Reliance Steel & Aluminum Co.
Q2 2015 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

Greetings, and welcome to the Reliance Steel & Aluminum Company Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Brenda Miyamoto, Investor Relations for Reliance. Thank you, Ms. Miyamoto. You may now begin.

[Brenda Miyamoto:]

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss our second quarter 2015 financial results. I’m joined by Gregg Mollins, our President and CEO; Karla Lewis, our Senior Executive Vice President and CFO; and Executive Vice President of Operations, Jim Hoffman and Bill Sales; David Hannah, our Executive Chairman will also be available during the question-and-answer portion of this call. A recording of this call will be posted on the Investors section of our website at investor.rsac.com. The press release and the information on this call contain certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors which may not be under the Company’s control, which may cause the actual results, performance or achievement of the Company to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, but are not limited to those factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, under the caption Risk Factors and other reports filed with the Securities and Exchange Commission. The press release and the information on this call speak only as of today’s date, and the Company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Gregg Mollins, President and CEO of Reliance.

[Gregg Mollins:]

Good morning, everyone, and thank you for joining us today. I am extremely pleased with our operational performance in the second quarter of 2015, which is a testament to the quality of our management team in the field as well as to our business model. Despite ongoing industry headwinds that further pressured metal pricing in the quarter, we were able to increase our FIFO gross profit margin to 25.7% up from our strong 2015 first quarter FIFO gross profit margin of 25.4%. We believe that our continued focus on small, quick turnaround orders and inventory turns allows us to maintain consistent gross profit margins and that our significant investments in equipment in recent years to provide higher levels of value-added processing to our customers, has further enhanced our ability to maintain and improve our gross profit margins, even during difficult business environments. We believe our position in the market has also contributed to our ability to increase our market share. With our tons sold in the first half of 2015 decreasing by 0.6% compared to the first half of 2014, compared to the MSCI industry average of a decrease of 5%. Although our second quarter tons shipped were lower than we had anticipated, we believe that underlying customer demand remains relatively strong. In particular, the aerospace and automotive end markets remain strong and we see ongoing opportunities for continued growth in these markets. We also continue to be encouraged by slowly improving momentum in our activity levels in the nonresidential construction market our largest end market. Although lower oil prices have significantly reduced demand for our business serving the energy market, our ongoing cost reduction initiatives and disciplined sales strategy have helped mitigate the impact on our overall profitability. Pricing for all commodity types continued to weaken as the second quarter progressed, primarily due to historically high level of imports, supported in part by the strength of the U.S. dollar. In fact, pricing was even softer than we had projected heading into the second quarter. As a result, same-store average selling price per ton sold declined 5.3% for the second quarter of 2015 compared to the prior quarter and declined 8.6% from the second quarter of 2014. On a positive note we have started to see pricing begin to firm with certain products in recent weeks. And we’re cautiously optimistic that overall metal prices will trend modestly higher in the second half of 2015. In light of the difficult pricing environment we remain highly focused on managing all aspects of the business that are within our control, which continues to lesson much of the impact from the challenging market conditions. In 2015 we’ve had a significant push on reducing inventory and I am proud to report that we decreased our FIFO inventory by a $163 million during the second quarter. This is a significant accomplishment for our company and use in June 30, 2015 FIFO inventory turns on hand. And our first half 2015 shipment levels our inventory turn rate would be 4.6 times. This is the first time in many years that we have been this close to achieving our internal company wide goal, which is currently 4.75 turns. I want to personally thank all of our employees that help us achieve these results. I attribute our progress to refocusing our team on several critical factors that have led to Reliance’s best in class inventory management. And these include compensation plans for our executives and managers in the field that reward working capital management. Our track record and strong preference to purchase domestically produced materials over imported materials that require much longer lead times. Our focus on customers requiring smaller quantities of material and just in time inventory management practices. And finally, the significant inner company support and sharing of best practices among the Reliance family of companies that includes nearly 300 service center locations. I currently believe that our improved inventory management contributed to an increase in our FIFO gross profit margin to 25.7%. As a result of our solid gross profit margin and effective expense control, second-quarter net income attributable to reliance was $90.2 million and earnings per diluted share were a $1.20 above our guidance range for the quarter. Our significant inventory reductions contributed heavily to our strong cash flow from operations in the second quarter of $292.5 million. Through the first half of 2015 we have generated a total of $464 million in cash flow from operating activities. We are pleased with this result, which highlights our ability to consistently generate cash flow through various industries cycle. In the second half of last year we completed the acquisitions of all MetalServices, Northern Illinois Steel Supply, and Fox Metals and Alloys that contributed to our second quarter 2015 consolidated net sales of $2.42 billion. In total we sold 1.51 million tons of metal during the second quarter of 2015. While we have not completed any acquisitions so far in 2015, we continue to see and evaluate opportunities and as always M&A will remain an integral part of our overall growth strategy. We expect to continue to be a consolidator in our highly fragmented industry by making strategic acquisitions of well-managed metals service centers and processors with end market exposures that support our diversification strategy. Our liquidity position and confidence in our operational execution provide a strong foundation for us to continue to grow our business through M&A and organic initiatives as well. At the same time deleveraging our balance sheet and returning value for our shareholders through dividends and opportunistic share repurchases. During the second quarter, we repaid a $156 million of debt. In the first six months of 2015, we repurchased $200 million of our common stock and repurchased an additional $61.5 million so far in July. On July 21st, 2015, our Board of Directors declared a regular quarterly cash dividend of $0.40 per share of common stock. As we have noted in the past Reliance has a broad range of products, significant customer diversification and a wide geographic footprint. Our high volume of small, quick turnaround orders and value-added processing coupled with our discipline sales strategy has helped the Company maintain and increase our gross profit margins even in today's difficult pricing environment. We have a very experienced team at Reliance and achieved industry-leading operating results and we remain confident in our ability to continue our track record of success going forward. I will now hand the call over to Jim to comment further on our operations and market conditions. Jim?

[James Hoffman:]

Thanks Gregg and good morning everyone. My remarks today will focus primarily on [indiscernible] carbon steel alloy products as well as our outlook on certain key end markets we sell those products into. Bill will then address our aluminum and stainless steel markets. From an end market perspective, automotive, serviced mainly through our toll processing operations in the U.S. and Mexico remains very strong, and we believe this will continue. Our toll processing operations in the U.S. are expanding primarily in support of aluminum product now going into the automotive market. We are also adding a facility in Mexico to support the increased automotive activity in that area. Heavy industries such as railcar, truck trailer, shipbuilding, barge and tank manufacturers, and wind and transmission towers are all doing reasonably well. Agricultural and construction equipment have come off their peak, but we still are seeing good demand and remain well position to continue to service these important end markets. Nonresidential construction is our largest end market and although we have seen demand continue to improve, it remains well-below the peak levels. We are optimistic that this important market will continue to improve gradually throughout 2015 and 2016. We have made significant investments in our businesses serving this space that will allow us to provide a higher level of value added processing to these customers as their volumes increase. Energy, that being oil and natural gas, has slowed down due to the severe drop in oil prices and the related reduction in drilling activities. Our second quarter volume sold into our energy businesses declined approximately 35% from our volume in the first quarter of 2015, which was down 30% from the prior year. Because we began the process of reducing our expenses and inventory levels related to that market early in the fourth quarter of 2014, and have continued to do so as demand continues to decline, our energy businesses as a whole remain profitability through the second quarter of 2015. However, pretax income for these businesses was down over 85% compared to the second quarter of 2014. Carbon steel prices continue to be under a great deal of pressure in the second quarter, mainly due to continued record high import levels in the marketplace as well as a rapid decline in raw material prices, a strong U.S. dollar, a soft local economy, and high inventory levels throughout the supply chain. However, in this environment we actually increased our FIFO gross profit margin on sales of our carbon products in 2015 second quarter as compared to both the 2015 first quarter and the 2014 second quarter. Our success is due to many factors, including our product mix [indiscernible] our excellent customer relationship and our strong supplier partnership along with increased value added processing. Flat-rolled pricing has been under pressure since late in the third quarter of last year. There has been some recent price increase announcement for the portion of these increases moving on so far. Carbon flat-rolled products represent only 15% of our total sales with hot roll is 7%. We believe the recent trade case filings on coated products has been supportive of domestic prices and anticipate this any additional filings with also be positive for pricing. Trade represents the largest portion of our product mix followed by carbon steel, structurals, bars and tubing. Therefore, our results are more impacted by pricing in these products. Pricing for these products continue to be under pressure however we believe current prices are near to bottom and we anticipate the potential for modern increase for certain carbon products by the end of 2015. Pricing for alloy products a majority of which are sold into the energy end markets as now fairly steady considering the significant reduction in demand this quarter. We expect prices for these products to remain fairly steady with current levels, due in large part to product going into the automotive market. I will now hand the call over to Bill to comment further on non-ferrous markets. Bill.

[William Sales:]

Thanks Jim. Good morning everyone. The aerospace market continues to be a bright sport for us. Demand is remain strong and we expected to improve throughout the balance of the year as build rates in the commercial airline market continue to grow. We've increased our presence in this area with the acquisition of All Metal Services, headquartered in the U.K., in August of 2014. As well as the opening of two new AMI metals facilities in France and Turkey in the first quarter of 2015. Sales to the aerospace market have increased as a percentage of our total sales. Now representing approximately 8% to 10% of our total sales in the second quarter of 2015. In addition to these growth activities our same-store tons sold also increased significantly reflecting the improved underlying demand. This is a good market for Reliance and we expect to continue to grow in this area as we support our global customers. The majority of the products that we sell to the aerospace market are heat treated aluminum products, especially plate, as well as specialty stainless and titanium products. Given the strong underlying demand the price for aerospace aluminum plate as improved over last year. Lead times are out 24 to 28 weeks up from the 13 to 17 weeks we saw in January. Both price increase announcements for this year have held and this product is in tight supply. We believe the aluminum played overhang that is existed for the past few years as generally work through the system. Our sales of common alloy up slightly from the volume standpoint with most of our product being sold sheet metal fabricators that support a variety of end markets. Demand on general engineering aluminum plate remain strong, with domestic lead times around 25 weeks. The price increases for March has held with the domestic mills but import pricing continues to be aggressive. Demand for semiconductor plate remain strong and the outlook is good for the balance of the year. Pricing on common alloy sheet follows ingot and as deteriorate from prior year levels due to increase imports as well as a significant reduction in the Midwest premium. Midwest spot ingot has been trading in the $0.80 to $0.85 per pound range down from the $1.06 per pound we saw in January. The conversion premium was that historically high levels for longer than we have anticipated and has decreased about $0.60 per pound since the beginning of the year. Outside of the energy market demand for stainless steel products continues to be good. We sell a significant amount of stainless steel flat products into the kitchen equipment appliance and construction end markets lead times are about 4 to 5 weeks. Pricing for stainless steel products is heavily impacted by nickel prices which began the year have $7.37 per pound and it’s currently down a $1.51 at $5.86 per pound in July. As an example surcharges for 304 have fallen from $0.76 per pound in January to $0.57 per pound in July. In addition, base prices have dropped few discount points due to a heavy influx of import products. We expect prices for stainless steel products to remain steady to up slightly for the remainder of 2015. I will now turn the call over to Karla to review our second quarter financial results in more detail. Karla.

[Karla Lewis:]

Thanks, Bill and good morning everyone. Given the market conditions discussed earlier our 2015 second quarter tons sold and average selling prices were down compared to the 2014 second quarter as well as the 2015 first quarter. Sales from the companies we acquired in 2014 help frozen the decline in our tons sold as well as our average selling price. Since most of these companies sell specialty products or provide higher level of value-added processing, resulting in selling prices above our company-wide average. Our same-store average selling price has declined sequentially in each month beginning in September 2014 with our June 2015 average selling price down $200 per ton or a 11.5% from our September 2014 average selling price. Based on our second quarter same-store tons sold this equates to a loss of nearly $300 million in quarterly sales or $1.2 billion per year due to the impact of metals pricing and as we have explained before the majority of lost sales from pricing also result in lost earnings Because metals pricing, especially for carbon steel products declined more than we had anticipated and in 2015 second quarter as compared to the 2015 first quarter, we increased our annual estimate of our LIFO adjustment to income of $80 million compared to our prior estimate of $30 million. This resulted in a LIFO credit or income of $40 million for the 2015 first half with $32.5 million or $0.27 earnings per diluted share included in our cost of sales in the 2015 second quarter compared to $7.5 million of LIFO income or $0.06 per share in the 2015 first quarter In the 2014 second quarter, when metal prices were generally rising we recorded a LIFO charge or expense of $5 million or $0.04 per share. This adjustment reflects LIFO accounting working in the manner intended, reducing FIFO cost of sales in a declining price environment. The majority of our LIFO income is attributable to our carbon products as carbon suffered the most pricing pressure in the quarter and represents 80% of our inventory turns and 50% of our inventory dollars. Our updated annual LIFO income estimate of $80 million assumes that pricing for certain carbon and stainless steel products will increase modestly from current levels by the end of the year. Our 2015 second quarter gross profit margin of 27.1% is up from 25.7% in both the 2014 second quarter and 2015 first quarter. Our increased LIFO income contributed to our increased gross profit margin and on a FIFO basis our gross profit margin during the quarter exceeded our expectations especially considering the declining price environment. Given the competitive market and lower prices we anticipated that our gross profit margins would decline. However, as highlighted previously our teams in the field did a great job of maintaining and increasing our gross profit margin. Our 2015 second quarter SG&A expenses decreased modestly from both the 2014 second quarter and the 2015 first quarter primarily due to effective cost control throughout the company including decreased headcount in our businesses servicing the energy end markets. As a percent of sales our SG&A expenses were 18.2% compared to 17.0% in the 2014 second quarter and 17.1% in the 2015 first quarter. The increase as a percent of sales was impacted mainly by lower selling prices in the 2015 second quarter, using our average selling price in the 2015 first quarter applied to our 2015 second quarter volume results in SG&A expense as a percent of sales of 17.3%. As individual markets change, we will continue to remain disciplined in our efforts to adjust our variable expenses such as personnel costs which represent about 60% to 65% of our SG&A expenses. Our quick reaction to the significant decline in sales volume to the energy market allowed us to remain profitable in our energy businesses in the second quarter of 2015, which we believe is quite remarkable. Although our pretax income of $135.9 million declined from the 2014 second quarter and 2015 first quarter, we are very pleased with our pretax income margin of 5.6% for the quarter given the difficult pricing environment. Again this was possible because of our strong gross profit margins. Our effective income tax rate for the quarter was 32.6% compared to 36.6% in the 2014 second quarter and 31.7% in the 2015 first quarter first quarter. Our tax rate in the 2014 second quarter included the effect of a gain on the sale of certain non-core assets. In addition, our 2015 rate is benefiting from lower tax rates in certain states and foreign jurisdictions and we currently expect that our full-year 2015 effective income tax rate will be in the range of 32% to 33%. In 2015 second quarter, we closed the facility that was not performing in line with our expectations, resulting in a charge of $0.8 million included in our SG&A expenses which is presented in our table of non-GAAP net income and earnings per share amounts in our press release issued earlier today. Net income for the 2015 second quarter was $90.2 million or $1.20 earnings per diluted share well above our guidance range. Going to our inventory reduction efforts, we generated cash from operations of $292.5 million during the 2015 second quarter. We typically use cash in the first half of the year as we build working capital from seasonally lower fourth quarter levels. However, given the declining metal prices along with strong gross profit margins and our successful efforts to reduce our inventory levels, we were able to generate $463.9 million of cash from operations in the 2015 first half. Given our current expectations for both pricing and demand in the 2015 second half along with our continued efforts to further improve our inventory turn. We expect to continue to generate cash from operations, but not at the same rate is in the 2015 first half. On the working capital front, we continue to manage our receivables well with our accounts receivable days sales outstanding rate at June 30, 2015, 42.1 days in line with our historical range. Our inventory turn rate at June 30 was 3.9 times based on dollars and 4.4 times based on tons both fairly consistent with the prior quarter. However, given the significant inventory reductions in the 2015 second quarter, we expect these rates to improve as we move through the year. As Gregg mentioned earlier using our June 30 inventory on hand in our 2015 first half shipment levels, our turn rate is 4.6 times on ton. We use cash from operations to pay down $156 million of debt during the quarter. At June 30, 2015, our total debt outstanding was $2.2 billion resulting in an improved net debt to total capital ratio of 33.9%. As of June 30, 2015 we had $585 million outstanding on our $1.5 billion revolving credit facility. We spent $45.8 million on capital expenditures during the 2015 second quarter and our full-year 2015 CapEx budget remains $200 million the majority of which related to growth activities. We also paid quarterly dividends of $29.7 million during the quarter and further enhanced our shareholder returns with share repurchases. In the 2015 first half, we repurchased $200 million or 3.4 million shares of our common stock at an average cost of $58.17 per share. As a result of these repurchases, we realized an EPS benefit of $0.05 per share during the 2015 second quarter. And given that our stock price has continued to be undervalued along with her strong cash generation, we’ve been in the market recently repurchasing approximately $61.5 million of our shares so far in July. We expect to use available cash to continue to opportunistically repurchase shares of our common stock as well as to pay our quarterly dividend reduce our debt and support our various growth activities. Now turning to our outlook, overall we expect the U.S. economy to continue its modest improvement throughout the remainder of 2015. With the exception of our businesses directly servicing the energy markets we expect underlying demand to generally strengthen from second levels, subject to normal seasonal patterns. That said, we anticipate a decrease in tons sold of 1% to 2% in the third quarter of 2015 over the second quarter of 2015, compared to the more typical seasonal trend of gallon 3% to 5%. Although we expect metals pricing to remain under pressure for most products we sell we do expect the slight improvement in overall pricing from current levels with our overall average selling price expected to be flat to up 1% from second quarter level. Given this environment we would expect to be able to generally maintain our current FIFO gross profit margin with the potential for downward pressure. Based on our current annual LIFO income estimate we expect LIFO income of $20 million in the 2015 third quarter down from our second quarter amount which would reduce our reported gross profit margin as well as earning. As a result we currently expect earnings per diluted share to be in the range of $0.95 to a $1.5 in the third quarter ending September 30, 2015. We are confident in our ability to continue to effectively manage the controllable assets of our business to mitigate the volatile factors that impact our industry. Our effective working capital management and consistent gross profit margin provides strong cash flows that allow us to continue to fund growth while at the same time providing steady returned to our shareholders. That concludes our prepared remarks. Thank you for your attention and at this time we would like to open the call up to question. Operator.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tony Rizzuto of Cowen and Company. Please go ahead. Anthony Rizzuto Thanks very much. Hi, everyone. Gregg Mollins Good morning, Tony. Anthony Rizzuto Hi, first of all congrats to you Gregg on taking over the helm and to you, David, for your exemplary efforts over the past two decades in guiding the company through a great deal of success. So congrats to both of you guys. Gregg Mollins Thanks Tony. Anthony Rizzuto You are quite welcome. My first question Gregg on your last conference call you were pretty adamant about the carbon flat mills needing to grab the bull by the horns and raise prices and shortly thereafter prices rose. So I'm very curious as to how your thinking today in the current environment accommodate any further price hikes and carbon flats? Gregg Mollins I feel Tony, obviously with the enforced where they are there is some difficultly there however they seem to be diminishing and I think the reason price announcement from U.S. steel is partially held and I could see carbon steel products for pricing going up especially with the trade case that's been filed I think will be supported and I would be surprised if there weren’t more trade cases on other several products to follow. So to answer the question I think the mills have reacted well and raise those prices were problem for doing that and we feel that they have a better chance of success than not. Anthony Rizzuto Gregg you indicated that that X hike that $40 or at least a portion of it is sticking out there. How come we’ve seen the consultant group seemed to be a little bit slow and maybe picking that up we’ve seen some improvement there some of it is sticking what portion? James Hoffman It’s in the neighborhood of about $20 a ton. So I think the consultants may look more at the contractual business more so than the spot, and I think those prices are holding better in the spot business than probably they are in the contractual. Anthony Rizzuto Okay, all right. Thank you for that and you guys indicated that the second quarter demand levels were somewhat below expectations and I was wondering I may have missed some of this and I apologize I just bounced off another call and maybe miss some of your commentary there, but could you provide some color on the specific areas of shortfall and what gives you guys confidence that the US economy continues on a path of recovery because we’ve been having some conversations and it seems like there is a growing level of caution out there being voiced by people we talk to. James Hoffman While, were a little disappointed in our second quarter volumes, primarily because our second quarter generally is better than our first quarter. And this particular case that didn’t transpire. On the another hand I will say that a portion of that decline in our volumes was related to - we reduced our inventory is $163 million in the quarter. We were not chasing business that was unprofitable, okay. So because we didn't have the need to blow out inventory. We received less inventory from offshore purchases. So we just - we took a very disciplined approach to our pricing and there were some tonnage reduction due to that. But that was a strategy of ours because we were not chasing business that we believed and well, we knew, was just not profitable at all. So that had a little to do with it. But in general our second quarter in volume wise is better than our first and in this particular case with the exception of what I just described it was - it seem a little softer than the first quarter, which historical speaking is a little bit unusual. Karla Lewis And we, Tony, our tons were pretty much in line with the MSCI industry averages of what happened in the second quarter. I think the industry was down about 2% and we were down 2.1%, which could support your question about is underlying demand flowing, but based on what we are hearing from the field with exception of energy. We’re so confident that there is continued underlying demand growth some markets stronger than others. And so we’re still confident in the outlook. Anthony Rizzuto Okay. And my final question is on the aluminum plate market, and again I apologize, I may have missed Bill's comments earlier but just in general engineering is the demand to aluminum plate still improving where lead times now and what about import pressures we’re hearing of greater import pressures out of South Africa and Europe and you know we’re increasingly concerned about what the Chinese are doing. So I was just wondering if you could bring us up-to-date with what's going on in those markets. William Sales Yes, Tony. Lead times are running about 24 to 28 weeks. The aerospace are part of that business is extremely strong. The supply side is tight. General engineering you know we are seeing aggressive import pricing. There is more product coming in from China and if the outlook really into the - we'll see, I think, more of that in the second half and then getting into 2016. We think the general engineering market is going to be new margins will be under pressure there. But that’s not impacting aerospace at all. Our outlook for aerospace through 2016 is very positive. Anthony Rizzuto So, one of the concerns that you and I have talked about in the past, is that material tends to kind of find its way into a little bit of overlapping these markets you concern that all that as quality continues to rise, is there any concern some of the excess supply in general engineering could soften up the heat treat market for aero? Is that a concern of yours as you go into 2016? Gregg Mollins Not in the outlook that we’re looking at. I think when you look long-term there is some potential for that down the road, but that’s pretty far down the road. Anthony Rizzuto Okay, great. All right, great color everybody. Thank you so much. Gregg Mollins Thanks Tony.

[Operator:]

Thank you. The next question is from Timna Tanners of Bank of America Merrill Lynch. Please go ahead. Timna Tanners Hey, good morning everyone. Gregg Mollins Good morning Timna. Timna Tanners That was a really thorough overview and outlook, so I wanted to thank you. It doesn't leave us as much to ask about as maybe in the past, but I did want to hone in on what Karla was saying about the ability to maintain overhead and how much of it is labor because it is pretty remarkable that despite the lower earnings, you've also been able to contain the overhead. So I just wanted to get a sense, you know, how much needs to improve if - sorry, how that can be sustained if volumes improved going forward or how to think about that number in the next couple of quarters? Thanks. Karla Lewis Yes. Hi Tim. So from expense standpoint certainly we’ve got our fixed costs with all of our service centers that we have out there and we’ve got a lot more capacity from the fixed cost standpoint to put a lot more tons through our businesses especially in a lot of our non-res facilities where we expect the mandate continue to improve. There is the variable cost component for handling more material, we might have to add a few more bodies typically in the warehouse or drivers to move the material, but that’s something it's not really a one for one increment. We can absorb more volume in our current structure and the people part of our is about 60% to 65% of our SG&A expenses, so that’s where we typically can attack cost or increase for instance in the energy businesses, we’ve had to reduce headcount and other costs that primarily headcount quite a bit. At the same time some of our business is like aerospace business as Bill talked about or our tool processing for automotive are growing and so we’re adding people to some of those facilities, but as you can see in the results we were able to reduce costs overall. So we’ll continue to do that, we look at each of our businesses individually to see what’s going on there. We said before we think kind of in a normal demand and pricing environment which we don't believe we are in. Currently, we think our SG&A expense should kind of be in the 14.5% to 15% of sales range. We are up to 18% now, but we were expected to trend down a little bit as we move forward, but certainly we won't get down to that normal level in 2015. Timna Tanners Okay. It's been really nicely contained, so thanks for that color. I just wanted to take a step back and ask more about non-res construction demand, and I feel like for the last - you said this is a normal demand and I feel like we've been saying for years now that it’s not normal non-res demand and then expectation seem to be for better growth this year when we were talking about last year. So I just want to get a sense on you guys what it will take to get a more positive outlook or what kind of trends we can look for. Is it really just the energy market that’s kept a damp on the overall non-res market or are there other factors? Thanks. James Hoffman Hi, Tim this is Jim. We have some lead indicators. Our companies out in the field, they've got really good relationships with their end use customers so some of these very large contractors and fabricators, they give us really good color on what they see as far as what backlogs they already have, what jobs are on the horizon, so we’ve lot of insight there also our strong supplier relationships. I mean in the non-res business, the producing mills pick up first, because these big jobs that are quoted, they go mill direct. Once the big mill direct jobs start working through that’s when they call us for the smaller pieces of the business. So the indicators are there. Another thing, when you go back to when it was real good, it wasn't very good at all back in 2009, 2010. There may be a job that’s being quoted out there and you have 30 different contractors bidding on the job from all over the United States even though the job itself and stock in California. Now it’s back to the kind of the usual suspects, the three of four local guys that basically do construction in that area. But right now we're positive on the outlook. It's up. It continues to be good. It's still way off its peak. We've got plenty of room to grow along with it. And it's just - it feels better, looks better and all of our lead indicators say that in fact it is better. Gregg Mollins We're getting a lot of positive, as you're hearing from our steel producers and our coating activity has improved, and it has improved, you know, fairly steadily over past few years. So that’s always a good indicator, our volumes are pretty good. The region with the most activity is the Northeastern part of the United States, the West Coast is strong, Texas even with regard to, you know, the softness in the energy market, they're still building there the LNG plants, our strong hospitals, schools, businesses in that regard are doing better. So we think that we are going to see growth and the non-res business going forward. James Hoffman And Timna one more point on the second part of your question, what would it take one there is pent-up demand. If our government if past comprehensive transportation bill, no matter where you are in the country, you can see bridges that are on the verge of collapsing, unfortunately and when that does happen, things will get better this is a lot of steel that goes into the infrastructure. Whether it's bridges, whether it's water treatment, on and on and on. So that would be something that would - I think would be good for everybody. Timna Tanners Okay great and then if I could just one last one I wanted to get your sense on the stainless imports, stainless sheet imports, and carbon plate imports, we're starting to hear maybe a possibility of also trade case is being pursued there. Do you think that that market is being unfairly treated by imports and that there could be a trade case either of those commodities? Thanks. William Sales Hey Timna its Bill. I will address the stainless part of that. We are hearing a lot of discussion from our suppliers about the potential for trade case, obviously the commodity part of the stainless flat businesses has been very, very competitive and you can see impact of that from some of the financial results from suppliers and then have read where one of the major domestic guys have said that trade case is likely. So we will come a step back and watch that but there absolutely is a lot of discussion about that possibility and it seems to be gaining momentum. Gregg Mollins And from the carbon plate side of the business Timna we would be surprised if there was not a trade case filed in that. There has been so much of that material coming into the United States from foreign suppliers had a ridiculous way. So you know price spreads there in that particular commodity are still fairly significant. Timna Tanners On carbon plate you are talking about. Gregg Mollins On carbon plate and Bill commented on the stainless and I am commented on the carbon plate. So will be surprise it there wasn’t trade case filed for that there certainly should be there’s unfair dumping that’s taking place in huge amounts and we help that there is a trade case file. Timna Tanners Okay great thanks for all the detail.

[Operator:]

Thank you. The next question is from Phil Gibbs of Keybanc Capital Markets. Please go ahead. Phil Gibbs Good morning. Gregg Mollins Good morning. Phil Gibbs Karla, I just wanted to qualify your comments on the FIFO gross margins in the third quarter did you say that you expected to maintain with some downward pressure I was in quite sure if that’s I heard, but that’s all [indiscernible] said. Karla Lewis Yes, that is what I said so I mean as we commented on during our prepared remarks 25.7% gross profit margin achieved during the second quarter we were very pleased with again you may remember when we talk to you in April that we were telling you we were pleasantly surprised that we are able to maintain FIFO gross profit at 25.4% in the first quarter, given that the competitive market out there the import in there and we were really pleased with the performance of our people and the fact that they increase does margins in Q2 you know we think is wonderful. We do think there are reasons why you're seeing our margins hold because of the things, Gregg talked about in our business model you know the quick turn orders we go after the high value add. So we do think you know we’ll continued have gross profit margin however there still a lot of metal out there so there decent pressure because of 25.7% so really strong level given the environment. So we’re typically a little conservative so we would anticipate the potential for some downward pressure not significant downward pressure in the third quarter. Phil Gibbs Okay, and I know you’re really focused on the quick turn businesses as you always have been but maybe Metals USA is focused more on the larger orders given the OEM bias that they have. Is there anything that you could give us a view into there that could be a little bit different meaning the purchasing behavior of the OEMs or they more likely to be looking at your offshore for steel, are they more cautious in buying large order patterns, have they backed away? Just trying to maybe see what the differences relative to the legacy business. William Sales The behavior of the OEMs has not changed dramatically other than the fact that they have seen prices going down, so they’re being more conservative on their buys. So and Metals USA has gained more momentum on the smaller order size business because of the environment that they're now in Reliance Steel. But you know as far as the OEMs we’re just seeing the OEMs reduced their buying patterns. It's not like they're cutting back their tonnage, they are just buying it more frequently more often, okay and just being cautious of the fact that metal prices are under pressure due to offshore - you know. But they're not - we don't see a lot of buying OEMs going outside of the country it is still remaining pretty much with the domestic producers, so we’re not seeing any change in behavior there. Karla Lewis And also Phil, by the time when we acquired Metals USA in 2015 they had been diversifying their business a bit. So they probably wanted is heavily kind of that OEM type business you're talking about as they had been a few years prior to that. And even in the Reliance legacy business, certainly we’re much more diversified and probably more you know next day delivery type orders than Metals USA had been. We’ve always had some portion of OEM type business in the legacy Reliance business also. Phil Gibbs Okay. And then I will just ask this last one if I could and then jump right off. You feel like Gregg you feel like you are to losing any share as an Industry or have lost shares in industry to direct import buys and how you expect that to unfold in the next couple of years? Thanks. Gregg Mollins No I don’t think we’ve lost any meaningful business with any of our customers going offshore. As I said earlier I think we’ve lost a little bit of tonnage business volume, okay from businesses that very honestly, we just didn't want to do business. There is some competitors out there that have too much inventory and they’re doing whatever it takes to get rid of that inventory. We’re not in that position. So you know we’re choosing to pass on some of that volume. But as far as market share is concerned we think, we’re building our market share, we spent a lot of money in CapEx spending. We’ve got you know great equipment out there that has tolerances that very few people have our CapEx budget for like the fourth year that row is at the $200 million mark. So we’re investing you know all the time in our businesses so they can have the highest quality, we focus on our lead times to reduce. So we think that we’re going to continue to grow market share as time goes on. And we don't believe that we’re losing any market share other than the fact that some business that, we choose not to take because it’s not taken because it’s not profitable, we’re going to pass on. Phil Gibbs Thanks, Gregg. Gregg Mollins Thank you.

[Operator:]

Thank you. The next question is from Luke Folta of Jefferies. Please go ahead. Luke Folta Hi, good morning. Gregg Mollins Good morning, Luke. Luke Folta I wanted to touch on something that I brought up last quarter, and it's - I know it can be a complicated to sort of summarize, but just on your average selling prices, when you look at your realized prices it really needs category relative to the spot indexes. They moved up quite a bit and your spread is over sort of spot pricing moved up quite a bit in the first quarter and I came away from the last quarters conference call thinking that some of that was temporary in that and you could hold up your selling price is little better on the way down and maybe the market is a whole, but as we look at that number into the second quarter in most cases it’s actually going up further. So I guess well done on that side. I guess when you think about the drivers of this and you may have answered the question earlier just with your comments on discipline and trying to maintain selling prices and margins, but what do you think the big drivers of that are? Gregg Mollins We are reducing inventory throughout the entire corporation, we are focused on that. On the other hand we are looking at every invoice line, every order, ever customer and because we recognize the fact that when you have prices that are as low as they are today in most all of our products, your saving grace is gross profit margin management and expense control. So we're just focused heavily, okay? I mean, Jim and Bill are sitting here next to me, and there's not a time I walk by their office that I don't hear them on the telephone talking about the gross profit margin management and inventory turn. James Hoffman This is Jim. You know, out in the field, our guys, they don't focus on moving tons. It's not part of what we do. They focus on their pretax profit earnings and gross profit and taking care of customers. They really don't discuss how many tons are we moving out here. So I think, everything that Gregg says is spot on. And it's just part of our culture. Karla Lewis And that’s all true and I think also when you compared to indexes and I think we talked about this a little bit before is the mix also, because we’ve got a lot of specialty type products within some of those broad categories when we report on, you know, carbon, stainless, aluminum, alloy, but within that, you know, there's a mix, and we've really over the years focused on trying to become as much specialty type higher value on product as we can't so I think that also impacts that comparison to those indexes. Gregg Mollins Yes, good example of that is on the aluminum side with the acquisition of All Metal Services their average selling prices are much higher than what our average had been, because it’s aerospace business or aerospace products so you will see impact from that. Luke Folta Particularly impressive in the sense that normally when you imply the strategy of maintaining discipline on pricing in margin that typically comes with you normally hear those companies talk about share loss as a result of that and really in your case you’ve been gaining share at the same time is doing that, so it’s pretty interesting. Go ahead I’m sorry. Gregg Mollins Yes, just a quick comment, the business out there it is not that, okay, we would like to see energy doing better, but other than when you get away from that into the other markets, okay, it's pretty strong and couldn’t keep lead times low. You’re on time delivery, okay, intact and something that our customers can depend upon that relationships with your customers with your outside and inside salespeople, okay. You didn’t get an extra penny here and there, which is exactly what happened with the 25.7%. So our people in the field are pretty darn good at blocking and tackling and doing the basic fundamentals well. Luke Folta Just on inventories, from your perspective if you look at the MSCI numbers in the trend that we see there it looks like in aggregate your inventory just starting to move towards the long-term average levels with two months on hand, but I mean do you see pockets of inventory out there whether it’s at the port as a result imports or at the end user level that would make it to see. I guess do you think the MSCI numbers are really indicative of the market as a whole or is there excess inventory out there it’s not reported? Gregg Mollins Karla? Karla Lewis Well, I think one of the things, at least when we look at the MSCI data that is out there, it’s very heavily weighted towards flat-rolled product and with flat-rolled certainly the majority of that goes into - which has been a good strong market, so we think that has positive for the inventory numbers that are being reported overall. When you look at some of the individual products I think there might be a few ports that Gregg or Jim could comment on where there might be some inventory sitting around. Gregg Mollins The typical force that we all hear about I Long Beach Houston in particular, okay, do they have their fair share material on the docks there? Yes they do will it be there a short-term long-term short-term certainly it’s going to be there and that’s problematic you but you hear that imports are starting to decline, that, licenses are going down, but when I look at that information very honestly and I still see it at the 3 million ton mark per month when it used to be. Jim, what is it now? It's somewhere around 35% of tons being consumed in the United States is coming offshore. James Hoffman Historically it's been in the - up in the upper in May was actually 39% which is unheard. Gregg Mollins Yes, we are hopeful that that's going to decline we think it’s going to decline, but we are running our business like is not going to decline. Karla Lewis Yes, that’s those are the inventory is docs and things that’s not reported in the MSCI data because it’s not by the service centers at that point and overall we things service center on inventory levels are reasonable that generally industry why they're in good shape just like a lot of other companies Reliance focused on bringing our inventories down in the quarter so we think overall there are in good shape energy there might be a few customers or service centers that are little heavy with some of the energy products that outside of that we think it's in pretty good shape. James Hoffman Overall MSCI reported 2.7 months on hand it is very manageable if you take our lead times with that kind of inventory load. Luke Folta Okay great and then last one if I could on CapEx, you often don't spend with full year forecast beginning of the year. So just give us an update on what you think you might spend in terms of 2015 and then just trying to think of the go forward. If we stripped all the growth out of that number and just look that a maintained sort of CapEx spend what would that look like? James Hoffman This is Jim again. Our CapEx budgets in $200 range and what expense so far have been looking forward I would guess we are going to be probably understand in the 150, 180 range. We seemed always budget higher we understand how hard it is to make money. So we just don’t plan it year in advance and then spend it. We look at it every month, if it's a good idea, good investment. For instance, in the energy sector, the CapEx dollars that are budgeted there, a lot of it's been put on hold. And when that sector comes back and your guess is as good as mine when that's going to happen, we'll go ahead and spend a dollar. We look at it monthly and that's just a guess, but we're budgeted for $200 million and I don't think we'll spend near that. Karla Lewis And you know we work consistently with in a little bit under but part of that’s because when recent the budget together for instance if we are going you know build a new facility or if we are installing a large piece of equipment will put the full dollar amount into the current year budget the time wise it made spread into the following year. So that’s also timing is a little bit of the reason sometimes we are bit under but you know at Jim’s point you know for most part we are going back on anything then you would asked about the maintenance portion and we think that’s about $80 million a year and that the balance of this is growth related. James Hoffman And one other point look on those lines. For instance, in the automotive end, which we don’t participate directly vast majority of our participation in there is through our toll processors, we're adding a new building in Mexico to support the big automotive down there. That was planned. However, due to the strength and the continued growing strength in that sector, there's a pretty good chance what we spending dollars into that to support that market that weren't planned. So the $200 million won't be spending in total but there may be additional dollars that will still stay under the $200 million that we had not planned for in particularly strong sectors like automotive. James Hoffman We are reallocating dollars that we’re going into energy originally into the automotive sector and aerospace for the growth opportunities. Karla Lewis Yes, and it’s interesting Jim mentioned on the toll processing side and sometimes people ask us, why we’re so excited about it when it's only 2% to 3% of our revenue dollars, but I think as we’ve talked about it - it’s very nice business that we have there. And we for years have mentioned periodically that through our probably 15 toll processing locations within the company, they process more metal than we do in the rest of the company. And even as we’ve continue to grow the rest of the company even with big additions like Metals USA, our toll processing businesses have continued to grow with the investments we've made in them that they still are processing more times in the rest of the company. Luke Folta That’s great detail. Thanks a lot.

[Operator:]

[Operator Instructions]. Then the next question is from Andrew Lane of Morningstar. Please go ahead. Andrew Lane Hi, good morning. James Hoffman Good morning. Andrew Lane Congrats on the solid execution this quarter and along the lines of gross margin expansion. I'm curious as to what percentage of your product you're currently buying via the import market relative to domestic producers. How is that figure changed since 1Q and then for perspective going forward what percent of imports would you typically buy in a more normalized mid-cycle pricing environment. James Hoffman Well, we’re right now at a more normalized of a buying pattern. We increased our purchases of offshore material basically in the second half of last year, because our mills were very busy and we basically said we’re busy enough that we don't need to institute programs to come back offshore material coming into some of the ports. So but they’re back in the game again, we prefer to buy from domestics and typically we’re somewhere between 3% and 5% of our purchases are offshore, okay as a whole on all metals and we’re back to that pattern. I think in the second half of last year with material also arriving in the first quarter of 2015 that got us to about 8%. So about double what we normally have gone and we don’t like that. So but the mills are back and we’re back down to our normal purchasing pattern of 3% to 5% coming in from outside North America Andrew Lane Great. And then to change gears, I wanted to ask about automotive aluminum tolling and how much of the growth area. That is for you without any major announcement since the F150 changeover, where do you think that growth is going to come from is it more likely you'll take share from business that already exists as you invest incrementally in your tolling business or do you expect automakers aluminum adoption to really pick up in the coming years? James Hoffman Well, we probably have three opinions over here, okay, I will give you my first one and Bill you can jump in on. The F150 is grown, I think more than even that Ford Motor Company even realized how quickly it is grown. We thought we were into X-number of million pounds of that and now it’s double and then our first expectations work. And there is other companies, I think that’s going to it’s going to change the picture of automotive okay and light truck just that’s my personal opinion, it’s taken pretty close to our toll processing operations. But I should give your opinion Bill. William Sales Yes, I agree. I think we’re going to see more and more conversions, we read early on, that some of the platforms we’re saying they weren’t going to convert to aluminum and they were there is a little bit of a back and forth in the market on what was going to be the product of choice. But I think more and more we’re hearing that they may not go all aluminum or aluminum intensive but they’re going to be more and more platforms converting parts to aluminum. So we think the outlook there is very, very positive. Gregg Mollins Our largest toll process or operation reports into Germen, and, Jim, you're involved with that company daily, so their outlook? James Hoffman It’s strong and it’s just not in aluminum. They process a lot of steel I mean the aluminum seems to be the sexy trend right now. There's a lot of steel product running through those operations that go into automotive and appliance and I mean they just and they have to be very good at and they set our growth 17 million plus units of automotive, we seem to be I think we are picking up a lot more of that share. So that number grows will grow up, but we’ll continue to go up I think from a long run, the part that we've captured, I think we'll hold onto that and growing more. Andrew Lane Okay, that’s helpful commentary. Thank you very much. James Hoffman Sure.

[Operator:]

Thank you. Our next question is from Brett Levy of CRT Capital. Please go ahead. Brett Levy Hey guys, Gregg, David, Bill, Karla good quarter. Can you talk a little bit about kind of the collapse of the Aluminum Midwest premium and whether or not that sort of is likely to be part of the reason that you're guiding down for the third quarter just sort of inventory that lost its value and then I have one question of follow-up from that? William Sales Really as you know that we’ve seen a significant change of drop there Midwest premium I think as of this morning was about $8.04, $8.05 cents down from half think of about $0.26 a pound, but for our guys it really - most of what we sell is going to applied to pricing is going to be more in the commonality side and some of the rod and bar soft alloy type products. And we turn that product very quickly and we price the material on a spot basis so it hasn’t had a negative impact in terms of our margins. We are seeing that what it is doing and I think if you look at common alloy in particular it was predominately supplied by import product because of the gap between the domestics and import. We are now starting to see that Midwest premium coming down, it’s bringing the best domestic mills more back into play and so we are starting to see some ship there where we’ll shift away from import more toward domestic. Karla Lewis And Brett you the common alloy aluminum does extend the Midwest premium will affect the pricing even though our prices could be down a bit in Q3. That’s a pretty small portion of our business probably in the 4% to 6% and from the standpoint of earnings guidance we don't think that our guidance into Q3 from Q2 should be a surprise or unexpected for years. The third quarter of the year is from a demand standpoint down for service centers and not just for Reliance compared to Q2. There a lot of - our customers who shut down, where we have fewer shipping days into those. So the normal trend is for demand to be down Q3 versus Q2. It appears from guidance that had existed out there that people doesn’t seem to remember that when they put their guidance out there, but we very consistently try to remind everyone of that and that’s the norm. The other thing in the Q3 EPS guidance down from Q2 is we try to highlight and probably maybe just do a good enough job that we had a big pick up in the catch-up LIFO income in Q2, we got $32.5 million on our $80 million annual estimate, but in Q3 we would only be booking $20 million of that. So that’s about a $0.12 change right there just in Q2 to Q3 guidance. So we think our guidance is pretty consistent and reflects us being able to continue to operate very well in the market given the normal seasonal patterns. Brett Levy Karla youget excellent credit for giving more than a full answer to that question. Karla Lewis Okay, we wanted to make a few points there Brett, okay that’s the opportunity. Brett Levy Thank you. The second one is on the CapEx front. It's always the buy versus build question. Obviously it’s 80 of the either 150 to 180 or 200 of CapEx is maintenance. The rest of it is growth. Can you talk about principle areas by product or region that you guys are aiming at, and then are we kind of in a market right now where you feel like some of the acquisition targets are full enough valued that you sort of lessen the M&A business and believe that it's more economic to take market share by building? Gregg Mollins Dave, do you want to hit the M&A? David Hannah Do you want me to do that first? Gregg Mollins Please. David Hannah Yes, overall Brett, on the M&A side, we’ve been reasonably busy, looking at opportunities out there. It’s not as active as it has been, couple of years ago. But that’s difficult for this kind of a market. As Gregg mentioned earlier demand is pretty good outside of the energy side. But pricing really puts a damper on that. And people business owners in our industry typically don't want to put their companies out there, when they're not maximizing profit. So we are busy looking at opportunities there are some out there we will continue to do that. We are still in the M&A side and I would expect that we will continue to grow in M&A like we have in the past. So… Gregg Mollins And from CapEx spending the majority of our has a percentage, the majority of our spending is going into support the toll process in areas in support of our automotive industry as a percent of our total spending. Whereas Jim mentioned we’re building a new facility down in and just outside of Monterey, Mexico to really put in their 80% for auto, 20% for appliance. We are spending money, we build those two plants in Europe for AMI operation, we are putting some money into our recent acquisition of our metal services in Europe, but we are also spending money in some of our operations if that support various industries outside of the energy sector. So it’s pretty typical for what we’re doing with the exception, we’re not putting very much money at all in energy, but we’re spreading it out across the North America and globally is pretty standard on what - we do on a normal basis. Bringing equipment, laser equipments the leveling lines you know all those things that we do every day everywhere. James Hoffman Brett, this is Jim. The other sector that we have been spending money and we continue to do that is in the nonresidential construction sector. The customers, they want different things from us now. As they came out of a very difficult period for a long time they come back now asking for us to do different things. For instance, just instead of just buying truckloads of beams and they do the work themselves, they're asking us that we deliver kits with beams with post drill them minor cuts, plates with etched, beveled and all the technology is available, and because of our strong balance sheet we were able to invest in those things before the market even does come back and we have done that and its being off and we will continue to do that in the non-res and the other sectors that Gregg had mentioned. Brett Levy Great. Thanks guys.

[Operator:]

Thank you. We have no further question in queue at this time. I would like to turn the conference back to management for additional remarks.

[Gregg Mollins:]

Okay. Well, listen, we'd like to say thank you for your support and for participating in today’s call. And we would like to remind everyone September we will be in Boston presenting that KeyBanc Capital Markets basic materials and packaging conference. Now we hope to see many of you there. Have a great day. And thanks again for participating on the call.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for participation.