Reliance Steel & Aluminum Co. (RS) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Reliance Steel & Aluminum Company First Quarter 2015 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Brenda Miyamoto, Investor Relations for Reliance. Thank you, Ms. Miyamoto. You may now begin.

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

Good morning, everyone, and thank you for joining us today. Our first quarter results were well ahead of our expectations, reflecting the resiliency of our operating model and the strength of our local management teams, which allowed us to maintain solid gross profit margins in spite of continuing industry headwinds from the challenging metals pricing environment. We benefitted from normal seasonal improvements in demand during the first quarter as compared to the fourth quarter of 2014 as well as expanded market share, with a 5.1% increase in our same-store tons sold, which exceeded the MSCI industry average increase of 3.6%. With the exception of the energy market, overall demand improved throughout the quarter and was at levels relatively consistent with the first quarter of 2014. We believe that our outperformance of the industry reflects our ongoing commitment to customer service as well as our continued investments in both organic growth and acquisitions, resulting in increased market share. Pricing for all of our products continued to decline as the quarter progressed, and continues to do so today, primarily due to the historically high levels of imports supported in part by strength of the U.S. dollar. Our same-store average selling price per ton sold declined 3.9% for the first quarter of 2015, compared to the prior quarter and declined 1.7% from the first quarter of 2014. Despite the downward pressure on pricing, Reliance’s focus on small quick-turnaround orders and value-added processing helped us maintain our gross profit margins. Our FIFO gross profit margin of 25.4% was better than anticipated, remaining relatively consistent with our first quarter 2014 FIFO gross profit margin of 25.5%, but was achieved in a much more difficult pricing environment. Once again, our solid performance was made possible by the strong operational execution of our managers in the field. As a result of our strong gross profit margins and effective expense control, earnings per diluted share exceeded the high-end of our guidance range for the quarter. First quarter net income attributable to Reliance was $101.3 million or $1.30 per diluted share. Earnings per share as reported were up 17.1% from $1.11 in the first quarter of 2014 and up 10.2% from $1.18 in the previous quarter, and was up 9.2% from non-GAAP earnings and up $1.19 in the first quarter of 2014 and up 28.7% from non-GAAP earnings of $1.01 in the fourth quarter of 2014. During 2014, we completed the acquisitions of All Metal Services, Northern Illinois Steel Supply, and Fox Metals and Alloys that contributed to our increased first quarter consolidated net sales of $2.61 billion, up 2.4% from $2.55 billion in the first quarter of 2014. We sold 1.54 million tons of metal during the first quarter of 2015. Going forward, acquisitions will remain an integral part of our overall growth strategy. We expect to continue to be a consolidator in our highly fragmented industry by making strategic acquisitions of well-managed metal service centers and processors with end-market exposures that support our diversification strategy. Our strong cash flow was another significant first quarter highlight with cash provided by operating activities of $171 million. Our liquidity position and confidence in our operational execution provide a strong foundation for us to continue investing in the growth of our business while at the same time returning value to our shareholders through dividends and share repurchases. On April 21, 2015, our Board of Directors declared a regular quarterly cash dividend of $0.40 per share of common stock. The dividend is payable on June 19, 2015 to shareholders of record as of May 29, 2015. Reliance has paid quarterly dividends for 56 consecutive years and we’ve increased the dividend 22 times since our initial public offering in 1994 including a 14% increase in the first quarter of this year. During the first quarter of 2015, we repurchased a total of $185 million of our common stock at an average price of $58.02 per share. We repurchased an additional $15 million in April of 2015, bringing our year-to-date total share repurchases to $200 million. Before wrapping up my prepared remarks with comments on our business outlook, I would like to discuss the enhancement we made during the quarter regarding our executive leadership succession plan. Following our Annual Meeting of Shareholders on May 20th, I will be transitioning from my role as CEO to Executive Chairman. Gregg Mollins, currently our President and COO will succeed me as CEO at that time. I will remain as Executive Chairman until my retirement in July of 2016 at which time an independent Nonexecutive Chairman of the Board will be appointed. Effective January 15, 2015, Mark V. Kaminski, a member of our Board of Directors was elected as our new independent Lead Director, succeeding Douglas M. Hayes who remains the board member. This announcement is the combination of a detailed and strategic succession planning process developed in conjunction with our board. And I am extremely confident that Gregg is the right person to lead Reliance going forward. Now turning to our outlook, overall we expect that the U.S. economy will continue to improve modestly throughout 2015. With the exception of the Company’s businesses directly servicing the energy markets estimated at approximately 8% to 10% of our sales, demand continues to strengthen. However, the historically high levels of metal being imported into the U.S. are expected to continue given the strong U.S. dollar and weaker economies in other parts of the world, which will continue to put downward pressure on most metal prices. Although we expect a modest increase in our tons sold in the second quarter of 2015 over the first quarter of 2015, we expect that downward pricing will negatively impact our average selling prices and margins. As a result, we currently expect earnings per diluted share to be in the range of $1.05 to $1.15 for the quarter ended June 30, 2015. As we’ve noted in the past, Reliance has a broad range of products, significant customer diversification and a wide geographic footprint. We’ve achieved industry-leading operating results on a consistent basis, and we remain confident in our ability to continue our 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. Overall, we were pleased with our performance in the first quarter, given the competitive environment we were in. Demand in most of the industries we support was relatively strong, with the exception of the energy market. Same-store tons sold were flat as compared to the first quarter of 2014. FIFO gross profit margins rose to 25.4% from 25.1% in the fourth quarter. Selling prices continue to be under a great deal of pressure, particularly in carbon steel products due to at or near record imports, a rapid decline in raw material prices and high inventory levels throughout the supply chain. Once again, our managers in the field did an outstanding job keeping our FIFO margins in the mid 25% range given the competitive landscape I just mentioned. With regard to inventories, we turned our inventories 4.3 times in tons in the quarter. This is a work in progress as we are determined to improve our turn. From an end-market perspective, automotive, serviced mainly through our toll processing operations in the U.S. and Mexico, is very strong, and we believe this will continue. Our toll processing operations in the U.S. are expanding their operations primarily in support of aluminum going into the automotive market. Aerospace continues to remain relatively strong, and we expect demand to improve throughout the year. We recently opened two new facilities in Europe, a 100,000 square foot facility in Turkey and a 60,000 square foot facility in France for our AMI aerospace subsidiary. We began shipping products from both operations in the first quarter of this year. Build rates in the commercial airline segment continue to grow and Reliance intends to grow right along with them. Heavy industries such as railcar, truck trailer, shipbuilding, barge and tank manufacturers, wind and transmission towers, as well as bridge fabrication, are all doing well. Agricultural and construction equipment have come off their peak, but we are still quite busy servicing this segment of the economy. Energy, that being oil and natural gas, has slowed down due to a severe drop in oil prices. We began the process of reducing our expenses early in the fourth quarter and will continue to do so if demand continues to decline. Nonresidential construction demand continues to improve but is still well-below peak levels. We are optimistic that this important market will continue to improve throughout 2015. Our new 260,000 square foot plant built in New Boston, Ohio which became operational in January 2014 is profitable and sales are increasing as we speak. As for pricing on carbon steel products, flat roll has been under pressure since late in the third quarter as has plate. Pricing on mini-mill products has recently come down mainly due to the drop in scrap prices and high levels of imports. Given the strength of the dollar as well as the economy the U.S. continues to be a prime target for exports. As for aluminum, Midwest spot ingot has been trading in the $1 to $1.10 per pound range since the first of the year. Demand on general engineering aluminum plate is strong, with domestic lead times 18 to 20 weeks. Several price increases were announced in the second half of 2014 as well as one in March of this year, all of which have held. Demand on common alloy aluminum sheet is strong and pricing on this product follows ingot. As far aerospace plate, demand is strong and lead times are out 20 to 22 weeks. The price increase announced to go in place this April has held and this product is inside supply. Stainless steel nickel surcharges began the year at $0.76 per pound and are currently at $0.61 per pound. Demand for sheet and bar products is still strong and lead times are 5 to 8 weeks. To conclude, we are proud of our performance in the first quarter. Our balance sheet is strong to support future acquisition activity, and our organic growth initiatives. We believe, except for the energy business, the major industries that we support will continue to improve as 2015 progresses and we will benefit, in turn, from their growth. I will now turn the program over to Karla to review the financials. Karla?

Thanks, Gregg, and good morning, everyone. Our 2015 first quarter sales were $2.61 billion, up 2.4% from the 2014 first quarter with a 0.8% increase in tons sold and a 0.9% increase in our average selling price. Compared with the 2014 fourth quarter, our sales were up 1.5% with a 5.1% increase in tons sold and a 3.6% decrease in our average selling price. Our 2015 first quarter same-store sales of $2.53 billion, which exclude the sales of our 2014 acquisitions, were down 1.1%, with a 0.1% decrease in tons sold and a 1.7% decrease in our average selling price compared to the 2014 first quarter. Our higher average selling price in the 2015 first quarter as compared to the 2014 first quarter is due to a shift in product mix to higher value products from our 2014 acquisitions. Excluding the impact of our 2014 acquisitions, our average selling price has declined in each of the past six months through March 2015. As mentioned earlier, our 2015 first quarter gross profit margin of 25.7% exceeded our expectations and was up from 25.4% in the 2014 first quarter and up from 24.2% in the 2014 fourth quarter. Our current estimate for our 2015 annual LIFO adjustment is a credit or income of $30 million, resulting in a 2015 first quarter credit or income of $7.5 million or a benefit of $0.06 per share compared to a charge or expense of $5 million or a negative $0.04 in the 2014 first quarter. In the 2014 fourth quarter, we had LIFO expense of $24.5 million or a negative $0.19 per share. Consistent with our increases in tons sold, our 2015 first quarter SG&A expenses increased modestly from both the 2014 first quarter and the 2014 fourth quarter. As percent of sales, our SG&A expenses were 17.1% compared to 16.9% on a non-GAAP basis in the 2014 first quarter and 17.1% on a non-GAAP basis in the 2014 fourth quarter. And the change as a percent of sales is impacted by fluctuations in our selling prices. We believe our managers controlled their expenses well. Since October of 2014, we’ve been reducing headcount in our businesses impacted by the downturn in the energy market. However, given our various growth initiatives including certain new facility openings that Gregg mentioned, we were also increasing headcount at certain of our other businesses with growing end-markets during the same period. As we’ve previously mentioned, personnel costs represent about 60% to 65% of our SG&A expenses and therefore represent the most significant element of cost that we can manage as markets change. Our 2015 first quarter operating income of $169.3 million was up 9.7% from the 2014 first quarter and up 24.4% from the 2014 fourth quarter. Our pretax income of $150.6 million was up 12.3% compared to the 2014 first quarter and up 18% from the 2014 fourth quarter. We were very pleased with our strong 2015 first quarter pretax income margin of 5.8%, especially given the very challenging pricing environment we were operating in. Our effective income tax rate for the quarter was 31.7% compared to 34.5% in the 2014 first quarter and 26.6% in the 2014 fourth quarter. The decrease in our tax rate versus the prior year was primarily due to lower tax rates in certain states and foreign jurisdictions. We currently anticipate that our full year 2015 effective income tax rate will be in the range of 31% to 32%. During the 2015 first quarter, we generated cash from operations of $171.4 million, an increase from $68.8 million in the 2014 first quarter. Typically, we used cash in the first half of the year as we built working capital from seasonally lower fourth quarter levels. However given declining metal prices along with strong gross profit margins, we were able to generate cash from operations to support our growth and shareholder return activities. We continue to manage our receivables well with our accounts receivable, day sales outstanding rate remaining fairly consistent at our 42 days. Our inventory turn rate at March 31 was 3.9 times based on dollars and 4.3 times based on tons, a slight decline from our 2014 rate of 4.1 times in dollars and 4.4 times based on tons. Although we are focused on reducing inventory levels and improving our turn rate to our company-wide goal of 4.7 times based on tons, in the 2015 first quarter, we continue to receive import material for orders placed in 2014. Given the long lead times and large quantities associated with import buys, our inventory levels increased. We continue to be focused on lowering our inventory from quarter-end levels and expect to generate significant cash flow from inventory reductions as we progress through 2015. Our total outstanding debt increased by about $50 million in the 2015 first quarter. At March 31, 2015, our total debt was $2.37 billion, resulting in a net debt to total capital ratio of 36.3%. As of March 31, 2015, we had $707.1 million available on our $1.5 billion revolving credit facility. We spent $31.3 million for capital expenditures during the 2015 first quarter. Our full year 2015 CapEx budget remains $200 million, the majority of which relates to growth activities. We also paid quarterly dividends of $31.7 million during the quarter. We made opportunistic share repurchases during the 2015 first quarter, repurchasing $184.9 million of our common stock at an average cost of $58.02 per share. We did not enter the market to repurchase these shares until March, so the impact of the 3.2 million shares repurchased had a limited impact on our 2015 first quarter earnings per share. However, in the 2015 second quarter, our earnings per share will benefit from the share repurchases as well as the additional $15 million of our common stock that we repurchased in the first two weeks of April. We expect an EPS benefit of approximately $0.05 per share from the repurchases in the 2015 second quarter. We expect to use available cash to continue to opportunistically repurchase shares of our common stock as well as to pay down the debt and support our growth activities. Our business model allows us to adjust our working capital and expenses in response to changing market factors which generally allows us to generate strong cash flow in all environments. To echo Dave’s comments from earlier, our strong quarterly cash dividend coupled with our ongoing share repurchase program demonstrate our confidence in Reliance’s growth prospects, strong cash flow generation and our commitment to shareholder returns. That concludes our prepared remarks. Thank you for your attention. And at this time, we would like to open the call up to questions. Operator?

Thank you. [Operator Instructions]. Our first question is from Michael Gambardella of JP Morgan. Please go ahead.

I have a question just in terms of your guidance for second quarter going down even with the share repurchase benefit. Where are you seeing the most pressure to push that EPS guidance down?

I think two things, Mike, are happening and we expected it to happen more in the first quarter than it did certainly. So, we’re anticipating that it might continue or kind of mature in the second quarter. And average selling prices are coming down. And we expect that that’s going to continue. And then the other issue which is probably the most powerful one is pressure on margins. So, we do see that probably having a bigger impact in the second quarter than the first quarter. So those are the two main things. We also had a piece of business, Karla do you want to talk about that?

Yes, we did have, Mike, in the first quarter, there was a piece of business we had supporting a large project that we had anticipated was going to probably spread out over few quarters, but it all got pushed back into first quarter and that was about $0.05 per share that we had not anticipated be in the first quarter. So, if you back that out, that kind of offsets the pick-up from the share repurchase in Q2. The main item is the potential margin pressure from price downward pricing.

Is the downward pricing, is it more in the carbon flat roll business, or are you also seeing it and feeling it in the aluminum business as well with Midwest premiums dropping?

It’s in the carbon side, probably across most all products, not just a flat roll. And so the other bigger area is more in the stainless side with the reduction of the surcharges.

And this one piece of business that was worth about $0.05, you were expecting that to kind of be spread evenly between the first and second quarter, so $0.025 in each, and a gain of $0.05 in the first?

Yes, I mean a little bit because it trickled in the third quarter but yes, it just kind of got pushed back and the customer accelerated it.

Deliveries, yes.

The next question is from Nathan Littlewood of Credit Suisse. Please go ahead.

This is actually Gayle [ph] in for Nathan. Congrats on the beat today. And I think my biggest question I guess is whether or not you guys can give us a little bit more color on the specific operational areas that outperformed your expectations for the quarter because it was a pretty big change from the thought process that you guys had laid out last call. So, was it driven more by a particular product or end market, or was it due to some aspect of execution?

I think we had across the end-markets Gayle [ph] and these guys can fill in some of the blanks where they’re closer to the market. But I think the only market that went down was our energy-related business and certainly we anticipated that. It’s still a good profitable market for us at this time; it’s just that the volumes have come down. But everything else, I think non-res construction continued to improve, that was a nice comparison for us. And then the auto side of things primarily through our toll processing businesses was very strong. So, those were the kind of the two. The giant aerospace continues to be strong but Jim, you want to make any comments on energy?

In the energy sector, as we said in the last call, we saw it come, so back in October we started the process of taking headcount and a substantial amount of headcount and expense out. And we’re going to continue to measure and monitor going forward, but the good news is we did take those expenses out and the demand has been obviously less, we’ve been able to maintain our margins. And even with all the issues in the energy sector, that sector, their pretax is still above our average.

And then Bill, maybe you can fill in on some aerospace.

Yes, the aerospace side continues to strong. We’ve got great backlog, solid build rates and lead times that are moving out in the 20 plus weak range. Plus we have the addition of all metal services into the group. There was a price increase in April that seems to have full support. So, our outlook for aerospace continues to be very positive.

So, it sounds like energy and aerospace where it was just better than you had expected?

I think Gayle [ph] from a perspective of the gross profit margin, we really saw all of our businesses do well, even in energy where there was downward pressure and we lost some volume, we did see that maintain their gross profit margins. We really saw that across the board. And we think a good part of that is just our operating margin model of the small put turn orders; we’ve been investing in and getting more higher value add, so we believe that helped us in the market by preserving our margins because of the way we focused on customer service. But in our guidance, certainly with when we see metal prices falling the way that they were and the imports continuing to come in, we’re conservative with our expectations on margins.

Maybe Gregg should comment maybe first on auto and then comments on non-res, if you want.

Okay. On the automotive side, Gayle, [ph] our toll processing operations increased their earnings in the first quarter compared to first quarter of last year considerably, okay? And that was mainly because we’re producing a lot more product for our customers which are the mills in the aluminum and the aluminum side of the business which is very profitable for us. So, we were very, very pleased with our performance on the toll processing side of the business. On the non-res, several of our companies have had really the quarter that they have had in sometime. So we were very happy about that from a regional standpoint. And northwestern part of the country seems to be more active on the non-res than other. We’re doing a lot of work in the multi-used retail and housing markets, doing a lot of bridge work. We’re doing business with stadiums and racetracks, hospitals, schools. All that activity is going pretty well across the country. So, we’re encouraged by the non-res and hopeful that that will continue to improve throughout the year.

One more which Karla kind of referenced the quick turn orders. I wondered if there was any change that you’ve noticed in your customer ordering patterns. I know last year the customers seemed to be going more towards imports; we still have the import problem coming into the U.S., but are you seeing customers starting to move away from import buying and perhaps back towards Reliance’s products a little more?

Our customers probably aren’t buying a lot of import because they tend -- I mean some of them, well, the larger OEMs but most of customers are smaller, job shops and fabricators. And in this environment when prices are decreasing, they tend to order smaller quantities and they order much more often. So, they only order really what they absolutely have to have today or tomorrow, for this week and then when they need more, they’ll order more because they can probably get it for less next week.

Our problem with imports Gayle [ph] really is not our customers buying it, it’s competitors buying it, okay? And then when it comes in late and they double shift, there is a need for cash flow, so they want to get rid of it, get rid of it quickly. And they do that by lowering the prices. That’s why we were pleasantly pleased with our 25.4% FIFO gross profit margins because with all of that competitive issues going on, on the street, we thought our guys did a really, really good job in keeping the mid-25% range.

So, it’s more that the order sizes have shrunk a little bit?

Yes. And that’s to our advantage. When we see customers buying small orders which they typically do, those are the customers that we focus on; it’s a good thing for Reliance Steel.

Thank you. The next question is from Tony Rizzuto of Cowen and Company. Please go ahead.

My first question is, you guys were buying more imports and to have the fantastic performance on the gross margin side, how have you been able to turn your inventory and have such strong results when you are buying more imports and that is taking more time to get here? And it’s obviously we’ve seen quite a devaluation in that. So what are the things specific? I joined the call a little bit late, so I apologize if you’ve got to repeat some things you may have said earlier?

Not, at all Tony. As far as the inventory turn, thank you for the nice comments. We’re frankly disappointed in our inventory turn. And you think we should be doing a better job and I am looking over to Dave who is laughing at me. But the fact of the matter is, we were buying more imports in particular in the second half of the year. We cut that back quite a bit back to more of a normal buying pattern from our domestic suppliers because the price spreads have narrowed. And that’s a good thing. We like to keep it domestic as you well know. But our inventory turn, we’ve been -- because we’ve been planning the imports and it has been coming in, in larger quantities at longer lead times, it has affected. I think we would have been a little bit better on our inventory turn as we’ve been buying from our domestic suppliers like we normally have in the past. But that should start to improve as -- once again Dave is laughing at me, just start to improve as less imports come into our inventory going forward.

Any Tony, on the margin spread, your question kind of how the imports affected that. I think, one of the things we tried to explain to folks last year because I think there was a little misunderstanding when we shifted a bit of our buys more to import which still was only 10% of our total purchases, up from a little under 5% normally. We were not reducing our inventory cost by the published priced spreads. The cost differential wasn’t as much as I think people had anticipated. So, to us it wasn’t -- the little bit more import wasn’t a bit impact on our margin.

The guidance that you guys provided, and you probably elaborated on this a little bit in your comments, but it did appear to us to be a little bit cautious and possibly a little bit conservative, and maybe overly conservative. I’m just wondering because you should have -- obviously seasonally it’s an improved quarter I believe, Q2. And to Gregg’s comment about he’s not pleased terms yet with inventory turns. I always expect Gregg to say that. But could it be a little or is this just a little bit maybe of cautiousness on your part given what’s going on for example in aluminum, where the premium structure looks like it’s under great pressure now, announcements that the Chinese are going to relieve export tariffs, and is it a little bit of that just uncertain maybe in some of the other product categories and nickel has been under pressure? Maybe you can elaborate on that a little bit, in terms of the guide that you provided.

I expect Gregg to say that too. So, actually we expect Gregg to do this.

I just had to get that in there. By the way, David, congratulations on a fine job that you’ve done at the helm.

Thank you, Tony. You’re always good as people around you as you know so.

I knew you would say that too.

On the guidance, we are trying to be a little bit on the conservative side; that’s kind of our nature, but we’re seeing and expecting that margins will trim up a little bit more, probably more so than they did in the first quarter certainly, just based upon the lower cost material that’s out in the market place now. Across most all products but primarily on the stainless side and also in the kind of across the carbon steel products, so also and I don’t know if you were on the call at this point, but Karla mentioned that we had, had shipped out ahead of kind of our plan, a big project order that we had had that added about $0.05 a share to the first quarter that we didn’t expect in our guidance for the first quarter to all get shipped in that quarter, but it didn’t. So overall, the energy side of things, I think we expect that contraction to continue. So, we don’t know exactly how much it’s going to come down, how much more it’s coming down but we do expect that it’s continuing and we’re anticipating that in our guidance as well as some modest improvement in tons as Karla said in her remarks but average pricing coming down and the biggest thing, margins really tightening up on us.

Because of pricing.

Because of pricing. I hope we’re wrong, I hope it doesn’t have the impact that we’re anticipating now.

Thank you. The next question is from Phil Gibbs of KeyBanc. Please go ahead.

I had a question on the import arrival comments. I think you said you had some coming in later in the quarter. Is that piece of the equation going to be a bigger headwind for margins in the second quarter than the decline in carbon steel prices and stainless surcharges, just because I know you had described some of that as coming in at maybe some less advantageous pricing than you had previously thought, maybe a couple months ago, just wondering what the magnitude of each could be or what’s the stronger…?

The more of the product Phil has come in, in the first quarter and fourth quarter and now we’re getting the leftovers, if you will, coming in, in the second quarter of the year. So, it’s not going to have a negative impact. But when you look at some of the pricing, hot roll coils gone down, this year beginning in January. It’s gone down almost $200 a ton, plates gone down almost $200 a ton. Those types of headwinds are going to be hitting. We thought it hits us more in the first quarter than it did okay but we anticipate that it is probably going to hit us more than it did in the first quarter in the second quarter and that’s the reason for the guidance. So, we’re not in trouble because of imports coming in, in second quarter, so don’t read that into the equation. But ourselves just like everybody else in our industry are going to be impacted by those $200 a ton discount since the first of the year.

And also with respect to the guidance, I think at least in the first half of April, it certainly doesn’t indicate what the whole quarter is going to be, but the businesses down on a per day basis a little bit in the first part of April compared to average for the first quarter. Nothing that we’re terribly concerned about, but we did factor that into our guidance.

And Gregg, I just want to make sure I heard you correctly. Did you say that general engineering aluminum plate lead times are 18 to 20 weeks? Because I think the last call you mentioned, they were closer to 10. So, I just want to make sure I heard that right.

That is right.

This is Bill.

We’ve seen those lead times move out. I think a bit part of that’s driven also by the strength in aerospace. So, we’ve definitely seen the lead times move out on the general engineering side and demand in general engineering has stayed good.

Terrific and I’d can just sneak one more in here, Just because I noticed there was a big pick-up in other volumes; I know you break out carbon, stainless, alloy and aluminum, but what’s left over, that piece grew strongly, maybe 50% year-over-year. Is that the tolling business that you guys are talking about, or were alluding to go earlier?

The tolling is actually broken out separately; it’s about 2% of our revenue dollars and that’s grown a bit. Some of the improvement we get in other has come through some of our recent acquisitions where we’re doing some more downstream processing. So, the Northern Illinois steel supply business we picked up the, GH Metal Solutions, a good part of their business, the service that they’re providing fall into other category. But we’ve also got titanium, brass, copper different types of metals, scrap sales are all in that bucket as well. So, I think that increase is mainly due to the additional value add processing that we’re doing through some of recent acquisitions.

Thank you. The next question is from Matt Murphy of UBS. Please go ahead.

Gregg, just had a question on the toll processing of aluminum. Is that a business where there’s a lot of volume upside where that can become more meaningful for you if it is good margin or is it something that you’ve got a bit of an advantage, because you have the capacity to serve it and the industry is not there yet and something that you might see competition coming in on? Just some color around that?

Number one, the volumes have come in even faster than we expected them too. Fortunately, we have the equipment and personnel that we were able to take that on and we were able to spread it through more than on plant. Do we expect that to continue? Yes. Do we expect it to grow? You bet, we do. We’re putting a lot of money into that that operation to support that growth? Yes we’re. So there is just -- I can’t tell you about how excited we are about the opportunities that lie ahead for us through our toll processing operations. And we’re very blessed to have the capital to be able to deploy for growth opportunities in that segment. And our toll processing managers are in conversations with not only the automotive producers but certainly the mills, all the aluminum mills that are involved in that and there is all the topics you hear about how the tons are going to grow, the pounds are going to grow in that; we’re going to be a big part of that. So, I can’t elaborate more because we don’t have "five year" purchase order programs or anything like that but I will tell you this, we’re in heavy negotiations with the mills. And it’s a process that very few people can do for exposed automotive parts. And our companies in particular in the U.S. are very, very capable and have been for many, many years on producing parts that go into the outdoor, the exposed automotive parts. So, we’re very, very excited about it.

And just a reminder too that in the fourth quarter we had announced that we increased our ownership percentage in our Mexican joint venture which -- toll process company, which now has consolidated into our financial results.

And then Gregg, maybe one other comment you made just about high inventory levels throughout the supply chain. I mean is that just related again to imports coming in, in the ports and the whole, delivery system, or does that extend through to customers? I mean maybe just some color on where you think the supply chain is with the destock year-to-date? Thanks.

Primarily, it is related to the imports. Imports are major problem. They have been all through at least the second half of last year, certainly in the first quarter this year, it’s going to continue to be through the second quarter at least this year. And that’s really the problem. So, our customers are living hand to mouth because they’ve seen prices going down and going down and going down and going down, so they’re living hand to mouth which very honestly is probably why are margins stayed at 25.4% on a FIFO basis because they’re living hand to mouth in expectation that prices are going down. And so they’re buying at the very last minute. And fortunately that falls right into our main deal and that is next day delivery on full products or cuts to size products. But if you want to just be specific where is the problem lie in inventory, it’s imports.

Thank you. The next question is from Chris Olin of Cleveland Research. Please go ahead.

I just have two quick follow-up questions. And the first is, I just wanted to know if you could talk a little bit about the competitive environment and I guess considering all the changes to the pricing, and some of the smaller companies being potentially upside down inventory, or looking at liquidity crunch. Is there any risk, incremental risk to the FIFO margins associated with people may be getting more aggressive out there on the price?

Yes. Unfortunately the answer to that is yes. Dave?

Yes, Gregg is absolutely right. I mean it’s tough out there. In our industry, it’s always very competitive. Right now because of the falling prices, it just kind of makes it a little more intense than normal. So yes, it’s certainly an issue.

And that’s part of the consciousness that it speaks itself into our second guidance, it also reflects that environment out there with what’s going on.

And Karla, I apologize, I might have missed it. What were you looking for on the LIFO for the second quarter?

Our current estimate for the annual LIFO adjustment is $30 million credit or income, so that’s $7.5 million per quarter. So that was also factored into the second quarter.

Thank you. The next question is from Timna Tanners of Bank of America Merrill Lynch. Please go ahead.

So, I’m still puzzled by the decline in guidance for the second quarter and the strong result in the first quarter. So, I wanted to summarize what I understood, and see if you could correct me maybe. So from what you’ve said, first you said that your operations on the ground helped you have a better margin, but I also understood you to say that you have yet to experience some of the impact of falling prices; some of the $200 falls in flat-rolled and plate. So, I’m just wondering so you have yet to experience some of this; is there somehow a delay in the way your customers see the prices falling and you can pass through prices until a point? I’m just trying to understand. And it seems like the scrap price fall of $100 a ton in February and maybe you have yet to filter through for a long product prices, is that fair?

It’s all true, Timna. The issue with the prices and the margins, we can maintain our margins as we did in the first quarter, say 25% and that continues the round number. But as the average selling prices come down that 25% actually produces less income dollars for us. So, we’re anticipating that the impact of the scrap production, the impact of the more recent price reductions is going to have a bigger impact as we go into the second quarter. And we also expect to have a bigger impact on the actual margin percentage. So, when you kind of link a reduction in the percentage to the reduction in the average selling price, you get kind of a double whammy. Now we’re just estimating, we’re trying to be conservative as Karla said earlier but that’s our best guess at this point in time.

And that’s right I think and that’s just probably fairly consistent with our guidance for the first quarter because again in the environment that we’re operating in, there is a lot of pressure out there and we were so pleased with the way that our people in the field kept the margins. And we’re really kind of and that was the whole kind of surprise so to speak or the upside from our guidance with the Q1 actual results in addition to that $0.05 for the one piece of business we talked about, it was really all in margin. And so going into second quarter, we’re anticipating in the guidance that downward pressure coming through like Dave just talked about, but with our business model and the great customer service our folks provide, hopefully we won’t see the impact to the extent that we have factored in right now.

And the one thing that we benefited too Timna, over the past three years, we’ve spent a lot of money on capital equipment. So the value-added processing that we’ve been providing our customers, has been expanded significantly over the past few years. So, we’re getting the benefit of those capital expenditures and charging for customers for more of the processing that we’ve been doing.

And also there is a little bit of timing uncertain pieces of our business too. And you used to hear me to kind of talk about this with some of the flat-rolled business that needs services. There is usually a timing lag of about a quarter. So with the price decline, we think on that piece of the business, we’ll see a little more margin pressure in Q2 compared to what we saw in Q1.

And then the final thought on aluminum, we have yet to see some of the lag in price -- the premiums falling through as well?

I think we are going to continue to see -- I mean we’ve seen the premium come down; our outlook is we think it’s going to continue to come down. So, you’re right, as that price comes down and those products that are tied to the Midwest spot pricing, we’ll see a little more pressure there on the margin side.

That’s primarily on the common alloy side. We have seen prices increases, both on the general engineering plate as well as on the aerospace plate. So we think that will more than offset drive the drop on the Midwest spot.

The other question I wanted to ask was on uses of cash. Obviously, business model generates a lot of cash flow. But with the strong buyback, a message that you don’t as many acquisition targets, or are you pursuing kind of both options right now?

No, it’s not a message that M&A has taken a lower spot on our list. I think with the amount of the buybacks that we’ve done and that we could anticipate going forward, would in no way inhibit our ability to make any acquisition that we could reasonably expect to make. So very honestly though, the opportunities out there are probably less now than they were a year ago, simply because in this environment when the competitive environment is more difficult and people are making less money than before, then they’re less willing to sell their business because they just don’t think that they’re going to get the price that they want. So, this has been typical as long as we’ve been doing this, that pattern that in difficult times unless somebody actually has to sell their business, they won’t do it. So certainly that’s part of our thinking, but at the same time the amount of money that we’re spending on the share repurchase is on our capital expenditures. When we look at all of our capital allocation, we do intend to pay down some debt. We think we can do all of those things and we’ll be ready for any size acquisition opportunity that pops in front of us that is attractive to us.

And then on the share repurchase, the low stock price the Reliance has had recently is also why it makes more attractive for us to put our cash there.

Yes, actually it would be hard for us now to find any deal that is more accretive than buying our own stock at this point.

Thank you. The next question is from Luke Folta of Jefferies. Please go ahead.

David, congratulations on an impressive career over there; it’s been a real pleasure working and learning from you over the last few years. I wanted to dig in more into the auto side of things, in terms of the comments around tolling. Very intrigued by what the growth could be there. Can you talk more specifically about what sort of processing you’re doing for aluminum and auto, just trying to picture the operations there?

It’s primarily slitting. That accounts for the vast majority of it but it’s light gauge like slitting. And when you do slitting, you do inspection, transportation. There is a lot involved in just slitting the material, believe me, but we also blanking and custom blanking on that. We do stamping, we stamp out parts. And we do some laser cutting. So that’s really the processing that we do. But it’s not as easy as it may sound describing to you over the telephone. I mean you actually have to see how the process is done to really recognize how difficult it is to provide the automakers with a part that can go onto an automobile to be painted, and be flawless. It’s very unique. And there is not a whole lot of competition. Alcoa likes to do it more in-house than some of the others that’s their right. But the vast majority of the aluminum producers would rather have it done outside of their location because it’s not their area of expertise.

Kind of like carbon guys.

It’s pretty specialized, it’s what we do on our toll processing operations there, we could not even come close to the type of precision and accuracy and surface sensitivity, surface requirements in any of our other operations. It is as Gregg said, very kind of unique.

And what’s an interesting side note as of today, I am not saying that that we could make this common in the year from now because I don’t know, but we haven’t dropped off our carbon steel processing operations either. So it’s just an addition too but we’re still very, very busy with the processing carbon steel, stainless steel through our toll processing operations. But obviously, it appears as though it’s got a fantastic future going forward.

Okay. And would you say that the aluminum processing is meaningfully more profitable than what you do on the carbon side?

I would say it’s more profitable. I don’t know if meaningful is really the right term, but it’s fair to say that we make some money off of it.

And then just lastly, if I could ask another pricing question, we tend to track -- you look at your prices relative to what the spot indexes are just as sort of a back check. And your prices, the premium that you earn really on each category, was quite a bit ahead of where the historical relationship has been relative to the spot pricing. So, there was a number of moving parts in there and Karla talked about a better mix and that the markets mix that you’ve talked about. How much of that I guess this quarter is something that’s temporary, that we’ll see come down as realizations come down in the second quarter versus more of a structural or mix sustainable impact?

I think at this point that’s kind of hard for us to tell precisely Luke. As we kind of commented too before, we have increased our amount of value additional processing and things that we’re doing for us customers. So that should be sustainable but we’re also kind of in reliance with all acquisitions we do and all the capital investments we make. We’re kind of continually changing here too. So it’s hard to give a real direct quantitative answer on that. And typically in the past what we’ve seen in times of falling prices because we typically are better at managing our inventory than most others in the industry, we’ve been able to often time hang onto our sale price a little longer when prices are falling which helps our margins during those environments. So, I think there is probably a little bit of that. So that is not necessarily sustainable at the points that prices would level out.

The uncertainty that you’re point too in your question is exactly the same uncertainty that we’ve kind built into our guidance. So we don’t have a really solid feel about it. So, we’re trying to be on a conservative side.

Thank you. The next question is from Andrew Lane of Morningstar. Please go ahead.

First of all, it looks like you generated a 20% increase year-over-year increase in aluminum related sales in the first quarter, although some of this might have been acquisition driven. Could you provide some commentary as to what the key factors in end markets will be in aluminum throughput growth going forward?

You’re right. A big part of that growth was tied to the acquisition of All Metal Services which is predominately aluminum. So that’s one reason you see the percentage growth there. In terms of looking out in the future, when we look at the markets, both aerospace; general engineering, the outlook there we think continues to be bright and we look for continued growth in both of those areas.

And when Bill referrers to general engineering, he is really referring to the industry that use that the most or the semiconductor and electronics industry.

And really more focused on the heat treat side of the business versus the common alloy side.

And then I might have missed it but could you remind us as to your expectations for 2015 CapEx, and then what is the underlying split between growth in maintenance, and how much of that budget is being allocated to the toll processing operations?

So, our annual CapEx budget for 2015 is $200 million and it’s kind of about 60% growth related and the other 40% kind of maintenance and as far as toll processing…

We’ve got about of the -- we’ve got about 40 million in it.

Yes, it’s about 40 million of the 200 million would be for our toll processing businesses, both in the U.S. and Mexico.

Thank you. The next question is from Tony Rizzuto of Cowen and Company. Please go ahead.

I think the question probably for Gregg that how much further do you think the industry inventories would have to decline before the market can absorb a price hike do you think by the mills in carbon flats?

Tony, I think personally that the producers and obviously we’re not one of them but we’re large customers of them, I’d be surprised if we didn’t see increase in the not too distant future. The spreads are close. I don’t think really anybody, certainly speaking only for Reliance, there is no reason or logic to go out and purchase material offshore given the pricing decline that we’ve seen especially over the last and so first of the year. So, there is no compelling desire to go out and buy for. So if that’s the case and it’s fallen below their expectations, the producers’ expectations, that there is no reason for it not to go up. So, if I were a producer, I would announce a price increase today. And I like those things and I am serious because the spreads are thin, business is good, consumption is there. We’re not hurting by way of volume. Pricing has been our major problem for quite some time now.

I mean what do you think is holding the mills back? Do you think it’s -- they’re trying to get all their ducks in a row on the trade cases or is it just trepidation about the dollar and given where raw material costs are around the world? What do you think is holding the mills back? Conceivably, we’re hearing of foreign offers coming into the ports that 400, maybe even lower -- pardon me, maybe even around that level, but when you add in the freight and everything else, they’re higher than what the domestic pricing is. So everything would seem to be in place for price hike announcement. Inventories probably are coming down more quickly than the MSCI data would reflect or at least indicated in the last read. So, I’m having a hard time I think -- we all are certainly having a hard time here trying to figure out why we haven’t seen anything yet?

Tony, I’d love to be able to give you an answer to your question that made sense. But I’m as perplexed, and when I say, I mean we’re as perplexed by that as you are. So rather than give you something that we really don’t know an answer to, I’d just assume to sit on the sideline on that and let you figure out and you call us and tell us what the answer is.

You might not get a call back.

The mills know their business and how to run it in the best way. And we think we know that for our business. So they’ll make whatever decisions. They’re good smart people. They will make whatever decisions are good for them.

Let me just, if I may, ask a further question, on the M&A front you’ve done such a wonderful job in maintaining your financial flexibility. You have repurchased $250 million worth of your shares, obviously a fantastic use of capital, raised the dividend significantly. There’s a lot of folks hurting out there, so are you guys seeing more opportunities come across your radar screen from an M&A standpoint?

No, not yet Tony. It’s still relatively quiet. And for general line service centers, it’s been pretty quiet since the recession back in 2009 because there so many of us are involved heavily in non-res which is really just starting to recover in a meaningful way. And as I said earlier, most business owners, the private business owners in our industry just don’t feel like they’re going to get paid what they’d like to get paid when they’re not really maximizing profit. And we try to convince them otherwise of course that we’re going to look at normalized numbers. Still the trend is that they tend to hold back unless they actually have to sell. So right now there is some activity out there but not much.

And I think the total of last year, 2014, it felt like we were starting to see a little more activity like some of those businesses coming off but then with the energy downturn we have those prices. I think anyone who is thinking about it is back on the sideline again.

It’s interesting because I was just thinking about a possible parallel here with the psychology of these folks and thinking about scrap prices and how scrap flows have been increasing. Someone made a comment, I think it was Steel Dynamics, they were talking how a lot of the obsolete scrap flows were being held back, because people didn’t think the scrap dealers didn’t think that prices would be sustainable at such low levels, but now they’re thinking that it’s a different environment. So, you see those scrap flows as people think it might be more sustainable. So maybe some of that thought process if people think that prices will remain lower for a longer period of time, or within a range, it might begin to change some of the thought process in terms of the owners of those businesses. I don’t know; just a thought I had.

It could certainly. The toughest environment for all of us in the service center industry is when prices are going down. Once they’ve leveled off, then usually you can kind of restore your margins back to a normalized level, even though the average price might be getting that percent of a small number, but it’s the downward trend that is the most difficult to operate through.

Thank you. I would now like to turn the conference back over to Mr. Hannah for any closing remarks.

Okay. Thanks again for all of your support and for participating in today’s call. We would like to remind everyone that in the month of May, we’ll be in New York City, presenting at Wells Fargo Industrial and Construction Conference and in June we’ll be in Chicago, presenting at Deutsche Bank’s Global Industrials and Basic Materials Conference and we hope to seeing many of you there. Have a great day and thanks for your support.

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