around a little bit higher than a buck a pound on Midwest spot. I'd say we're pretty much at bottom there, okay. Most smelters had a buck a pound, they're not making any money. So I would guess and I would hope to see we have discipline enough to say, if we're not making any money, it's not going to go down any further. So I think we're pretty much down at the bottom there. Now, there is going to be another discount on the surcharge in stainless. That's going to apply in December. It's going to be sizable, okay, somewhere between $0.30 and $0.40 a pound, okay. That's going to bring that surcharge level as I think I mentioned earlier somewhere between $0.70 and $0.80 a pound coming off of highs of $1.67 a pound. Is that at bottom? I hope it's at bottom. I would say if it's not, it's pretty going close to being at bottom. So bottom line for anybody that's listening from the Reliance Company, turn those inventories maybe.
Bob Richard:

Okay. Thanks very much for that color. And great quarter. Congratulations.
Gregg Mollins:

Thank you, Bob.
Operator:

Thank you. The next question is coming from Yvonne Varano.
Yvonne Varano:

Hi. It's Yvonne.
David Hannah:

Hi, there, Yvonne.
Yvonne Varano:

I was wondering if you could just give us a little color on what the customers' sentiment is out there. Obviously, hand-to-mouth type of buying, but is there a feeling that things are going to get materially worse or are they panicking? Is there any color you can give us there?
Gregg Mollins:

You know, Yvonne, our customers are skittish. Okay? Their mind frame I don't think is any different than yours or mine or anybody else's.
David Hannah:

It's different than hers.
Gregg Mollins:

Okay.
David Hannah:

They're not nearly as negative as she is thinking it could be.
Gregg Mollins:

But the order book, okay, the activity with respect to quoting and business and what not -- I had an opportunity to be at a sales meeting a couple of weeks ago, and I was asking, what do you guys see out there. They said, you know, Gregg, you always say believe what you see on your financial statements, not what you read in the newspaper. There is still a lot of steel and aluminum and stainless that are in our customers' operations. But they're just ordering them at the very last minute. Okay? And which plays well for us. But the bottom line is that for the first nine months of the year, we're off just slightly above 2% on our volume, okay, compared to the first nine months of last year. Last year wasn't bad. Okay? So, are they cautious? They are cautious. Are they concerned? I think everybody is concerned. We don't know what's going to happen next with the credit crunch and all of the other stuff. But the fact of the matter is, is that people need to produce. They need to manufacture. Our customer base, as we always say, they're flexible, they're job shops, they're fabricators, they are family-owned businesses, they have to support their families. They got to put food on the table. They're going to go out there and get business, whether it is in the industries they've been supporting in the past or new industries that they have to go after today. So, are they cautious? You bet they're cautious. On the other hand, we're selling a lot of steel.
Yvonne Varano:

Okay. On the demand side, can you compare what you're seeing now maybe to the other cycles you've been through and give us some sort of feel of whether you think we're in the very beginning of this or if we're more towards the middle?
David Hannah:

The toughest periods that we've ever been through in our working lives, and I think it's probably the toughest period for the whole industry, was 2001 through 2003.
Yvonne Varano:

Right.
David Hannah:

And 2003 was probably the toughest part of that. It seemed to get progressively worse. It started really in the second half of 2000 and got progressively worse. It just isn't like that. As Gregg I think mentioned earlier that back in that time period, we had really very little demand. Demand really just dried up in the industrial side. There was no activity, virtually no activity in the non-res construction side. That didn't really come back until late 2005. And it had been down for about four and a half years from our perspective at that point. So demand was just awful in 2003 and it started getting awful in late 2000. You can adjust for that. You can manage for that, because if you're processing and shipping less weight, you don't need as many people and you don't need as many trucks, and so you can adjust your overhead better. The complicating thing in that time period, also Gregg said earlier, was the pricing. I mean we always quote the base hot-rolled price, because that's kind of the reference point out there. But it was 240, 260 a ton back in 2003. If you look at our gross profit margins during that time period, they were still right around the same gross profit margins that we have today. The difference, though, is that you're getting 26%-plus or minus of $900 a ton now versus the same percent of $260 to $300 a ton back then. And that's painful when you don't get that differential in there. So, it's different because pricing levels are at significantly higher levels today than it was in the most difficult period that we've ever seen. Demand, even though it's not as good as it was last year or maybe in 2006 which was pretty darn good, it's still reasonable. From our perspective, again, we don't have a lot of exposure in selling metal to the troubled areas out there. So it's not what it was in 2001 to 2003. I don't think this is the beginning of something that's going to develop into that, because the root cause of all the uncertainty has not been the industrial economy. It's been this credit issue. The troubles that it's caused and the wealth that it has erased from people in their homes and the way they financed their personal lives as well as their businesses. So it's just a different thing today. And while the causes maybe different, I think the actions may not be. The people who've worked through the prior periods that were difficult successfully, I think we'll work through this period, however long it is, successfully also.
Yvonne Varano:

Sure. I think we're pretty comfortable that you guys did a great job and really think that pricing is going to be a different scenario than it was in the last downturn that you talked about. I think the big question, as Karla said earlier too, is the demand and what happens there.
David Hannah:

Yes, you can only take so much negative news out there. I mean we get pelted with it from all sides every day. And then you layer on top of all the negative news in the media of what's going on in the stock market, and your head starts to spin. People lose confidence in what's going on out there, and they're losing confidence in their decision making. And that has an impact on them. But then again, they look at their order books, and they're still quoting jobs and we're still shipping metal. So, I think they're so uncertain, because they're getting slapped around so much by all of this negative news, they just don't know what tomorrow brings. But so far, it's been okay.
Karla Lewis:

We won't be really happy if we didn't have to look at our stock price.
David Hannah:

Yeah, that's right. From a business standpoint, things are okay.
Yvonne Varano:

Just touch on imports quickly, because (inaudible) brought down that the prices to be in line with imports. But just curious on the offerings on the import side to get a gauge for what's going on globally. Is there really a lot of steel that's looking to come here now?
Gregg Mollins:

Well, let's put it this way, Yvonne. There are more offerings today than there was two months ago. But I really have to tell you, I feel better about the fact that the mills are kind of stepping up and recognizing the fact that it is a reality, that they could be coming back into the United States and they're lowering their prices today rather than waiting 90 days from now and then lowering them when it's too late, because everybody already bought offshore.
Yvonne Varano:

Right.
Gregg Mollins:

So, yes, there is more offerings, but it's not a tremendous amount of offerings though. I mean it's nothing like it was a couple of years ago when we had imports coming in over the imports, about 45 million tons that came in a couple of years ago. And it's not even close. It's not even close, and it's not attractive. So, our message to our people in the field is that if they get offerings and they're even thinking about taking advantage of it, they have to clear it with us first, because we just think that the domestic mills are going to be very proactive in making sure that they do not come in any major way. So, I guess as a roundabout answer to say that, yes, there is more offerings today than there was a couple of months ago, but A, they're not very attractive; and B, they're not in huge quantity.
Yvonne Varano:

Perfect. Thanks very much.
David Hannah:

Thank you.
Operator:

Thank you. We'll take the next question from [Christer].
Michelle Applebaum:

Hey, this is Michelle.
David Hannah:

Hey, Michelle.
Michelle Applebaum:

I have a couple of questions. Number one, with prices coming down, is there a chance you could have a fourth quarter LIFO credit?
David Hannah:

No. No. The reason is I think Karla had in her material what our LIFO assumption is for the year, and we book it pro rata through each quarter.
Michelle Applebaum:

Okay.
David Hannah:

So, we do expect that our actual calculation will turn around in the fourth quarter, but we're still going to book some expense because of the way we believe we're supposed to book it, which is pro rata for the year.
Michelle Applebaum:

Okay. Asking you to put qualitative spin with a quantitative bent, if you were to say on a scale of 1 to 10, if you could rate your stock price on that scale and rate your current business outlook on that same scale, where would you pick those numbers?
David Hannah:

Is 10 the best?
Michelle Applebaum:

Yes.
David Hannah:

Stock price is zero or minus if that's possible.
Michelle Applebaum:

Okay.
David Hannah:

It is just ridiculous, Michelle, that we have --.
Michelle Applebaum:

No, incomprehensible is the word today.
David Hannah:

To have a PE of three or four is just -- anyway, I won't go there. So, zero. Business conditions, 7.
Michelle Applebaum:

7?
David Hannah:

Yes.
Michelle Applebaum:

And have you been below 7 in the past?
David Hannah:

Yes.
Gregg Mollins:

We were 4 in 2003.
David Hannah:

Yes, yes.
Michelle Applebaum:

So this isn't even close.
David Hannah:

No.
Michelle Applebaum:

It's probably to give us --?
David Hannah:

Yes, anyway.
Michelle Applebaum:

It's probably to give us year-to-date same-store sales, but it's irrelevant. The only thing that's relevant probably is October. Can you give us the October same store sales?
Gregg Mollins:

No. Sorry.
Michelle Applebaum:

September? How about September?
David Hannah:

Yes, we can give you September, I think.
Michelle Applebaum:

And there have been quarters where they have asked this question, David, and you have answered midway through the first month.
David Hannah:

Yeah.
Michelle Applebaum:

So, don't shoot me.
David Hannah:

October, we don't know yet. But that's the kind of information, Michelle, if we think it's meaningful, whatever it is. After we close out October, then that's the kind of information we'd like to get out to the marketplace.
Michelle Applebaum:

We'll be talking on November 8. September, you are going to give me? I just wanted to ask you, looking at my history which goes back to before the IPO, I'm looking at historical gross margins and wondering if you were going over my head a little bit in this last discussion. Your worst gross margin for any given year I think has been about 25%. Is there reason to believe it could get worse? Is that what you were trying to explain with the higher price?
David Hannah:

Yes, I think with the LIFO impact, it's been so significant this year too, that has been huge with respect to our gross margins. And really the main reason why we dropped down to, what, 24.3 or whatever, we just reported. So that and then with PNA in there, their margins will come up, but it's going to take a little time for that to work its way through, especially in this environment when you have prices coming down. Yes.
Michelle Applebaum:

But I guess I'm trying to look as opposed to the fourth quarter, first quarter, kind of a full year when you got the LIFO and then at (inaudible). Then one more question.
David Hannah:

Let us answer your first question before we forget what the answer is.
Karla Lewis:

Yes. And if you remember, Michelle, in Dave's comments, he talked about the July and August didn't drop off as much as we expected. They were pretty flat. August to September same store was down 7%, which is what we were for the quarter down 7% volume.
Michelle Applebaum:

Okay. Great.
David Hannah:

One little interesting fact that kind of surprised us actually is July usually slows down with kind of vacations and things mostly in the Midwest and really in the eastern half of the country. So, we anticipated July to slow down and then the typical pattern is early August is still a little slow and then it kind of builds back up. September is better and October is a little better. But July this year didn't slowdown. And it actually ended up on a FIFO basis. So again, we look at this on a FIFO basis. It ended up being the best month of the year out of the first seven months of the year. And I don't ever remember July being the best month of the first seven months of any year. And that's on a same-store basis. We didn't have PNA in there until -- so that was kind of a surprise. If anyone out there listening heard us speaking, in July when we were out trying to sell stock, and we were pretty upbeat because of what we were seeing during the month of July. And then August held really steady with July and then September, we were down as Karla said about 7% on the same-store or not. That's we had a PNA (inaudible).
Gregg Mollins:

(inaudible) negative.
Michelle Applebaum:

It was same-store, right?
David Hannah:

Yeah. That was same-store.
Michelle Applebaum:

Then one last question. In my own experience, this seems from a steel market perspective, much like the Asian crisis in the fall of 1997. And the way I remember that happening was that when it happens, the steel market here went into complete tailspin. There were offers of all kinds of really attractive low price stuff. For that first month of October, there was some aggressive discounting imports came in, and then, what was wild was that users were so worried about the pricing trend that the country took in fewer imports in the fourth quarter of '97 after the crisis, and then in the first of '98 and the mills here actually had an eight-month window before you saw a big surge in imports. Do you get any sense? This reminds me a lot of that, where users are still worried about the trend that they're not buying a lot of imports, but the big difference is the mills are actually cutting price here. I'm just wondering, I'm starting to suspect we're going to see fewer imports in November, December, January, than we had seen.
Gregg Mollins:

Yeah.
Michelle Applebaum:

Because of this, and that could make a far more stable market. Do you get any sense?
Gregg Mollins:

I think you hit the nail right on the head, Michelle. This is Gregg. And I don't think that there is going to be a surge of imports at all. Whenever there is uncertainty, okay, most people that are reasonable, have any common sense take a very cautious approach to their buying patterns. And every time we've ever looked at a company, the three of us, okay. And there were problems in their history, okay, when you look at five-year past history of sales and earnings and what not, it's always related that when they had problems, it was inventory-related. I think with the uncertainty that we have in the marketplaces today, there is not very many people that are foolish enough to go offshore and with the domestics taking them on a more proactive stance and really looking at their pricing and lowering their pricing to prevent that from happening, brings a lot more stability to the market. So, I think you're absolutely right. I don't think you're going to see very many imports coming in any time soon. And I'd take it out at the end of the first quarter. I just don't see it.
David Hannah:

And the environment is so much different, Michelle, as you mentioned that the mills are reacting now and sooner and in 1997, you just didn't have that disciplines, so it's…
Michelle Applebaum:

You mean production cuts?
David Hannah:

Yeah.
Michelle Applebaum:

Right.
Gregg Mollins:

Yes.
David Hannah:

It was kind of a different world then.
Michelle Applebaum:

All right.
David Hannah:

And now we have a whole different Group, really running the mills and their attitude is different, their expectations are different.
Michelle Applebaum:

Their costs are different, too.
David Hannah:

Yes, yes. I don't think it's going to happen the same way.
Michelle Applebaum:

One more, please.
David Hannah:

Yes.
Michelle Applebaum:

In prior recessions and we've seen many in the last 30 years, in prior slowdowns, how soon going into a slowdown did you start the announcements of production cuts?
Gregg Mollins:

Production cut…
David Hannah:

By the mills?
Michelle Applebaum:

By the domestic and the global mills?
Gregg Mollins:

Gosh, it is a -- God -- it's about12 months after the (inaudible)
David Hannah:

Yes.
Michelle Applebaum:

Ok.
Gregg Mollins:

It was really slow, yeah.
Michelle Applebaum:

Okay. I was going to say never.
Gregg Mollins:

Well, that's, yeah. That's probably what you wanted to say, but...
Michelle Applebaum:

So the group of us 50 somethings, can say we've never seen this before, right?
Gregg Mollins:

I think that's true.
Michelle Applebaum:

Okay.
Gregg Mollins:

Yes. Different environment.
Michelle Applebaum:

We'll have to see if Sheldon aggress with that.
Gregg Mollins:

Yes. Yes.
Michelle Applebaum:

Listen, thanks and listen you are -- one of my..
Gregg Mollins:

Probably
Michelle Applebaum:

Guys one more thing.
David Hannah:

All right.
Michelle Applebaum:

You are one of my top three picks. You've been consistently -- I'm a very happy shareholder. Just keep up the good work and keep that list in your pocket.
Gregg Mollins:

Thank you.
Michelle Applebaum:

Bye.
Gregg Mollins:

All right, bye.
David Hannah:

Have a good day.
Operator:

Thank you very much, ladies and gentlemen. We have one final question, a follow-up from Mark Parr.
Mark Parr:

Hey, thanks very much.
David Hannah:

Hi, Mark.
Mark Parr:

I guess I changed my name, too. Hey, just the $0.12 accretion from PNA, was that excluding purchase accounting?
Karla Lewis:

That has the estimates of the depreciation and amortization and things pushed down. We're still finalizing those evaluations. But that is fully loaded for purchase accounting, interest costs and also on a LIFO basis.
Mark Parr:

All right. (inaudible)
David Hannah:

You might say so. But there was no…
Karla Lewis:

And that was $0.20…
David Hannah:

But there was no inventory purchase accounting.
Karla Lewis:

Correct.
David Hannah:

Yeah.
Mark Parr:

Okay, no inventory purchase.
David Hannah:

Right, right.
Mark Parr:

Okay. So, that should be -- that kind of $0.06 a quarter was kind of the run rate you're -- $0.06 a month is kind of the run rate you're starting off for instance on PNA.
Karla Lewis:

Correct. And yeah.
David Hannah:

And that's as reported, too. So it's got a pretty heavy LIFO component as Karla mentioned.
Mark Parr:

Okay. All right, terrific. Thanks very much.
David Hannah:

All right, Mark.
Mark Parr:

Yeah, take care.
Operator:

Thank you very much. We have no further questions in queue. Do you have any closing comments you would like to finish with?
David Hannah:

Just thank you for taking the time to talk to us and we're going to have some fun over the next quarter and we'll talk to you as soon as we have any meaningful information that we think would help us all understand what type of environment we are really in. And last thing, today it's not nearly as bad as you might think it is. Thank you very much.
Operator:

Thank you very much. This concludes today's conference.

Reliance Steel & Aluminum Co. Q3 2008 Earnings Call Transcript

Other Reliance Steel & Aluminum Co. earnings call transcripts:

Reliance Steel & Aluminum Co.
Q3 2008 Earnings Call Transcript