Good morning, ladies and gentlemen, and welcome to the Reliance Steel & Aluminum Co. Sponsored Second Quarter Earnings Conference Call. [Operator Instructions] Now I'd like to turn the floor over to your host, Brenda Miyamoto. 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 second 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. A recording of this call will be posted on our website at www.rsac.com in the Investor Information section. 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 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 here and there. 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. Our second quarter results generally reflected a continuation of the trends we and the industry experienced during the first quarter of 2013. On a same-store basis, our average pricing declined 2.7% sequentially, while tons increased 3.7%, due in large part to an extra shipping day in the quarter, along with a slight improvement in overall demand levels. Compared to the second quarter of 2012, demand was marginally weaker, resulting in a year-over-year decrease of just under 1% in our same-store tons sold, compounded by a 7.8% reduction in our same-store average price per ton sold. On a more positive note, our June tons shipped per day, excluding Metals USA, were the highest since May of last year by about 2%. That said, we remain highly focused on managing all aspects of the business that are within our control, which continues to mitigate much of the impact from these challenging market conditions. We're pleased with the strong operational execution by our managers in the field, as demonstrated by our solid gross profit margin performance and slightly improved inventory turns despite the ongoing weak pricing environment. While the macroeconomic factors have hampered organic growth in recent quarters, Reliance continues to extend its track record of successful M&A activity. Most recently, the acquisition of Metals USA, our largest to date, was completed early in the second quarter and has helped the company generate profitable growth in a challenging environment. Karla will provide more details in her remarks on Metals USA's contributions in the second quarter. But as we indicated when we announced the acquisition, Metals USA was immediately accretive to our bottom line results. Including all acquisitions that were completed in 2012 and 2013, second quarter consolidated net sales were up 10.8%, and…

Thank you, Dave, and good morning. As Dave pointed out, we are pleased with our results in the second quarter and the progress being made integrating Metals USA into our family of companies. As prices continue to fall in most all of our products the first half of the year, pressure on gross profit margins intensified. On a FIFO basis, gross profit margins in the first quarter on a same-store basis were 25.6% compared to 25.3% in the second quarter. Once again, given the economic environment, we were proud of our sales people and management for their continued focus on managing one of our most critical success factors, that being gross profit margins. Inventory turn in the first half on a same-store basis, excluding the Metals USA and acquisitions made last year, was 4.6x based on tons. Consolidated Reliance companies, excluding Metals USA, were able to reduce inventory $52 million second quarter versus first quarter, and Metals USA was able to reduce their inventories by $66 million from April 15 through June 30. Our companies have all joined together in a spirit of cooperation to help one another reduce inventories and share best practices. We're proud of the way they have banded together in support of each other. It's extremely rewarding. In spite of some softness in demand, we still feel pretty good about most of all the major industries we service and their outlook going forward. Commercial aerospace build rates continue to rise, and our companies doing business in this space are all doing well. Commercial aircraft shipping volumes were the highest in the quarter since 1998, and that's music to our ears. Oil and natural gas continue to do well, albeit not at the same rate they operated at in 2011 and '12. Here again, our companies doing…

Thanks, Gregg, and good morning, everyone. As mentioned, our gross profit margins have held up fairly well given the weak business climate in the 2013 first half, at 25.4% for the 2013 second quarter compared to 25.8% in the second quarter of last year, and 26.1% in the 2013 first quarter. Product mix also impacted our 2013 second quarter gross profit margin, mainly due to the acquisition of Metals USA. [indiscernible] Gross profit margin improved to 23.3% from 22.3% in their 2013 first quarter. Our LIFO adjustment for the quarter was a credit or income of $5 million or $0.04 per share compared to income of $7.5 million or $0.06 per share in the second quarter of last year, and income of $5 million or $0.04 per share in the 2013 first quarter. Our LIFO adjustment is included in cost of sales, and in effect, reflects cost of sales at current replacement costs. Given the weak pricing environment in the first half of 2013 and our expectation that pricing over all will continue near current levels for the remainder of this year, we maintained our annual LIFO adjustment estimate of a credit or income of $20 million. Our SG&A expenses for the second quarter were up 19% from the preceding quarter on a 28.7% increase in tons sold, due mainly to our acquisition of Metals USA. On a same-store basis, excluding our onetime costs related to the Metals USA acquisition and the consolidation of an existing Reliance facility, our SG&A expenses were down slightly from the 2013 first quarter on a 3.7% increase in tons sold. And because of the significantly lower metal prices, our SG&A expenses, as a percent of sales, were 17.4% compared to 15.7% for the second quarter last year, and 17.7% in the 2013 first quarter.…

[Operator Instructions] We'll take our first question from Sohail Tharani.

Dave, you mentioned something about the stores. Various stores you own have banded together to reduce inventory and they're sharing best practice. Is this something new policy because in the past, your different divisions have worked independently, except, I believe, in early 2009 when the market crashed, you had done something like that. But is this something we should expect going forward?

Well, I think, Sohail, going forward, we would expect to have a little more of that than we've typically seen in the past. I think in 2009, as you pointed out, one of the things that came out of that -- probably the only thing that came out of that, that was positive was that our people learned that they can rely on a lot of their brother and sister companies out there, particularly with regard to slower-moving C&D type items. We don't want to stock those in every location, certainly. But they learned that different other companies can help them by stocking those products and getting it to them in smaller quantities when they need it. So I think we learned then that they can rely on each other. We're still not changing our philosophy in terms of how we purchase. We're not having different of our locations purchase metal on behalf of other locations. They'll still do that relative to their own business. But I think you will see, and we do expect to see, more cooperation throughout all of our companies. And this last quarter, with Metals USA coming into the family, certainly they had some items that they had to stock, that because they were in their own family at that point in time. And now they realized, and we realized, that we could help reduce some of the quantities, mainly on these slower-moving items. I don't know if Gregg has some more to say about that or not.

There was a lot more commonality as far as, Sohail, the product mixes were concerned, not necessarily the customer bases. Metals goes after a little bit more The OEM business than we do, and the Reliance companies are more on the transactional side. But the product mixes are very similar to one another. There's quite a bit of overlap on the product mix, which helped make that integration a little easier. But I think the excitement that we received from the management team all the way down in to the guys that are running the actual plants about being -- with a publicly-traded company out of the private equity, new management team at their facilities, there was just a lot of excitement that was -- that came about. And our guys were very excited to have the Metals USA team on board of one of ours. So it was really a very easy sell, just because of, literally, everybody was just excited as hell to get together with one another. So will you see that more in the future? Sure. But when you -- when we buy companies like Jorgensen that were in a more specialized product mix, we couldn't do that as much as we possibly could with the people that are -- they're heavy in beams and mini-mill and plate and some flat-rolled products. And we're heavy in that also. So the integration process, as both Dave and I mentioned earlier, it went a lot more smooth than we've ever seen ever in any major acquisition.

And maybe, Sohail, just to be clear. The model has not changed that they're going in and pulling inventory directly out of a sister company's inventory. They're working together to coordinate that.

Okay. And in terms of price increases, some of this was because of the disruptions at AKS and U.S. Steel and Thyssen also in Brazil. Most of those have been resolved, and these companies are ramping up. I was just wondering what your thoughts are? Are you seeing more metal now in the field than, let's say, a month ago when these disruptions have occurred? And do you think prices can stick around till the end of the year?

It's a good question. We not necessarily have seen an increase in metal out there today. I think AK's just started that. It ramped up just a little a while ago, last week, latter part. We expect to see it, certainly, with the extra slab coming in from Brazil into Thyssen. That's going to increase the availability and -- with that company. So it's a good question. Are prices going to be able to maintain it through the balance of the year? We can't answer that any more than anybody else could. But we think with this last increase that was announced yesterday by both AK and Severstal, that has a chance to stick. How long those will stick? Depending on capacity, imports, what not -- I don't know. But I think, speaking from our company's point of view, we're going to be very guarded, and we're going to run our inventories close to the best because supply and demand fundamentals, at the end of the day, they're generally the ones that drive the pricing mechanism. And with all that additional supply that you just mentioned, is there a potential for the price increases to deteriorate in the second half of the year? Yes, there is that potential, and we're going to be very guarded about that.

We'll take our next question from Timna Tanners with Bank of America Merrill Lynch.

A bunch of questions. One, I just want to make sure I understood the impact to your gross margin. What was it from the purchase accounting from Metals USA? If you could help us.

Yes, there is no impact at the gross profit margin line from purchase accounting. The inventory values at Metals USA, similar to the other companies we've acquired historically, have basically been out replacement cost. So there was no hit at the gross profit margin line. The only purchase accounting adjustments are marking to fair value the PP&E. And as we had mentioned earlier, there wasn't much of a pickup there, so the depreciation stayed pretty consistent. And then certainly, though, on the amortization expense, when we wrote up [ph] the intangibles to fair value, we do have some there. But the gross profit margin line was not impacted.

Got you. Okay, that helps. On the -- the big thing that stood out in terms of your detail per product was the alloys information. Can you help us understand what was driving that? And that tends to be, we thought, a higher-margin part of your business. Can you talk to us about the outlook there and how much that might have impacted margins as well?

Well, I think the alloy category that you see in the table there, Timna, is mostly related to our energy business. And there's a lot of I think cold finished bar in there, plate, SBQ bar. So that, from a demand -- that part of the business from a demand standpoint has been good, but not as good as it was last year or the year before. So -- and that's -- kind of what was consistent also with the first quarter is, I think, we used an analogy that if you're driving at 100 miles an hour and then you slow down to 70 miles an hour, you feel like you're going a lot slower, but it's still over the speed limit. And I think that's how we feel about our energy businesses, is that we're still making good money. It's just there's less dollars. We did see a decrease, of course, in Canada relative to OCTG. And we have about on an annual basis about $100 million of revenue a year in OCTG. It's all up in Western Canada. And certainly, we did see some big volume decreases there, and also margin compression because of the pricing issues and the new capacity coming on with OCTG. But all that alloy is pretty much related to energy.

Okay, so given that you've talked about some weakness potential or at least flat prices, help us understand. Your outlook for the second half sounds like you're in the camp of a second half recovery. Is that demand and price? Or can you give us a little more color on how you're thinking about the second half?

Well, I think from a demand standpoint, we are expecting some improvement. How much of that improvement -- and this is -- with Metals USA in and even on a same-store basis, we would expect demand to improve slightly -- from just a pure demand perspective. But then, we do have some offsetting seasonal issues. They don't seem to be yet, anyway, through this far in July, they don't seem to be as big as some of the seasonal slowdown that we've seen in prior years. The auto-related slowdowns haven't been nearly as big or as long. And -- but we all have to remember, too, we're starting from a lower number. So it's good that it doesn't go down its normal amount. But I think pricing also has an impact on what we're thinking about for the third quarter. Pricing on the carbon side, as Gregg was just talking about, has -- there've been increases. So we certainly don't expect to see the kind of decreases that we've seen through the first half of the year. Aluminum stainless alloy is still soft, but the potential for them going down as much as they've gone down in the first and second quarter is not...

It's slim.

Yes, it's not really there. So overall, I think we're expecting better -- better business conditions, just from a feeling standpoint. And also, Timna, when you're thinking about our guidance for the third quarter compared to what we reported last year, which, I think, was $1.30 a share in earnings for the third quarter last year, we had about $0.19 more LIFO income in the third quarter of last year than we're anticipating in the third quarter of this year. So even though the guidance that we gave you is less, I think if you look at just the LIFO impact, really, you'll see that we're expecting some improved performance, certainly, relative to Metals USA, but also relative to just slightly improved business conditions.

Yes. And that third quarter guidance range we've provided of $1.15 to $1.25 is really kind of compared to a Q2 number of $1.14 because we're not anticipating the onetime deal-related costs in Q3.

Well, I was just going to say on the pricing standpoint, from a marginal point of view, even if it just bounces along where it is right now currently, at least it's not dropping, dropping, dropping month after month as we saw in the first half. So bumping along and not having the difficulties of passing prices through as quickly as the discounts are happening should help us modestly improve our gross profit margin.

Got you. The only other thing I wanted to ask is if in rising interest rate environment, does that change much the way you think about doing acquisitions?

No, no. I don't think that -- certainly with the potential of the -- I don't know how much you're anticipating in terms of increases, but anything that we might be thinking, and I think hopefully you would be thinking, would not have an impact.

We'll take our next question from Michelle Applebaum with Michelle Applebaum Research.

So did I read it right that your LIFO in the first quarter and the second quarter was a credit of $5 million?

Yes, that's correct.

So is this the first time -- you're certainly the only company in my coverage universe that managed to get LIFO the same 2 quarters in a row. Does that mean you have some magic crystal ball or just very good accountants, Karla?

Of course, it's very good accountants, Michelle. Yes, I know, I mean...

I heard there's an accountant that runs the company. Is that true?

That's what I hear. Yes, our annual estimate of $20 million that we came up with at the end of the first quarter, given the somewhat weaker pricing condition. And you have to remember that what we're estimating is where will the price -- overall prices of all the different metals that we sell, what will the price on hand be at the end of 2013, compared to the beginning of 2013, knowing there could be some ups and downs in between. And $20 million for the year is still our best estimate at this time, based upon the monthly calculations that we make and monitor that against our annual estimate and what we anticipate pricing to do between now and the end of the year.

Well, I hope I'm speaking for the accountants at Reliance, as well as the entire industry, when I say that I hope the $20 million credit turns into a $20 million charge by the time the year is over. And I hope someone understands that joke.

We understand.

So my next question is, you're increasing the dividend a lot, and your payout ratio is now up to 28%, and I would normally worry about a growth stock with an increasing dividend. But since your stock's only at 14x, which isn't much of a growth multiple, and I think it's pretty much lower than a lot of the steel mills, are you increasing the dividend because you're seeing less opportunity to use that capital to acquire?

No, absolutely not. I think, Michelle, our dividend's been too low for quite a long time. And it was about a year ago that we made the most major move with it when we essentially doubled the dividend over the last 12 months. And I think the move that we made with the dividend and get it up to a respectable yield for a company our size, with our cash flow, with the consistency that we have, and I think it's helped the value of the stock, and I think that we want to continue that. We have, as you know, over all of the years, increased our dividend regularly. They just haven't really been the size increases that we've done, really, last year. This last increase of $0.03, or 10% was -- it was not a significant increase, but I think it was meaningful and we wanted to signal to the market that we do have a great deal of faith in our business and our cash flow. Our cash flow was outstanding. In some respects, you'd like to think that the cash flow from operations would've been less because that meant we would be using more for inventory and better business conditions. But I think, where we are, we expect to see solid cash flow even with improved business conditions. And with our size, I think it just makes sense for us to do it. So it's all about that, and not about that we don't see good alternative uses for the capital.

The other thing I was going to ask in your release, you seemed to upfront in your release say there's more opportunities to acquire. I don't remember seeing you say that in a release like that before, so I'm going to read that very positively, right?

Yes, I think, certainly, there aren't a lot of Metals USAs out there, that size companies -- we've talked about that before. But there are a number of other companies -- are they all ready today? No, but we do expect that the opportunities as business continues to improve, and we still haven't fully recovered from 2000 -- late 2008 and 2009. And I think as business improves in a more meaningful way, the biggest catalyst of which is an improvement in non-res construction. I think, then, we'll start to see some more opportunity, and we just want everyone to know that we're ready, willing and able. And I think have demonstrated in the past that we can acquire and grow our profits, not just volume.

One more question. We noticed that the fab rebar shipments in a couple of the mills were down from the first half of the year and down significantly double-digits year-on-year, and we're hearing weather as a reason for that. Is that something that's impacted your -- that's a similar channel, obviously, where you play. Is that something that's impacted you, and if so, is there any pent-up that we could see?

We don't see that as having a major impact on us, Michelle. I hear the weather conditions, all the rain and all that. We frankly don't use any of those weather-related incidents as much of an excuse for our business because typically, it's a delay. There's a delay reaction, maybe our customers can't receive material over the next couple of days as we would normally ship it, but it ends up shipping out the door nonetheless. So I can't honestly tell you that there isn't any pent-up demand out there. The business that is normally delayed with us, it's delayed a couple of days til the streets are clear and the customers are open and off we ship again. So we never really see a big -- a major problem, unlike -- like maybe in February -- January, February this year, we lost in a couple of our operations especially on the structural side, about 5 days worth of billing. But we picked it back up as February came in and March came in so...

Do you have a better guess on why rebar fab shipments were down first half?

I honestly do not. Our involvement in rebar is less than 1/10 of 1/10 of 1/10 of 1%.

But it's a similar channel.

Yes, I know. I understand that. I don't know if the imports were a big factor coming out of Turkey...

Why would imports impact fab rebar? I mean, import -- does it come in already fabricated?

I can't honestly answer that. I'm not a rebar expert by any stretch of the imagination. I might as well be a brain scientist before I was a rebar genius.

We'll take our next question from Tony Rizzuto with Cowen.

I've got several questions here. And I think, Dave, you commented that -- I think I heard that June was possibly the strongest month of the quarter. And we're seeing strong autos. I know that a lot of these industrial companies came out recently and had some pretty robust order data. And I'm just trying to -- I wonder if you could go into your various end markets a little bit more and just kind of see how you kind of exited the quarter, and are you seeing any acceleration? Generally, is there something going on within the economy that might be beginning to occur out there? That's my first question.

I think -- and Gregg can talk about the specific areas of the business, Tony, but we -- so far, in July, I think we've seen an extension of volume consistent with, slightly above, I think, so far, what we were doing in June, and -- which is a good sign because as you know, July typically would fall off some. But we, as I said earlier, we were already at a pretty low point so we didn't want to fall whatever the normal decrease is from that point. We did have in June the best -- you heard it correctly, we did have the best shipping month in terms of tons shipped per day that we had had since last May. And it was the first month where we had -- this year's month corresponding to the last year month that we actually were better. So that was kind of a turning point. And as you know, the back half of last year, things got pretty weak in the third quarter, and then the weakness accelerated even towards the end of the year. Hopefully, this year, we won't see a similar pattern. We do expect, certainly, the seasonal things in the back half of the year that we would normally see. But last year, it was accelerated more than what we truly expected. I think, there's -- in the aerospace side, we're still very positive there. Our businesses in the aerospace end of the economy are doing very, very well from a return standpoint. But again, their numbers are smaller this year than they were last year because volumes are down slightly and prices are down -- not at the mill level as much as with -- just at the selling price level because of the overhang in inventory that Gregg alluded to earlier. Well, I think we're seeing some improvement in semiconductor, aren't we, Gregg?

Yes, we should have one of our best months in the last couple of years here in July, August, September. The bill-to-book ratio coming out of the semiconductor equipment manufacturers is up. I think it's at 1.10 for last month, which is a positive. We're getting some good reports from some of the end users on what's -- their volumes going forward in the second half of the year. We've had good luck with the ag equipment manufacturers. I recognize the fact that they've got inventory within their system. But we're doing the business with -- in general, with the majority of their subcontractors, job shops. That's a very busy business for us. So Dave mentioned the energy-related is not as strong as 2011 and '12, but I think his analogy that we've gone from 100 miles an hour down to 75 is very appropriate. So we're just -- and I think we're picking up a little bit more market share. We've invested quite a bit of money in CapEx spending. We've increased square footage in several -- many of our locations, including the ones that support the automotive and appliance businesses. So we're seeing some pretty good improvement. We compare data to MSCI, and we look at some of our increases in some of the commodities that we have, stainless steel is an example. And that seems to be semi-depressed, certainly at the mill level it's very depressed; on the service center level, it seems to be somewhat depressed. We're doing extremely well on the stainless steel side, both on the flat roll and on the bar side. So I think it's a combination of investment and our people in the field capitalizing on those investments. And just -- we have some pretty good niche marketplaces and industries that we support that we're very pleased that we got into those type of businesses many years ago, and we're benefiting from that.

And if I just could maybe go into the aero overhang a little bit because there's a lot of discussion out there about it, and I'm wondering how much of that overhang is maybe being caused by maybe the OEMs, Airbus and Boeing taking a little bit more material. And they've got a little bit too much right now, so that the mills might be dipping more into the kind of the general engineering market and maybe competing more with foreign supplies, that pushing prices down and creating some of that issue you guys are seeing right now?

Not as much as you would think. There's a fairly significant spread between general engineering domestically produced plate versus what's coming in from offshore. And with Europe slowing up, there's all the more reason to direct some of that general engineering plate into the United States. Is that a little problematic with the mills? Yes. And they identify it just by dropping the price across the board sometimes, but generally not very aggressively. But I think they take their shots here and there to protect certain end markets. And so they take a rifle approach instead of a shotgun approach. The aerospace overhang, it's there. Is it at the OEM level? Yes, it is. Is it at the service center? I think probably to some degree, it is. With our company, we're able to convert with the mills, as I've mentioned before, to you, Tony, if our 2 and 7 aerospace alloys are slowing up a little bit, we can take tonnage that we're committed to and move it into general engineering, and that helps us move from one slower mix into a faster-growing mix. And where you get your problems in the service-center end is that you're responsible to take certain amount of tonnage on a quarterly basis. And if you don't take the tonnage, you're penalized, so they take the tonnage and that can put people in an over-inventories position. With us, we're -- but we're not into that game because we've got the flexibility of moving it around into general engineering back into aerospace and whatnot. But the major problem with the overhang is definitely at the OEM level.

That's very helpful, Gregg. And I've got one more question for you guys, and it's in regards to M&A and ThyssenKrupp, so now with the new management looking to get out of steel, when can we expect these guys to get out of distribution? And what are you hearing out there? And what can you talk about? And does the portfolio of companies they have -- it seems like it would be pretty complementary to you guys? And just what kind of comments can you make on this?

Yes, Tony, I think your comment about their companies being complementary to us, that's true. From what we know, and it's only just what we know, the distribution businesses that they have here in the U.S. are doing reasonably well, and they're not interested in selling them. So that's what we hear. And if they're listening to the call, hopefully, they'll know that we're interested.

We'll take our next question from Luke Folta with Jefferies.

I had a question. Karla, you said something about, I think a $77 million investment in 18 properties. And I didn't get really the details around that. Can you kind of expand upon what that's all about?

Yes, back in 2008 when we acquired the PNA Group of companies, there were 18 of the real estate properties where their operating companies have facilities that were kind of wrapped up in a CMBS. And so we did not acquire those at the time we acquired the PNA Group. And so we just basically recently, given relatively attractive real estate prices at the time, the fact that these are good facilities that we want to continue to operate in even beyond our lease term, we were able to basically purchase the company that holds these real estate properties from Platinum Equity. And so we were happy. Basically, we're converting rental expense into depreciation expense and then will own the facilities for the long term.

Okay. So, really, you just bought facilities that you're already operating in -- that you were renting?

Yes.

Got it. Okay. And then, just secondly, you've owned Metals USA for a little while now, and I just wanted to understand -- since you've had some time with the facilities and with the business, is there -- it doesn't seem like there's any major change to what you expect as far as inventory turns and perhaps margins. But when you look at the footprint there, there's some product overlap. Is that -- have you had any kind of renewed thoughts on whether or not there's any consolidation opportunities there?

We haven't really gotten into that deep, with the consolidation. We've been talking more about, in general, their gross profit margin improvement, which there was one, as Karla pointed out in her report, their margins were up a full point in the second quarter compared to their first quarter. Also we've been concentrating on their inventory position. In our opinion it was high, and that's why we stepped up and transferred material. And not to be disruptive in the marketplace, we chose to move it around into other facilities and then move it out into the market in that manner, which is much less disruptive than just dumping material. And we're happy to say that their turns in the first quarter this year were 3.4 turns, and their quarter -- in the second quarter, it was 4.2 turns. So about a 8/10 improvement on their turn, which generated, I believe it was $66 million in cash just out of their inventory. So we think we're headed in the right direction. There's an old line that's used in the metals business and elsewhere: You can't sell from an empty wagon. That's not used in the Reliance company at all. So -- and we can transfer back-and-forth if we're low on items, and so we're just putting our arms around that and we're not getting into -- is this place questionable or not? At some point in time, we'll get into that as we do with our own, but we don't look at anything that's going to be significant at all there. And even the ones that were performing maybe a little bit under par are showing signs of increasing their performance. So I think you always have to give people the benefit of the doubt to be able to step up. And that's -- I mean, we're in no hurry, and I think that we owe them that.

Luke, with regard to consolidation, because we get that question a fair amount. So much of our business, not just at Reliance but in our industry, is based on relationships, and we typically do not combine facilities or consolidate facilities unless there's a facility that can't make the kind of return that we would expect them to make, given their products and their position and their size in the marketplace. So when we have operations that we don't think can justify their separate existence, then we will shut one down and move it into another location. We just did that up in the Portland, Oregon area, which was part of the -- well, this one was actually -- Portland was a year ago. The one we just did was in Northern California, where we shut a facility, and we just didn't think that they could sustain the kinds of returns that we thought we needed to have to have a separate facility. So it made a lot of sense to shut down that business and move it into one of our other ones.

For the most part, it's like the last resort.

It's the last resort. As I said, the relationships -- customers look at -- they have relationships with different people. Rarely do you have a customer that gives you 100% of their business. And they like to spread the business out, and they like to spread it out among different -- for different reasons. But one of the reasons is to kind of spread the risk that the person you're dealing with at company A leaves company A, you still have somebody over here at company B. There's some kind of natural disaster or fire or something like that, that occurs and one facility can't produce the product that they need. So -- and even if both companies are owned by Reliance, despite the fact they have different names, customers know that, but they feel -- they still feel like they're diversifying their business because they're dealing with different people, different facilities, different trucks come in, different names. And it really accomplishes for them what they're after, which is just trying to spread their purchasing out. So as Gregg said -- I just gave you that color because it is the last resort. When you combine facilities, you will lose business. You're not going to keep 100% of the business that you have in the 2 facilities separately. So it is a last resort when we do that. But we're not bashful about doing it when we need to.

We'll take our next question from Aldo Mazzaferro from Macquarie.

I just have a few questions on the income statement. But first, I want to ask a question just on what you're saying about demand in the third quarter. Remember back in the late first quarter, early second, people were talking about a potential counter-seasonal decline in demand in the second quarter versus the first. It turns out your same-store sales were up almost 4%. And now you're saying your third quarter might be up a little bit from the second. Do you think that's a counter-seasonal development going the other way? Or is third quarter typically slightly better for you?

It's typically, Aldo, our third quarter compared to second quarter volumes are down a bit. But we're usually coming off of a stronger second quarter than we had this year. So we are hopeful that some things have been pushed out, the buying patterns with what goes on with the pricing impacts that. So we do think that net-net, we could have a slight improvement in volumes in Q3 versus Q2 this year. And we're saying slight, even though we do still anticipate some of the same seasonal things with customers shutting down in July and other times during the quarter. But yes, we believe that we could get a little bit of a pickup this year that we don't normally get.

And Karla, those same-store sale adjustments that you make, do they extend through all 4 of the categories of product? Or is it like you had same-store sales of -- the gross total of $1.133 million. And then you have 4 categories showing all the carbon, aluminum, stainless. Is there some adjustment in every one of those categories for same-store?

So when we show same-store, basically, our same-store numbers exclude all of our acquisitions in the current year and the prior year. So for this year, it's metals, and then all the company's that I think 6 acquisitions and asset purchases that we did last year, which were not that significant. But in certain product areas such as alloy, it can impact those numbers a little more.

Great. So if I can just ask 3 little questions on the income statement, while on the modeling. In terms of the working capital you took out, are you going to need to -- based on your current forecast, do you think you can maintain flat working capital going forward for the second half?

Yes, we should be able to because even though we did see some good inventory reductions during the second quarter, our inventory turns still are not at the level where we would like them to be, so we're still focused on continuing to rightsize the inventory. So even if we have to -- we would love to have to increase working capital because of demand improvements. But even with what we're projecting, we should still be able to maintain and hopefully improve our inventory levels.

Great. And then Karla, on the synergies, you mentioned $2.3 million in the quarter, excluding the metal purchases. Does that estimate you gave for the year -- or for an annual number, 15% to 20%, does that also excludes the metal purchase impact?

No, that would include some improvement from getting the Reliance programs with our suppliers more integrated at the Metals USA facilities.

Great. And I just -- and the final thing is just -- I wonder if you could give us a quarterly budget for what you're looking at for SG&A and for DD&A, especially after the adjustment for the PNA properties?

Yes, so I think on the depreciation and amortization, we should be coming in around $50 million, maybe a little more per quarter, combined on that. And then from an SG&A, that one gets impacted. We typically kind of look at it as a percentage of sales, and that gets impacted quite a bit by the pricing of the metals that we acquire. So we anticipate that as demand improves, we anticipate that trending down so we would anticipate -- it depends what you think demand and pricing are going to do, but from a dollar standpoint, certainly there was $10 million of onetime costs in Q2 that we do not anticipate on a go-forward basis. So you could knock that down a bit, but from a relative dollar amount, just probably general cost increases, and then any demand improvement.

We'll take our next question from Phil Gibbs with KeyBanc Capital Markets.

As far as June, you had pointed to best same-store or best tons per day since May of last year. There are specific categories of product that were stronger, and maybe some others that stood out. I think you had pointed at some semiconductor, which could be aluminum, but anything else?

I don't think so, Phil. I think it was pretty much spread across carbon, aluminum and stainless. Maybe the alloy was lagging a little bit. That was the product that has been kind of behind, but we did have some improved pricing on the alloy, but from a volume standpoint, it lagged a little bit. But I think, overall -- and that was for the quarter. We saw marginal improvement across the board.

Do you have any sense, Dave, regarding your customer inventory levels? It sounds like on the aerospace side, they're a bit high. Maybe just some -- maybe just some color that you may have on the general industrial and the non-res front. It's our view that underlying demand really hasn't improved all that much maybe from June of this year from earlier this year? So is it your sense that it may be these guys need to come back to the market for material?

I think inventories are -- in our industry, inventories are lower than they typically have been. But they're relative to demand in a pretty good spot. Out at the customer level, you mentioned the overhang in the aerospace plate, but that's kind of a special situation that's created by the way that you have to buy that material. So I think aside from that, inventory at customers is also -- everybody's been playing it pretty close to the vest, because we all -- 2009 wasn't that long ago, and we all remember what happened. And I think there's just no reason right now to load up on inventory. It just doesn't make sense. The lead times aren't that far out, so there's -- it's a risk. So I don't think that there's a problem with inventories. Certainly, I think when real demand improves, then you'll see inventories go up to support higher demand levels. But I think we've all, in the industry, and even at the customer level, have learned a lot of lessons since 2009. It's just not worth the risk to carry a lot of heavy inventory.

Really where that inventory hang is whether it's in aerospace industry or even at CAT. I think CAT came out and announced earnings yesterday and they mentioned that they are still a little bit heavy on inventory. So the OEM levels are the ones that seem to have a little bit more inventory than they should. Maybe they didn't anticipate mining going down as much or as quickly as it did. So that's an error that anybody could make. So they're going to correct that. But the majority of our business goes through job shops and fabricators. And job shops and fabricators got hit pretty bad in 2009. And to Dave's point, they haven't forgotten that in the least. And what gets you in trouble faster than anything in our business is speculation buys and too heavy of inventory. I think a lot of companies, both in service center business, as well as the job shops and fabricators, have understood that very clearly, and they're not speculating in the least. So they buy for need, not for greed. And that fits our motto absolutely perfectly.

So there could potentially be, if the economy finally does get to -- back to a call it 3%, 4% GDP growth rate, who knows when that happens, but there could be a pretty quick upshot or scramble at that point, given how everybody just seems to be in kind of a buying malaise right now.

Yes, there could very will be and there probably will be. That's a very probable example. And mainly, the reason for that is that the mills will -- they'll take out their lead time so fast it will make your head spin. They'll go from 6-week lead time to 10-week lead time. You'll wonder why they got there so fast, and it's kind of a magic thing. But it is what it is, and it's good for us. So yes, that can cause some concern about the lead times being too far out, and them not being able to have availability that they would like so that causes some extra buy. But it's got -- there's got to be demand-driven. It's got to be that 3%, 4%, 5% GDP. So when that happens, we're ready for it.

And the thing is, too, when you think about how can we get from where we are to that kind of growth level, it's non-res construction. That's the big catalyst for our industry. It's got to kick in, and when it does, then you'll see that -- you'll see lead times go out. You stop and think about it now, the largest consumer of flat-roll material -- carbon flat-roll materials is the auto industry. And the auto industry is doing pretty well. And we haven't had the extended lead times. We haven't had the issues that Gregg was just talking about. So what's got to change between now and that period when GDP doubles or triples from its current levels, it's the only significant area, and the largest metal consuming part of our economy is construction. It's non-res construction. And that's what's got to change to make this thing kick up in a really big way.

It looks like we have one final question today, a follow-up coming from Sohail Tharani of Goldman Sachs.

Karla, can you also give us what should we expect for the second-half CapEx?

Yes. So we did, as I mentioned in my comments, our current -- our 2013 annual budget is now $220 million. We bumped that up a bit because of some activities and opportunities we see, along with including Metals USA, they had not been in our number previously. So we spent $74 million in the first half. We should spend about that much and up to $100 million, $125 million in the second half. Oftentimes, we haven't -- we don't hit our full CapEx budget, so -- but we should be close to $200 million for the year.

Okay, great. And also if -- let's say the debt levels stays the same, what should we expect for the interest expense going forward quarterly?

Yes, I think, compared to the second quarter, we should be pretty close to that. We didn't -- there were 2 weeks that didn't include our increased borrowings for Metals USA in the second quarter, but we paid down some debt. So we think we'll continue to pay a little debt down against the revolver. But the rates -- the nice thing is the rates are pretty low. But they -- but then it doesn't bring the interest expense down as much when you pay down your revolver, but we anticipate good strong cash flow. So there should be some reduction in interest expense in the subsequent quarter.

And lastly, have you converted all the Metal USA inventory into LIFO yet?

Yes, they are effective at our acquisition date, they are now on LIFO. So the monthly calculations we did, April, May, June, we also did for Metals USA. And they are included in our $20 million estimate for the year.

So you didn't change your LIFO reserve. It stayed the same?

Well, remember, we're estimating during the year. So there was a LIFO adjustment at the Metals USA level, but it was pretty small because they just went on LIFO and prices in their inventory haven't changed a lot from April 15.

Okay, I'm showing no further questions in the queue.

Great. Okay, just a couple of final thoughts here. From a demand standpoint, business isn't as bad as maybe you think it is. I think the biggest headwinds we've had, we've talked a lot about it on the call here, have been the pricing headwinds. And it really makes our life more difficult. It really hampers our results more than the changes in the demand. Demand overall has been reasonable with certain exceptions, but certainly not at its peak levels that we witnessed back in 2005, 2006 time. So it looks like demand is steadily improving. Some of that improvement has been masked again by the price increases, and I just wanted to point that out. So thank you all for your support and for participating in our call. We want to remind you, too, that we'll be presenting on September 10 at the KeyBanc Capital Markets Basic Materials and Packaging Conference at the InterContinental Hotel in Boston. We hope to see many of you there. Thank you very much, again, and have a great day.

Thank you very much, ladies and gentlemen, this concludes today's presentation. You may disconnect your lines, and have a wonderful day. Thank you for your participation.