Reliance Steel & Aluminum Co. (RS) Q3 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Reliance Steel & Aluminum 2012 Third Quarter Conference Call and Webcast. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Brenda Miyamoto, Investor Relations, for Reliance. Ma'am, the floor is yours.

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss our third quarter financial results. I'm joined by David Hannah, our Chairman and CEO; Gregg Mollins, our President and COO; and Karla Lewis, our Executive Vice President and CFO. After the completion of this call, a printed transcript, including Regulation G reconciliations will be posted on our website at www.rsac.com in the Investor Information section. Before we begin, please remember that our prepared remarks and responses to questions may contain forward-looking statements relating to future financial results. Our 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 our annual report on Form 10-K for the year ended December 31, 2011 and other reports on file with the Securities and Exchange Commission. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be obtained. Reliance undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. I will now turn the call over to David Hannah, Chairman and CEO of Reliance.

Good morning, everyone, and thank you for joining us today. We're pleased with our third quarter performance despite one less shipping day and the softer pricing environment. Net income was $98.1 million or $1.30 per diluted share. That's up 15% from the third quarter last year and down 10% from the previous quarter. For the 9 months ended September 30, net income was $323.1 million or $4.28 per diluted share. This is up 17% compared with net income of $275.9 million or $3.68 per diluted share for the 2011 9-month period. Sales for the third quarter were $2.06 billion, down 4% from the third quarter last year and down 7% from the prior quarter. Our top line results reflect continued downward pressure on pricing that, along with economic uncertainty, impact the buying patterns of our customers. Our average price per ton sold was $1,848, which was down 3.8% sequentially and down 6.3% from the third quarter last year. Our selling prices are lower in the 2012 periods than in 2011 because of the general trends in metal pricing. However, the average selling prices of our newly acquired companies are higher than the company average due to the specialty nature of their products and their processing capabilities, which has helped partially offset the downward pressure on our average price. Similar to the second quarter, pricing trends for our products were supply, not demand driven, as underlying cost inputs at the producer level continued to decrease, imports remained at high levels and domestic overcapacity persisted. As such, top line momentum continued to decelerate sequentially. However, our FIFO gross profit margins improved in September over July and August levels. Moving on, we sold 1.11 million tons of metal during the third quarter. This was down 3.5% from the prior quarter, but up 2% year-over-year. Year-to-date, total tons sold were up 8.5%. Our 2012 volumes are up from 2011, due to slowly improving end demand as well as the incremental sales of our acquisitions and strategic asset purchases. On a same-store basis, total tons sold were up 6.2%. In general, overall demand in the quarter was in line with expectations, after taking into account normal seasonal fluctuations and one less shipping day this year compared to the prior quarter and the third quarter of last year. Based on MSCI data, Reliance continued to outperform the broader industry, which reported total tons up 3.3% year-to-date. Consistent with the first half of the year, Reliance's out-performance of the industry reflects our exposure to higher growth industries, including aerospace and energy. As expected, relative demand strength led by aerospace, the auto markets, primarily through our toll processing operations, and energy, that being oil and gas, followed by farm and heavy equipment. Non-residential construction continues to show signs of life but demand remains well below peak 2006 levels. Reliance continues to operate from a position of financial strength. Our operating cash flow for the quarter was $247.6 million compared to $102.8 million in the 2011 third quarter. In addition, our strong balance sheet provides a solid foundation for our operating activities and our growth strategies, both organic and through acquisitions, that we continue to aggressively pursue. In fact, subsequent to the end of the third quarter, we are pleased to announce the closing of 2 acquisitions. Earlier this month, we completed the acquisition of GH Metal Solutions Inc., a value-added processor and fabricator of carbon steel products, located in Fort Payne, Alabama. GH is a high-margin company that complements our Feralloy operation. In addition, we also acquired Sunbelt Steel Texas, LLC earlier this month. Sunbelt increases our growing exposure to the energy market in high-end niche products serving customers across multiple oil and gas well-drilling types. While we continue to see M&A opportunities, with many of these in the oil and gas market, transaction sizes have generally been smaller than our current target. However, we expect that we'll continue to evaluate these opportunities, despite their smaller scale, as we broaden our exposure to the high-growth, higher-margin markets with acquisitions that offer key products or strategic capabilities. With respect to dividends, we have an outstanding track record. Since our IPO in 1994, we've increased our dividend 18 times and have paid quarterly dividends for 53 consecutive years. In July of this year, we increased our regular quarterly dividend rate 67% to $0.25 per share. On October 23, 2012, our board of directors declared a regular quarterly cash dividend of $0.25 per share of common stock. We're pleased that our solid financial position provides us the flexibility to execute our growth strategies while returning value to shareholders through quarterly cash dividends. Looking ahead to next quarter, we expect that global economic uncertainty will continue to impact the economy as a whole and will result in further downward pressure on certain carbon steel prices, in particular. Partially offsetting this, stainless and aluminum prices are anticipated to increase slightly. We also anticipate lower tons sold for the fourth quarter from a reduced number of shipping days due to the holidays and some seasonal closures by customers. As a result, for the fourth quarter ending December 31, 2012, we currently expect earnings per diluted share to be in the range of $0.90 to $1. As we've noted in the past, Reliance has a broad range of products, significant customer diversification and a wide geographic footprint. These attributes have helped us achieve industry-leading operating results on a consistent basis and we remain confident in our ability to continue this track record of success going forward. I'll now hand the call over to Gregg to comment further on our operations and market conditions. Gregg?

Thank you, Dave, and good morning. As Dave pointed out, we were pleased with our results in the third quarter, but it sure was a challenge. Demand was certainly softer as compared to the first and second quarter of the year. For the most part, prices continued their steady decline throughout the quarter on most all of the products that we stock. Our FIFO margins for the third quarter were 24.7% compared to 25.4% in the second quarter. Inventory turn on a same-store basis, excluding Continental, McKey Perforating and National Specialty Alloys, was 4.3 turns in dollars and 4.6 turns in tons, the same as reported in the second quarter. From a demand standpoint, we still feel pretty good about most all of the major industries that we support and their outlook going forward. Oil and natural gas continue to be one of our strongest markets and, although their volumes are off slightly from the peak periods, we are still quite busy and very profitable in the companies that service this market. Commercial aerospace build rates continue to rise and our companies that support this base are doing extremely well. Heavy industries such as mining equipment, barge and tank manufacturers, transmission towers and railcars are still doing quite well. Agricultural equipment has slowed some, in part due to the drought, but their forecast for 2013 is bullish. Automotive, supported by our toll processing businesses in the U.S. and Mexico, is doing extremely well and the future here looks bright. Our operations are running flat out and there are no signs indicating this will change anytime soon. Non-residential construction is showing signs of life mainly through industrial construction projects throughout North America. These include bridge projects, industrial warehouse construction, university housing expansion, et cetera. Activity is a little better than last year and we believe it will improve some next year. As for pricing on carbon steel products, it began a steady decline in March that went through July. Modest increases were announced in August, but were adjusted back down in September and October. Recently, there was a $40 a ton increase announced by a U.S. producer on flat-rolled that was followed immediately by the major flat-rolled producers in North America. Will it stick, or at least a portion of it? We hope so, but time will tell. Hopefully, at the very least, it will serve as a floor for more declining prices going forward. Unless raw materials move up, imports decline significantly or capacity comes down, it is very difficult for price increases to hold. As for aluminum, Midwest spot ingot has traded in the $0.95 to $1.05 a pound range over the past 6 months. Aerospace sheet and plate are still tight and material is still being allocated by the mills. The lead time on aerospace plate is 10 to 13 weeks. Life today, as well as next year, is looking good in aerospace. Demand for general engineering in the aluminum plate has softened somewhat in the last 2 quarters and lead times are 6 to 8 weeks. Common alloy sheet demand is good, with tons up just shy of 10% for the first 9 months of this year compared to last. Mill lead times are 5 to 8 weeks, with some domestic producers out 12 weeks, primarily due to automotive and truck trailer demand. Stainless steel nickel surcharges were in steady decline in April through September, but have experienced modest increases in October and November. Demand in stainless flat-rolled is up double digits in tons sold for the first 9 months of the year compared to the same timeframe in 2011. To conclude, we believe Reliance is well-positioned to take full advantage of any and all opportunities that may arise in the future. Customers, producers and service centers are all being very cautious on the buy side. Pricing on most all of the products has come down since March and everything you hear or read in the media is negative regarding the world economies. However, we don't believe business is as bad as it is being depicted. 2012 same-store tons are up 6.2% in the first 9 months of the year compared to 2011, and we believe 2013 tons will be up over 2012. Bear in mind, the fourth quarter, as always, will present its challenges due to the holidays and their impact on shipping days. This should come as no surprise, just a general reminder. I'll now turn the program over to Karla to review the financials. Karla?

Thanks, Gregg, and good morning, everyone. Our 2012 third quarter same-store sales, which excludes the sales of our 2011 and 2012 acquisitions, were down 6.6% over the third quarter last year, with a 1.4% increase in tons sold and an 8.4% decrease in our average selling price. Same-store sales compared to last quarter were down 7.9% with a 3.9% decrease in tons sold, and a 4.3% decrease in our average selling price. Our gross profit margin for the third quarter was 26% compared to 23.1% in the third quarter last year. Our LIFO adjustment for the quarter was a credit or income of $27 million or $0.22 per share, compared to a charge or expense of $22.5 million or $0.19 per share in the third quarter last year. Our LIFO adjustment is included in cost of sales and, in effect, reflects cost of sales at current replacement costs. We currently estimate that our 2012 full year LIFO adjustment will be a credit or income of $36 million compared to 0 LIFO adjustment that we had estimated at the end of the 2012 second quarter. Our new estimate anticipates that mill prices, on average, will be near current levels at the end of the year when considering fluctuations across all the different products we sell. We currently expect to book a LIFO credit or income of $9 million in the 2012 fourth quarter. As a percentage of sales, our SG&A expenses for the third quarter were 16.8% compared to 14.9% for the third quarter last year. The lower metal prices in 2012 compared to 2011 significantly impacted our SG&A expenses as a percentage of sales. Our current cost structure can support significantly higher volumes and we anticipate that our SG&A expense as a percentage of sales will begin to fall as our volumes improve and as pricing improves. Operating income for the quarter was $152.6 million or 7.4% of sales, compared to $140.1 million or 6.6% of sales in the third quarter last year. Our increased gross profit margin was the major contributor to the improvement. Our other income of $5.9 million for the quarter was up $12.4 million from the same period last year. On a sequential basis, we also had significant variances with a positive $9.4 million or $0.08 per diluted share swing from the 2012 second quarter to the third quarter. The variances are mainly due to foreign currency fluctuations on our intercompany loans, as well as the timing of insurance proceeds and investment returns on our life insurance assets and gains on our fixed asset sales. Our effective income tax rate for the third quarter was 30.9%, compared to a rate of 27.2% last year, with the difference primarily attributable to changes in our state income tax rate based on shifts in our income as well as the timing of settling various tax matters. We provided cash from operations of $247.6 million for the quarter, compared to cash from operations of $102.8 million in the same period last year. Although we increased our working capital in both periods, higher metal prices in 2011 consumed more cash than in 2012. Our accounts receivable balance increased $60.6 million from the end of last year due to increased sales. Our day sales outstanding rate in 2012 is still less than 42 days on a trailing 12-month basis, relatively consistent with 2011. Our FIFO inventory levels increased $109.9 million and our accounts payable increased $33 million at September 30, 2012, from year end 2011. Our 2012 third quarter inventory turn rate, based on dollars, was 4.0x compared to 4.4x last year. We invested $50.6 million for capital expenditures during the third quarter and $137.4 million year-to-date. This includes the purchase of facilities that we previously leased, as well as purchases of land, buildings and processing equipment to improve and expand our existing capabilities. Our outstanding debt at September 30, 2012 was $1.37 billion, up slightly from $1.33 billion at year end 2011. We used $112.6 million to fund our acquisitions of McKey Perforating and National Specialty Alloys, as well as the purchase of the Vonore assets from Worthington and the Airport Metals assets from Samuel. In the 2012 third quarter, we paid down $165 million of debt on our credit facility with cash provided by operations. At September 30, we had $788 million available on our $1.5 billion credit facility, which we borrowed against in October to fund our acquisitions of GH Metal Solutions and Sunbelt Steel. Our net debt to total capital ratio at September 30, 2012 was 26.4%, down from 28.4% at December 31, 2011. The covenants in our credit facility require us to maintain a debt to capital ratio of less than 60% and an interest coverage ratio of a least 3x. Our interest coverage ratio at September 30 was 10.8x. That concludes our prepared remarks. Thank you for your attention. And at this time, I'd like to open the call up to questions. Operator?

[Operator Instructions] Our first question today is coming from Timna Tanners at Bank of America Merrill Lynch.

2 questions. If you could give us just a little bit more color. I know you said that the carbon side was a little more fragile, but in particular there's a lot of focus right now on the markets of SBQ and pipe. If you could give a little bit more color on those products please?

Well, SBQ product, obviously lead times have come way down from the mills. Business conditions in the SBQ world, which is primarily automotive, energy-related, ag-type business has slowed down a little bit. But I think the added capacity that the mills are bringing on has not helped that equation very much. But business is, as far as we’re concerned on the SBQ side, we're still doing very well. Our profit margins are good, and we just wish that there was less capacity out there. And on the pipe, just -- are you talking about line pipe or...

And your tubulars?

Yes. That business, as you well know, the imports have really hurt that business enormously. At this time of year, the last 3 months, 4 months, 5 months has been slower on line pipe and OCTG, which is typical. Where our exposure is, is in Canada and that business begins to pick up right now as we speak. And the colder it gets, the icier it gets, the better it gets as far as a demand point of view. But I'd be foolish not to tell you that the import situation has been extremely problematic in that product.

Okay. Fair enough. And then the other question I had is, and I feel like we always ask this question, but if we continue modeling free cash flow into next year with the rate that you've been at, we get to kind of no net debt within the next 18 months or so, and this just kind of prompts the question again of uses of cash and how you're thinking about it. I know you gave some color on acquisition opportunities, but can you provide a little more detail on how these small acquisitions can add up? Or how you're looking at the M&A landscape?

Sure. Karla will probably have some words to say about this, too. But from a -- that we'll continue to acquire, Timna, that's not a surprise to you or anyone else. The smaller ones do add up. We've added -- just with Continental last year and the 5 or 6 that we've added this year, that's about $600-plus million in revenue, so we've had to work a little harder than if we did that all in one transaction, one acquisition with $600 million in revenue, but that's okay. We know how to do this and we've done it before. So we'll continue to look at even the smaller opportunities that give us a strategic advantage or fit in with one of our existing businesses and a lot of what you saw this year was exactly that. As long as I've been at Reliance, which is an awful long time now, we've never had no net debt, so -- but -- so I don't really anticipate that, that would happen. I think that, certainly from a cash standpoint, we do pay down debt. We'll use it for acquisitions. Our capital expenditures have been pretty robust. We may not hit our $250 million budget this year, but just because we watch projects, even after they're approved, we just don't go out and spend. We watch what's going on and if we can delay something or replace one planned expenditure with another, we'll do that. So CapEx for internal growth and organic growth purposes is still very, very important to us and we focus on that a lot internally. We expect the businesses that we own, as well as the businesses that we acquire, to grow. And that's part of our due diligence when we look at new opportunities is, can we take this business from $100 million in revenue to $200 million in revenue or whatever it might be. Dividends, certainly, we had a nice dividend increase about a quarter ago and we would like to continue to increase our dividends as long as that makes sense. I think we said that last time. And we have a share purchase reauthorization [ph] that still has some availability. That's something that's there if it makes sense to use it. We think long term is better to invest in the business through organic growth and acquisitions. And I think that's...

Yes. I mean, you're right on your modeling, Timna, that absent acquisitions or meaningful levels of acquisitions we will build up -- would built up a lot of cash, that's the nature of our business. And so, we're hopeful that we'll have good acquisition opportunity to use the cash.

And sooner or later, we're going to have non-res construction kick in which still represents a pretty good percentage of our business as you know, it's probably 30% of our business or close to it. And when that kicks in, we'll naturally have to have more inventory to service a higher sales level.

Our next question today is coming from Arun Viswanathan at Longbow Research.

I guess I just want to ask about SG&A, it's a little bit higher this quarter. And, I think, is that due to some recent acquisitions and will that like decline in future quarters? Or what's the outlook for SG&A?

So as a percentage of sales, it came up a bit this quarter. If you look on a pure-dollar basis, comparing the third quarter to the second quarter, we actually, dollar-wise, came down slightly. So we think the SG&A expenses are being managed well. Certainly compared to last year, we have some acquisitions in there, so we've added their incremental expenses. But as a percentage of sales, it really popped up mainly because our sales levels and the pricing came down, as we still think that about 14.5% of sales, when we're at normal demand levels, which to Dave's point he just made, means some meaningful improvement on non-res. We think that's the right target for us. And then also as prices improve, you'll see the percentage start to turn back down also.

Okay. I guess the other question I had was just on the market in general. What's driving the outlook for increased stainless in the coming months? And then, you talked a little bit about overcapacity and the outlook for carbon being weak. Maybe can you go in a little bit more detail on what you're seeing as far as lead times and why the mills actually came out with this increase? Or any speculation you have there.

Well, on the answer for your -- the nickel, we believe that when nickel surcharges are down in the low 70s, even in the 70s period, that it's pretty much hit bottom. I think it bottomed out in September at about $0.74, $0.73, and went up slightly in October to about $0.765 and then in November to $0.79. So we just anticipate that, typically on a seasonal basis, nickel ends up going up whether it's moderately or spiking in the first half. And it's began that increase phase as of October, so we think that that's just going to continue. Now that's just speculation on our part, we could be wrong. But it is what it is.

And that does have -- our customers who will shift their buying patterns a little bit, depending on prices, if they see nickel going up -- for example, as Gregg just mentioned, nickel went up in October and then there's anticipation because of the visibility you have on how the surcharges are calculated, you could tell in early October, most likely, that the surcharge was going to go up. Maybe again in November, maybe you didn't know how much, but you'd know directionally where it was going. So customers, to the extent they have the need, they'll go ahead and buy now rather than wait and buy later when it might cost them a few cents more. And on the flat-rolled stainless side, our growth has been double-digit, okay, this year, in tons sold, so that's actually -- it's been very favorable for our company. Your question about -- on the carbon side about the increase and overcapacity, well, there's been overcapacity, and imports certainly don't help that either. But nonetheless, the -- why was there a $40 a ton price increase announcement? I guess, because the mills, once product goes below $600, okay, they're not making any money off that. So in order to stop the bleeding, I think it was prudent for them to announce a $40 a ton increase. Unfortunately, when you don't have raw material increases, like iron ore or scrap, okay, and we are running somewhere around 71% capacity, where 3 months ago, it was 76% capacity, it's difficult to get those price increases in. I'm not going to say that it's not happening. But I wouldn't be surprised at all if there's another price increase announced on flat-rolled products in the not-too-distant future. I'm just saying it's a little difficult to get those when you don't have anything behind you, like raw material increases, that are going up. So -- but I'll say again, we're very hopeful that these price increases stick. I think it's good for the mills. I know it's good for the mills, and it's certainly good for Reliance.

Our next question today is coming from Michelle Applebaum at Michelle Applebaum Research.

I wanted to ask a kind of bigger picture question, and more of a kind of strategic industry question. You seem to -- you get on the conference calls and you have negative comments on imports often and you're a buyer of steel, and service centers are typically some of the biggest buyers of imports. And I was hoping you could tell me, why you have kind of the same message that the steel mills have? And about what it is that the imports do, in terms of disruption, to your business? And then also, if that's changed in the last few years, since you seem to be talking more about imports lately, as a problem.

I don't think it's changed really for us in the past few years, Michelle. We've never been big import buyers and we just are much less of an import buyer now. What we buy on the import market is primarily what we have to buy because it's not available here domestically. But very little of our purchasing is import. And the import that's here, and Gregg can talk more about this also, it's just disruptive from a pricing perspective, and it -- there -- when you talk about different countries, certainly China always comes up, but it's just unfair, you know why. And it's unfair to our mills for them to have to cut capacity when imports are coming into the country at a much higher rate. Why should they have to suffer because the imports are coming in and if the imports are coming in unfairly? So we have been talking a little more about it. We'll probably continue to talk more about because we're very supportive of our domestic mills and we don't like the disruption from a pricing standpoint that happens when these imports come in, and even if they're unsold, and they just sit at the docks, and pretty much anybody can pick away at them. That's not good for the industry. It's not good for the mills. It's not good for us.

And from the service center industry standpoint too, Reliance may sound more like the mills because we like it when mill prices are higher. We think that's better for us with what we can return to the bottom line. And that could be different than a lot of other service center companies, because we're working in the spot market. We're buying on the spot, selling on the spot and for other service centers, who are locked into contractual obligations on the sell side, it could be more attractive for them to bring in import and be able to service those contracts.

A perfect example, Michelle, is plate, carbon steel plate. Okay, the amount of plate that's come into this country, this year, is absolutely appalling. Korea is flooding the market, okay, Japan has been in, when Japan hasn't been in, in the past. And pricing on a plate is down $250 a ton since March. Okay, that's not because of the domestic producers want to lower their prices $250 a ton. It's because cheap plate's coming in the market. That's just one example. We could go on for quite some time, but you don't have the time and neither do we. But that's an example, okay, that -- and plate's like 13% of our tons. And that's an important piece of our business for you to drop $250 a ton on one of your core products. That's problematic.

I wanted to ask, as long as we're on plate, and then I have another -- 2 follow-ons to this. The weird thing about plate, which has been the Korean -- first of all, total Korean imports this year have been an all-time record. And the bulk of that growth has been plate imports, which I think are at like a 5- or 6-year record or maybe that's all-time too, and I just haven't checked. But the weirdest thing about plate is that, for most products you see imports pick up when the relative price of domestic rises relative to global. And so there's kind of this dance, right? Where prices here get too rich and that's -- you've seen that in some markets and the plate market, you saw that up until about 9 months ago, and what's happened in the last 9 months is that the American plate price in this country versus the price of imports has actually declined. So it keeps going down, but the imports are actually an inverse relationship so they've just been going up irrespective of how much the domestic guys have brought plate prices down. So they -- it gets cheaper and cheaper versus imports, but people -- more imports are coming in. Is that a unique situation, and why is that happening?

Well, yes, it is unique. And I believe, this is just one guy's opinion, is that the ship building business in Korea, I've been told is -- has softened considerably, and that's where a lot of that plate goes, okay? That they manufacture there in Korea. So they're just looking for an outlet because they can't absorb it internally.

China has slowed down and Europe has slowed down, so we're the only spot. Actually plate demand for us has been very, very good. It's one of our best products from a demand standpoint.

Exactly.

So it sounds like there may be a dumping case on plate coming. Would you guys be out there supportive of something like that if there was a trade case?

Yes.

Okay, interesting. Second, a related question and this is all macro stuff. You talked about the import pricing issue, and the -- supporting the mills issue, but I think at the inventory issue, and I don't think the people understand this, that people -- when everybody's buying more import versus domestic, they have to carry way more inventory to do that because it's a 3-month lead time. And then there's speculative import buying, like sitting on the porch. So that's disruptive to everybody, including the people who are doing it. So then my other question is Nucor has talked about doing something new and different. They've hinted at it, louder on the last call and then they've hinted about it before. And I can't find anybody in my own Washington contacts who know what they're doing. Do you have any idea of what new and different thing Nucor might be doing to kind of deal with the trade problem?

We heard the same thing that you have and whatever it is, I hope it's good.

Our next question today is coming from Shneur Gershuni at UBS.

Most of my questions have been asked and answered, but I do have 2 quick follow-ups. You sort of talk about weakness in the fourth quarter and then you sort of talk about your expectation that 2013 should be a better year than 2012. Some of the commentary we've heard from various different management teams across industries often talk about the fiscal cliff as being an issue. Do you feel that, that's sort of impacting your sales expectations for the fourth quarter, and once it's resolved, it comes back? Or are we trying to blame the fiscal cliff for something that seems -- sort of seems to be a real undercurrent?

I think, Shneur, that the uncertainty regarding the fiscal cliff, and the election and many other things that are occurring in our country, compounded by some of the uncertainty yet with respect to different economies in Europe and China slowing down a bit, all of those things have created more uncertainty here and uncertainty just isn't good for business. And I think it's kept some of our customers, particularly in the larger industries, like non-res construction for example. We've had a few false starts, if you want to call it that, with non-res earlier this year. And actually towards the end of last year and early part of this year, we saw some signs that non-res was picking up a little bit more than it had before, but then that came to a halt as we kind of exited the first quarter and into the second quarter. And I think, the uncertainty from all of those things is causing our customers, and ourselves to a certain extent, who want to make significant decisions to pause a little bit because nobody really knows what the rules are going to be. So our comments which -- I think that's had an impact on the seasonality of our business. The first quarter this year was the strongest quarter for us and that's not usually the case. Usually, we see a pick up in the second quarter and that didn't happen, but I think there was more uncertainty that popped up in the second quarter. And then, the third quarter, I think, we continued to see that concern. And I think we're going to see it through the fourth quarter. Our comments with respect to 2013, when Gregg mentioned we thought that next year would be better than this year, we do think next year would be better than this year but we're not -- we're assuming that the fiscal cliff does not occur when we say that. If that happens, it could be ugly for a while until it gets sorted out. And I'm not saying ugly just for Reliance. I'm saying ugly for the domestic economy as a whole. So are we considering that? Yes, but I think our consideration is more that the uncertainty is impacting current business. But we expect to get over this fiscal cliff issue and not be injured next year, when we say next year should be better than this year.

Great. And a follow-up question, you sort of talked about in your prepared remarks about your acquisition pipeline and so forth, or rather the acquisitions that you've done. I was wondering if you can talk about the pipeline a little bit. You'd noted that some of the ones you've done were small or smaller than you expected. Is that kind of what's in the market right now? What we should think going forward or we could expect to see some larger bites at the apple as we go forward, but that just take a little bit longer to execute?

I think, we've said before that we'd rather do some larger transactions. In our industry, Shneur, as you know, the majority of the companies are smaller and the majority is -- the vast majority, certainly, are privately owned and operated companies. There's only about a half dozen of us that are public companies. So it's hard to predict sometimes when those transactions or opportunities occur. And we thought that maybe this year, with the potential tax changes looming out there, that we would have seen more business owners concerned about that, and perhaps, willing to sell their business by the end of this year. We did see that for a while, a couple of years ago, when the same tax issues were hanging out there. But then, midyear in 2010, it became apparent that, that was going to be resolved without the taxes going up, so that activity kind of calmed down. In this year, maybe it's because 2010 kind of went away, that people just didn't seem, in general, as concerned about the looming tax increase as they did 2 years ago. So I don't think we saw the activity that we had anticipated and maybe hoped for. But, yes, over time I think there will be some larger transactions out there. When and how much? It's just very, very difficult to predict that. In the meantime, I think there's a fairly steady stream of service centers that -- and processors that will be interested in looking at ownership alternatives as they go forward.

Our next question today is coming from Richard Garchitorena at Crédit Suisse. Richard Garchitorena - Crédit Suisse AG, Research Division: My first question is, I seem to recall on the last conference call, you're a little more upbeat about pricing. And obviously -- so you're given the LIFO estimate and you're now saying that carbon prices are relatively flat versus current levels. I guess, what's really sort of changed, I guess, between last July and today? I know you've talked a little bit about that but -- also just, you know, I guess, is it fair to say you don't expect any price hikes really through the back half of this quarter, which we typically see at the end of the year ahead of Q1?

We're not sure about that. We don't make the call on whether pricing is going to go up or down. I mean -- we speculate,, ourselves. We talk internally about that, but, you know, business conditions are flat. Okay? It's the fourth quarter, there's less billing days, less shipping days so we -- price increases, we haven't seen the raw materials prices go up, iron ore. It's speculated that next month, scrap could go up $10, $20 maybe even $30 a ton. We think more $10 to $20, personally. But that's not going to move the needle very much. So we just think prices are going to pretty much stay where they are, plus or minus $10 or $20 a ton.

If I remember, also Richard, from a LIFO perspective. It's obviously, we carry many different products and some can go up a little, some can go down a little, so we've got to look and cross that, and then another factor is kind of the timing lag when the mill announces the price increase, when that takes effect and we receive the material into our inventory. And that results in overall pricing effect within our inventory levels. So we're projecting that what we have are costs in inventory, as of December 31, from a LIFO standpoint.

And with respect to the quarter, I think we're more positive on pricing in this fourth quarter than we were telling you 3 months ago in July. I think in July, we had anticipated that pricing was going to be, in general, trending downward during the quarter. We were wrong, in that it went down, particularly in carbon, prices went down more than we had anticipated and certainly, stainless and aluminum continued to go down because of the LME and the nickel surcharges. So price softness in the third quarter was actually much worse than we had anticipated. And we're more positive on pricing this quarter, really, because we think it's going to be relatively flat, as Gregg -- on an average, as Gregg pointed out, with maybe a slight bias on the upside on carbon and aluminum probably flattish and stainless, maybe a little bit higher because of the surcharge here in October and November. So overall, I think the challenge with the fourth quarter is, just like Karla said, there's just a huge impact on the number of shipping days. If you count the available shipping days in the fourth quarter, I think it comes up to 62. And -- but practically speaking, because of the day after Thanksgiving, you know that's -- or the day before Christmas, the 31st, which is technically a shipping day of December. Those aren't really shipping days. So I think in our planning, we're looking at a number of shipping days at about 56 or 57, not -- an effective number of shipping days as opposed to the technical number at 62. So, if you think about the fourth quarter that way, you can see that we're really not anticipating a falloff in sales. We're looking at pricing in a, relative to the third quarter, in a much better way I think, than we did for the third quarter. So overall the fourth quarter will be fine. It's just the real challenge because of the number of shipping days.

And I think Richard, at the last call, at that time, there had been some carbon price increases because there were anticipated potential strikes at some of the carbon mills. So there was a little more up momentum, so to speak, out there. And then obviously, we all know what happened there. And now, and at that time, we also were thinking that we might have a fourth quarter price increase that's coming in the way we did last year and the prior year. And I think, just with the things Dave talked about earlier, all the macro and U.S. uncertainty, that we're not sure that we're going to get that same bump up in prices that we got the last 2 years.

And as Gregg mentioned earlier too, about the pricing in the fourth quarter, it's hard to have those things stick. And even if they're announced, usually they don't have much of an impact on the fourth quarter itself. Those higher prices don't usually arrive until the first quarter, even though maybe material is being ordered at higher prices in the fourth quarter. So you're still out there competing with the lower price material through pretty much the fourth quarter. Richard Garchitorena - Crédit Suisse AG, Research Division: Great. David, that's very helpful. One other question, on the tax rate, obviously a little lower this quarter, what's your tax rate assumption for Q4 guidance?

It's 33%. We typically, because of the expiration of statutes of limitations, our third quarter trends down a little bit from the normal. So we think about 33%.

Our next question today is coming from Leo Larkin at S&P Capital. Leo J. Larkin - S&P Equity Research: Could you give us any guidance for, at least directionally, for capital spending in 2013?

We don't have our budget put together, but it's probably going to be $175 million plus or minus a little bit. Somewhere in there, which I think we had mentioned $250 million for this year. It doesn't look like we'll get there, but I think next year, just without having gone through all the details yet -- how we determine that, Leo, is we ask our business units to submit to us their requests for capital expenditures next year, right around Thanksgiving time. And then we'll go through it here, it gets, as our guys like to say, it gets scrubbed here. And then we take it to the entire Reliance board for approval early in the year. So that being said, I think if you think about $175 million, that's probably a good number.

Our next question today is coming from Sohail Tharani at Goldman Sachs.

I have a very quick question. Gregg, you mentioned non-res construction comment about sort of some life and it's in the press release also. So I was just wondering, this was a similar comment we heard in third quarter -- sorry, second quarter conference call. I just was wondering if there's any sequential improvement you're seeing or it's just a -- it's better than year-over-year and sort of flattish but better?

It's flattish but better, Sohail. We've been fortunate that we participated in some projects such as the Timken [ph] . The Timken [ph] project where they're expanding their production levels over there. We have a nice participation with some structurals that are going in there. And we're participating, as one of our managers said to me the other day, he said, "Gregg, in 2009 when business conditions dried up everybody decided to go back to school, so they have to build more dorms." So we're participating in some of that as well. Is it better in the third quarter than the second quarter? No. Is it better than last year? Yes. Do we think it's going to be better next year than this year? Yes. So it's moving up. It's not moving up as rapidly as we would like, but I'm happy to say that all of our operations that are doing business in non-res are profitable. We did some pretty brutal actions with respect to our expenses in 2009, and we haven't added back and business has improved. So we're just dying for it to get back in 2006 demand levels.

And Gregg, you mentioned a dramatic price decline in plate and also SBQ's coming down. I was wondering how you -- some of these products you carry a little bit larger inventory than other commodity? And I was wondering if -- how you -- have you changed anything in your planning or the way you carry inventory, or it's just that your inventory turn is so good that you don't need to do any further changes, including the turns in these products that generally have longer shelf life, if I'm not mistaken?

Our inventory turns on plate and SBQ, we're happy with it. We've -- what -- like Dave mentioned earlier, the demand from our perspective is still good. I think the mills are losing some business on a direct basis from some of the OEMs. I'm not sure -- they're not losing a heck of a lot of business from us. Okay, because our business has not dropped -- it's down 10%. Okay, that's not a real big deal. But our inventories, to answer your question, our inventories on SBQ, can they get actually lower and we can turn it a little bit better? Sure. When lead times are shortened from 25 to 30 weeks down 10 to 12 weeks, we can turn our inventories better but we haven't really had a problem on the plate side or the SBQ side on inventory. Where we do -- and some of the SBQ products, when you get into the alloy products that support energy and natural gas, it -- that business is still very, very strong for us. But it's inventory that's never going to turn 5x. It's just not going to do it. You have minimum quantities that you have to buy from the mill. And just -- it makes sure inventory suffer from a turns perspective. But on the other hand, on a positive side, okay, our margins are much higher in that product mix than it is on just standard 10, 18 commercial grade material. So we offset it at a lower inventory turn with a higher gross profit margin and it seems to work for us.

I have one more question. The aluminum plate, and there was a strike at I believe Constellium, which has been over. Was there any tightness or change because of the strike and has it changed since then? Or is it business as usual throughout this whole time?

I'd like to say that it's kind of business as usual. I'm hearing a lot about people talking about capacity increases. Kaiser for example, they have what is called their fourth phase increase of production capacity. It represents about 5% increase in their tons on 2000 and 7000 series heat treat plate for aerospace. 5% is peanuts. The Alcoa has got a $90 million investment but that's for aluminum-lithium sheet. Okay, and that goes on the wing skins. It has really nothing to do with 2000 and 7000 series plate. So -- then you -- Constellium, I still call it Ravenswood, Sohail, I'm an a old guy. It's hard for me to change all these different names especially how weird the names end up being. But there's an investment there. But it's because of their stretcher. They're -- they rebuilt their stretcher. It's not adding any capacities, just they had to rebuild their stretcher that broke. So I don't see all this capacity and lead times have shortened a little bit, okay? But it's still a tight market. It's being allocated by the mills and, as Dave and I were talking yesterday afternoon, we wish that all of our business have the margins that the aerospace business did.

And the demand outlook, when Boeing just came out the other day, and they gave some more visibility into their build rate increases, as Gregg alluded to earlier, and that's very positive. So I think aerospace is a great place to be. Any capacity increases that are being taken on now are going to be needed going forward, given what the airframe people are doing. So we're encouraged by aerospace. It's really good for us.

[Operator Instructions] Our next question today is coming from Chris Olin at Cleveland Research.

I just have a simple question actually. I didn't see it in the release. Could you provide the percentage sales breakout by the product categories that you normally give?

Yes. Yes, and sorry, we realized we forgot to put that in the release. For the third quarter of 2012, carbon represented 51% of our revenue dollars; aluminum, 16%; stainless, 15%; alloy, 11%; tolling was 2% and then 5% in other.

We have no further questions in the queue at this time.

Okay, well in closing I'd just like to say thanks again for your support and for participating on today's call. We'd like to remind everyone that next month, we'll be participating in the Goldman Sachs Global Metals and Mining Conference and also the JPMorgan's Smith Cap Conference in New York. And then in December, the Macquarie Global Metals and Mining Conference, also in New York. And -- so we hope to see many of you there. Have a great day, and thanks again for your support.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.