Reliance Steel & Aluminum Co. (RS) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Reliance Steel Third Quarter 2015 Financial Results Conference Call. [Operator Instructions]. I would now turn the conference over to your host, 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 third quarter 2015 financial results. I'm joined by Gregg Mollins, our President and CEO; Karla Lewis, our Senior Executive Vice President and CFO; and our Executive Vice President of Operations, Jim Hoffman and Bill Sales. David Hannah, our Executive Chairman, will also be available during the question-and-answer portion of this call. A recording of this call will be posted on the Investor 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 achievements of the Company to be materially different than 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 Gregg Mollins, President and CEO of Reliance.

Good morning, everyone and thank you for joining us today. Once again, our operational performance was outstanding despite significant industry-wide challenges that continue to put pressure on metal pricing. In particular, I am very pleased that we were able to increase our FIFO gross profit margins to 26.4%, up 70 basis points from the prior quarter and up 100 basis points from the first quarter of 2015. Our ability to increase our gross profit margin sequentially in each quarter of 2015 in an environment with metal pricing falling each month reflects exceptional execution by our managers in the field. Our business model focusing on smaller orders that require quick turnaround, along with providing high levels of value-added processing, coupled with our disciplined operational execution, resulted in non-GAAP earnings of $1.16 per diluted share, well ahead of our guidance range. Overall customer demand remained relatively strong with our tons sold per day increasing sequentially each month of the quarter. The typical seasonal trend is for the third quarter volume to decline 3% to 5% from the second quarter. However, in line with our expectations, our third quarter tons sold were down only 1.5% from the second quarter and once again, we outperformed the industry with the MSCI average down 2.9%. Although we sent some hesitation in the market at this time, mainly due to recent announcements about slower growth in China, resulting in even further downward pressure on metal pricings, we believe customer demand across our business is relatively healthy outside of the energy industry. We continue to increase our market share by providing high levels of customer service as well as investing in our people and our businesses we have made and will continue to make significant investments in our businesses that perform toll processing work for the auto industry as this is highly profitable for us and we have no metal price risk. Our primary growth relative to the auto industry in the U.S. has been due to the increased aluminum usage in autos and truck which we believe will continue. Reliance is very well positioned to further grow our participation in this area. We have also increased our presence in aerospace distribution through an acquisition in August of 2014 as well as opening new facilities for our companies serving this market. These investments have expanded and strengthened our ability to service our Aerospace customers on a global basis and we anticipate continued growth in the aerospace market. Our business model positions us well to increase our market share in the current environment as our customers typically place orders for smaller quantities on a more frequent basis when metal prices are declining. This is Reliance's sweet spot as our decentralize the structure allows us to respond to small quick turnaround orders. Demand for our products was in line with our expectations for the quarter. But we face significant headwinds from continued pricing pressure across all the metals we sell with the exception of aerospace play. Going into the quarter, we had expected prices to be stable to up slightly, however, conditions softened even further and as a result, our average selling price per ton sold was down 4.4% compared to the prior quarter and 12.7% compared to the third quarter of 2014. Given the weak global economy and strong U.S. dollar, imports continued to flood the U.S. market and raw material costs continued to fall. So far in the fourth quarter, domestic metal pricing has continued to decline. At this time, we do not see any meaningful near-term catalyst to change the direction of pricing. That said, we remain highly focused on managing all aspects of the business that are within our control which continues to offset much of the impact on our profitability from the weak pricing environment. During 2015, we have made a concerted effort to lower inventory levels and I am pleased to report that year-to-date we have decreased our FIFO inventory by $239.8 million including a $120.5 million during the third quarter. Inventory turns, a key area focus for Reliance, improved to 4.7 times based on our FIFO inventory tons on-hand at September 30, 2015. And our first nine months of 2015 shipment levels which is near our company-wide goal of 4.75 times. Not only did this provide cash that we used to reduce our debt by $106.1 million and to repurchase $142.3 million of our stock, I also believe that our improved inventory position contributed to our increased gross profit margins. I'd like to personally thank all of our employees who helped achieve these results. Another example of our focus on the controllable aspects of our business is our effective expense management. Over the years, Reliance has consistently demonstrated our ability to quickly respond to changing market factors. We started to reduce expenses and inventory at our businesses that focus on the energy market when we first began to sense a slow-down towards the end of 2014 because of these quick reactions, our energy-focused businesses as a whole were profitable for the nine-month period ended September 30, 2015. During the period when our volumes in these businesses decreased over 40%. The only way to achieve this is by attacks your costs quickly. In line with our quick reactions to changing market conditions, we recorded an impairment and restructuring charge of $55.5 million during the quarter, given our updated outlook that oil prices remained depressed for longer than we had previously anticipated which is expected to reduce both volume and profitability of our energy businesses. This charge includes closing a few of our locations. While we regret any hardships this may cause on our employees, we believe these are necessary actions to enhance our overall operating efficiencies and long-term profitability. We will continue to be vigilant in assessing energy and market demand trends and we'll take further actions as necessary. In the third quarter last year, we completed the acquisition of northern Illinois steel supply and All Metal Services, followed by the fourth quarter 2014 acquisition of Fox Metals and Alloys. These acquisitions contributed it our third quarter 2015 consolidated net sales of $2.29 billion. In total, we sold $1.49 million tons of metal during the third quarter of 2015. While we have not completed any acquisitions so far in 2015, we continue to see and evaluate many tunes. Reliance is required -- regarded as the acquirers of choice throughout our industry and M&A remains as 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 processers with end market exposure that is support our diversification strategy. To sum up the quarter, I'm extremely proud of our performance. We increased our FIFO gross profit margins to $26.4%. We reduced our inventory by $120.5 million. Our cash flow from operations was $252.4 million. We paid down $106.1 million of debt and we repurchased $142.3 million of our common stock. We have a very experienced team at Reliance that again achieved industry-leading operating results in a very difficult environment. Our strong performance improved our balance sheet and liquidity position which provides a strong foundation for us to continue to grow our business through M&A and organic initiatives while at the same time deleveraging our balance sheet and returning value to our shareholders through dividends and opportunistic share repurchases. I thank all of our employees, customers, suppliers and shareholders for our success and I remain confident in our ability to continue our track record of success going forward. We'll now hand the call over to Jim to comment further on operations and market conditions. Jim?

Thanks, Gregg and good morning, everyone. I'm going to speak mainly about pricing and demand for our carbon steel and alloy products as well as our outlook on certain key markets we sell those products into. Bill will then address our aluminum and stainless steel markets. I would like to echo Gregg's comments about how proud we're of our operational execution during the quarter. First I will comment on several of our key end markets. Automotive that we service mainly through our toll processing operations in the U.S. and Mexico has shown consistent strength throughout 2015 and we expect that trend to continue. Our growth in this end market in the U.S. has outpaced the general industry growth primarily due to incremental processing volume from increased aluminum usage in the automotive market. This is new business for us, made possible by our expertise in hard-to-do processing as well as our ability to make significant investments in new equipment and facilities to support this growth. Even though we're just ramping up for this new business, we have already processed double the amount of aluminum we processed last year at our toll processing operations. And as we discussed on prior calls, we're breaking ground on a new facility in Mexico to expand our existing toll processing capacity to support the increased automotive activity in that area. We expect this facility to be operational by mid-2016. As a reminder, our toll processing operations are not impacted by metals pricing. As we process the metal for a fee without taking ownership of the metal. This provides consistent returns and although toll processing represents a small portion of our total sales dollars, it represents a larger percentage of our profitability. That's why we're so excited about this growth. Moving on into heavy industry which includes railcar, truck trailer, ship building, barge manufacturing, tank manufacturing and wind and transmission towers, demand for this quarter remained fairly steady with the prior quarter. Our exposure to heavy equipment also includes sales into the agriculture equipment market which has weakened recently but has not impacted us the same -- to the same extent as our OEMs. On a positive note, demand in the construction equipment market is trending up. Non-residential construction is our largest end market and although we have been experiencing continued moderate improvement in demand over the course of the year, our volume remains well below the peak levels. We expect positive growth in 2016 with the potential of some pullback activity during the fourth quarter of 2015. We have made strategic investments in our businesses servicing this space since 2009, rather than scaling back or closing facilities as we believe this market for us will eventually return to prerecession levels. Our investments include processing equipment that will enable us to provide a higher level of value-added processing to our customers as their volumes increase which can easily be absorbed in our existing cost structure. Turning to energy, that being oil and natural gas. Our third quarter volumes sold and our businesses servicing the energy market actually increased a bit from the prior quarter, mainly due to normal seasonal patterns in certain of our markets where we sell heavier products. Compared to the third quarter of 2014, our volumes were down 44%. In our opinion, the overall energy market deteriorated further in the third quarter from the second quarter which continued downward pressure on both pricing and activity levels due to low oil prices and the related reduction in drilling activities. Because our managers in the field reacted quickly and have continued to cut expenses throughout the year, mainly through headcount reductions, our energy businesses as a whole are profitable for the nine months ended September 30, 2015. However, pretax income for these businesses was down about 80% or $67 million compared to the same nine-month period of 2014. We have reduced head count at our businesses servicing the energy market by one-third or approximately 400 people. With our operating expense run rate for these businesses, now approximately 38% lower than it was at the end of last year. Our updated outlook, however, assumes that oil prices will remain low for longer than we had previously expected which resulted in our decision to close a few of our underperforming locations that are solely dependent on energy customers. Turning now to carbon steel, prices continue to be under a great deal of pressure in the third quarter, mainly due to continued record high import levels in the marketplace as well as a rapid decline in raw material prices, a strong U.S. dollar, a soft global economy, including a weakening Chinese market and high inventory levels throughout the supply chain. However, in this environment, we're once again able to increase our FIFO gross profit margins on sales of carbon steel products in 2015 third quarter as compared to both the 2015 second quarter and 2014 third quarter. The increased gross profit margin dollars from our carbon steel operations largely offset our pretax income losses from our energy-focused business reflecting the importance of Reliance's diversification strategy. Blake represents the largest portion of our product mix followed by carbon steel structural, bars and tubing. Therefore our results are more impacted by pricing on these products versus carbon flat rolled products which represent only 15% of our total sales with hot rolled at 7%. Flat rolled pricing has been under pressure for over a year now with mills down over 30% since the beginning of 2015. Although plate demand remains fairly healthy, pricing for plate products has declined significantly, down over 40% from the beginning of 2015 and we expect further pressure for the balance of the year. Base prices for alloy prices, a majority of which are sold into our emergency market, has held up well considering the significant reduction in demand. Going forward we expect prices for these products to remain fairly steady with current levels, due to in large part to the product going into the automotive market. I will now turn the call over to Bill for comments on our non-ferrous markets.

Thanks, Jim. Good morning, everyone. The aerospace market continues to represent one of our strongest end markets from a demand perspective. With our same store tons sold up 7.6% in the nine months ending September 30, 2015. We remain very bullish on the aerospace markets as build rates in the commercial air plane market continue to grow. As Gregg mentioned, we've increased our aerospace presence in new geographies through our acquisition of All Metal Services headquartered in the UK in August of 2014 as well as opening two new AMI metals facilities in France and turkey in the first quarter of 2015. Sales to the aerospace market have increased as a percentage of our total sales. Now representing nearly 10% in the third quarter of 2015, we believe Reliance remains very well positioned to gain market share in this area on a global basis. Earlier this week, we announced that we were awarded the contract for aluminum flat roll product to be supplied to the F35 joint strike fighter program. This contract runs from 2017 through 2021 and is estimated at $300 million. The majority of the products that we sell to the aerospace market are heat treated aluminum products, specially plate, as well as specialty stainless steel and titanium products. Given stronger demand, aluminum plate has increased with two pricing increases announced this year. Lead times for the domestic suppliers of aerospace plate have moved from the 24 to 28 weeks reported last quarter to a controlled order entry process. Lead times for the nondomestic suppliers are currently in the 24 to 28-week timeframe and we believe they too are moving toward a controlled order entry process. Both price increases announced this year have held and the product is in tight supply. Our sales of common alloy aluminum remain consistent from a volume standpoint with most of our product being sold to sheet metal fabricators that support a variety of end markets. Demand on general engineering aluminum plate remains solid with domestic lead times around 20 to 25 weeks, yet pricing remains challenged, especially with ongoing aggressive import pricing. Demand for semiconductor plate has been strong and is expected to remain steady for the balance of the year. Pricing on common alloy aluminum sheet follows ingot and has deteriorated from prior year levels due to increase imports as well as a significant reduction in the Midwest premium. Midwest spot ingot has been trading in the $0.75 to $0.80 per pound range, down from the $1.6 per pound in January. The Midwest premium was at historically higher levels for longer than we had anticipated but it's has now decreased about $0.17 per point since the beginning of the year. Outside of the energy market, demand for stainless steel products has continued to be good December spite challenge being pricing with primarily related to stainless flat rolled. We sell a suggest amount of stainless steel flat markets into the kitchen equipment, appliance and construction end markets. Lead times are about three to four weeks and we expect pricing pressures to continue for that product, in particular given the excess inventory in the supply chain. That said, stainless steel bar which represents about 30% of our stainless steel volume remains more profitable for us. Pricing for flat rolled stainless steel products has declined more than any other product in 2015 with September pricing down about 40% from the beginning of the year. Pricing for these products is heavily impacted by nickel prices which began the year at $7.37 per pound and is currently down $2.79 per pound to pound to $4.58 per pound for October. As an example, surcharges for 304 stainless have fallen from $0.76 per pound in January to $0.42 per pound in October. In addition, base prices have dropped by a few discount points due to a heavy influx of import products. We expect prices for stainless steel products to remain under pressure for the remainder of 2015 and into 2016. That being said, our managers in the aluminum and stainless steel portions of our business have increased their gross profit margins during a very volatile pricing environment and managed their expenses well. We applaud them for their performance. I'll now turn the call over to Karla to review our third quarter financial results.

Thanks, Bill and good morning, everyone. Our sales in the third quarter of 2015 were down $419 million or 15.5% from the third quarter of 2014 and down $137.5 million or 5.7% from the second quarter of 2015. The majority of this decline was due to lower prices resulting from the market conditions discussed earlier. Our same-storm average selling price has declined sequentially in each month beginning in September, 2014 with our September 2015 same-store average selling price down $292 per ton or 16.8% from our September 2014 average selling price. And based on our 2015 third quarter tons sold, this equates to a loss of nearly $400 million in quarterly sales or $1.6 billion per year due solely to the impact of metals pricing because metal prices declined more than we had anticipated, in the 2015 third quarter, as compared to the 2015 second quarter, we increased our estimate of our annual LIFO inventory valuation adjustment to income of $100 million compared to our prior estimate of $80 million. This resulted in the LIFO credit or income of $75 million for the nine months ended September 30 with $35 million or $0.29 earnings per diluted shares included in our cost of sales in the 2015 third quarter, compared to our projected amount of $20 million or $0.17 earnings per diluted share. We recorded LIFO of $0.27 per diluted share in the 2015 second quarter. In the 2014 third quarter, when metals prices were generally rising, we recorded a LIFO charge or expense of $20 million or $0.16 per diluted share. This adjustment reflects LIFO accounting working in the manner intended, reducing FIFO cost of sales in a declining cost environment to value inventory at current replacement costs. Our 2015 third quarter gross profit margin of $27.9% increased from 25.1% in the 2014 third quarter and 27.1% in the 2015 second quarter. Our increased LIFO income contributed to our increased gross profit margin. On a FIFO basis, our gross profit margin during the quarter increased exceeding our expectations especially in light of declining prices. Given the competitive market and lower prices, we had anticipated that our gross profit margins would remain relatively consistent with the prior quarter with some potential for downward pressure. However, as highlighted previously, our teams in the field did a great job of maintaining and increasing our gross profit margin. Our 2015 third quarter SG&A expenses decreased $44 million from the 2014 third quarter and $12 million from the 2015 second quarter, primarily due to effective costs control throughout the company including reductions in workforce at our businesses servicing the energy end market. Company-wide, our head count at September 30 was down 3.7% or 550 people, compared to January 1 on a 1.7% decline in tons sold. As a percent of sales, our SG&A expenses were 18.8%, compared to 17.5% in the 2014 third quarter and 18.2% in the 2015 second quarter. And the increase as a percent of sales was impacted mainly by lower selling prices in the 2015 third quarter. As individual markets change, we will continue to remain disciplined in our effort to adjust our variable expenses such as personnel costs which represent about 60% to 65% of our SG&A expenses. We're proud of our quick reaction to the significant decline in sales volumes to the energy market. Our non-gap pretax income of $133.2 million was lower than in both the 2013 third quarter and the 2015 second quarter. However our third quarter non-GAAP pretax income margin of 5.8% improved from 5.4% in the 2014 third quarter at 5.6% in the 2015 second quarter. Again, this improvement was only possible because of our excellent operational execution across all controllable aspects of our business in a very challenging environment. Our effective income tax rate for the quarter was 32.1%, compared to 25.7% in the 2014 third quarter when we benefited from the resolution of certain tax matters and 32.6% in the 2015 second quarter. The nine-month periods, our effective rate of in 2015 was 32.1%, compared to 32.5% in the 2014 period, down slightly as we're benefiting from lower tax rates in certain states and foreign jurisdictions. And we currently expect that our full-year 2015 effective income tax rate will be in the range of 32% to 33%. As Gregg and Jim both mentioned, we recorded a pretax impairment and restructuring charge of $55.5 million or $0.47 earnings per diluted share in the third quarter of 2015. This includes charges directly related to the planned closure of certain energy-related businesses where we anticipate losses on the disposition of certain assets. In addition, we recorded charges for the write-down of intangibles due to the loss of customers and low future earnings expectations for certain of our operations servicing the energy market. These charges are presented in our table of non-GAAP net income and earnings per share amounts in our press release issued earlier today. We expect the positive impact on our future earnings due to the closure of the identified locations that were operating below our company-wide pretax income levels as well as lower amortization expense from a portion of the intangible write-downs. As always, we will continue to monitor performance at all of our businesses, not just those servicing the energy market and take appropriate actions as warranted. Net income attributable to reliance for the 2015 third quarter was $51.4 million or $0.69 per diluted share as compared to net income of $95.5 million or $1.21 per diluted share in the 2014 third quarter. We believe our non-GAAP net income of $85.5 million or $1.16 per diluted share is a better reflection of our performance in the quarter. We generated $252.4 million of cash from operations during the 2015 third quarter resulting in $716.3 million in cash from operations for the nine months ended September 30. We're very proud of our ability to generate such strong cash flow in the current market which demonstrates the counter cyclical nature of our working capital needs. Our cash generation was greatly enhanced by our efforts to drive down inventory levels during the year with an inventory reduction of $120.5 million in the third quarter and $239.8 million in the first nine months of 2015. On the working capital front, we continue to manage our receivables well would our Accounts Receivable Days Sales Outstanding rate at September 30, 2015 of 42.3 days in line with our historical range. Our inventory turn rate at September 30 improved to 3.9 times based on dollars and 4.4 times or 2.7 months on hand based on tons. Given our significant inventory reductions during the year, we would like to point out that our tons based turn rate calculated on our September 30 an inventory levels and year-to-date shipment levels would be 4.7 times, very close to our goal of 4.75 times. We used our cash from operations to reduce our outstanding debt, invest in our businesses that are performing well and return value to our shareholders. We paid down $106.1 million of debt during the third quarter and $291 million in the nine-month period. At September 20, 2015, our total debt outstanding was $2.1 billion resulting in an improved net debt to total capital ratio of 33.8%. As of September 30 of 2015 we had $489 million outstanding on our $1.5 billion revolving accessed facility. We spent $42.3 million on capital expenditures during the 2015 third quarter and $119.4 million year-to-date. Our full year 2015 CapEx budget remains $200 million. The majority of which is related to organic growth North Americas including the toll processing and aerospace activities mentioned earlier. We also paid quarterly dividends of $29 million during the quarter and further enhanced our shareholder returns with share repurchases. Given what we believe to be an undervalued share price, we have been very active repurchasing our shares this year with repurchases of $142.3 million or $2.5 million shares in the third quarter of 2015. And in the nine months ended September 30 of 2015, we've repurchased $342.3 million or $5.95 million shares of our common stock at an average price of $57.50 per share. As a result of these repurchases, we realized an earnings per share benefit of $0.11 per share during the first nine months of 2015. And on a pro forma basis, that is if we would have repurchased all of the 5.95 million shares on January 1, the impact on our earnings per share would be $0.23 for the nine months because of our significant share repurchase activity in 2015, we have almost depleted our authorization under our existing share repurchase program. To allow us to continue to opportunistically repurchase shares when they are undervalued and we have available cash, our board amended our share repurchase plan and increased the authorized the number of shares available to be repurchased by 7.5 million shares and extended the plan through December 31, 2018. The 7.5 million shares authorized for repurchase represents approximately 10% of our current shares outstanding. We expect to use available cash to continue to reduce our debt, support our various growth activities, pay our quarterly dividends and opportunistically repurchase shares of our common stock. Now, turning to our outlook, while we believe the U.S. economy will continue its slow growth going forward, given increased uncertainty in the market at this time, along with normal seasonal patterns, we're cautious in regard to both business activity levels and metal pricing in the fourth quarter of 2015. These factors, combined with two less shipping days in the fourth quarter lead us to expect a decrease in tons sold of approximately 4% to 5% in the fourth quarter of 2015 over the third quarter of 2015, compared to the more typical seasonal trend of down 5% to 10%. Metals pricing is expected to remain under pressure for most products the company sells through the remainder of 2015. Accordingly, we expect our average selling price in this fourth quarter of 2015 to be down %1 to 2% from the third quarter of 2015. As a result, we currently expect non-GAAP earnings per diluted share to be in the range of $0.75 to $0.85 for the fourth quarter ending December 31, 2015. We remain confident in our ability to continue to effectively manage the controllable aspects of our business to mitigate the volatile factors that impact our industry and are beyond our control. We're proud of the exceptional execution by our managers in the field. Our effective working capital management and consistent gross profit margins provide strong cash flows that allow us to continue to fund growth opportunities while at the same time providing steady returns to our shareholders. That concludes our prepared remarks. Thank you for your attention. And at this time, we would like to open the call up to questions. Operator?

[Operator Instructions]. Our first question is from Michael Gambardella of JPMorgan. Please go ahead.

I have a couple of questions, one, I mean just based on how aggressive you've been really this whole year on the share buy-back and how the board has increased the share buy-back, is that an indication that the M&A activity coming in your door, like, what you -- what people are bringing to you or what you're looking at has diminished even though the market -- kind of is towards the bottom anyway?

The answer to that Mike is no. There's quite a bit of activity on the M&A front. But as you know, we've always been very selective on our acquisition strategy. They have to accretive. And we just haven't seen anything thus far that really caught our interest. So but there is activity, we fully intend to keep a very active in the M&A portion of our business. But as so far this year we just haven't seen anything that we really thought would be a good addition to our group and the diversification policies that we have.

And Mike, we've tried to, you know, make it kind of clear that we have not given up anything from our capital allocation whether it be M&A, investing for organic growth, paying our dividends or repurchasing shares. We're in a position where we're still able to execute on all four of those. Unfortunately, our stock price has been at a level where we felt it was an extremely good investment for us and so we've been, you know, more active both because of the price and also because of the available cash we've had from our really strong working capital management and the inventory reductions we've had during the year.

Would your typical acquisition target though be a company that probably wouldn't want to sell at the bottom because typically go after companies that are well managed make -- probably better balance sheets because they're well managed and probably don't necessarily want to fail down at the bottom? Would that be a true statement?

Yes it would. And even though we don't value based on the highest level of times like 2008 or the lowest 2009, we do it over the period of time in a normalized pretax profit basis. But as a seller, if you're not doing as well as you think you should be doing or could be doing, then the likelihood of you're sitting on the sideline until a period of time until your results are where your expectations lie with probably pretty good.

Yes. And we have I would say recently seen a bit more potential opportunities out there and they're not -- a lot of them aren't attractive to us as Gregg said, but it does seem there's been a bit more pickup in companies that are considering selling.

And just another question on the -- you said that the carbon sheet business is about 15%. In that area, when you have such a significant trade case -- you have three trade cases that maybe, you know, represent about 15% of U.S. supply of carbon sheets coming for preliminary ferrous out into end of December and, say, January, do you do any preparation in terms of purchasing or not or do you just wait and see what happens with the announcement?

Yes, Michael. This is Jim. Yes. We don't speculate. It's too difficult to do. It's just not part of our model. We bagpipe for need, not for greed. Customers tell us what they're going to buy and we stock the right stuff. So we don't try to play in that game.

We don't anticipate anything coming forward. If it's very positive on the tariffs, that's fantastic but we just -- as Jim pointed out, we're just totally focused on turning our inventories and hopeful of good results with respect to the trade cases.

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

Obviously very impressive that you guys were able to increase the FIFO margins so much. You much 70 basis points and then you've done that every quarter this year. So, you know, first question is the type of performance repeatable in your view? And could we see the larger gains if prices simply were to stabilize?

I think that that 26.4% is about as good as it's going to get in my personal opinion. Okay, now Karla is looking at me cross signed. She may have a different opinion than that. But I think that we had a remarkable gross profit margin improvement in the third quarter, but I would not look for an improvement in the fourth quarter over the third quarter because the seasonality -- a lot of people in the fourth quarter, a lot of competitors of ours like to dump inventories in the fourth quarter. So we're going to be faced with that headwind. There is still ample imports at all the docks throughout North America. That's not a good thing. So I wouldn't factor in any improvement in our fourth quarter gross profit margin over the third quarter.

Yes, I would agree with everything, you know, that Gregg said and especially through the fourth quarter but to the extent we do get into a period of, you know, stable prices, we should be able to get a bit of a bump in that gross profit margin even though the fact that we've been able to achieve what we did in this environment is still pretty amazing to us. And it's the point when we would start to see prices increasing, that's when we should be able to get some type of a spread to our current margins for a period of time.

And then I wanted to follow up because we're starting to hear a lot of mixed comments. You guys made some mixed comments. Jim talked about obviously some further slowdown, perhaps, in Ag and industrial equipment. And just my question is it on the general health of manufacturing in this country and the industrial economy. Are you guys generally getting a little bit more concern that with the dollar, with a lot of moving parts here, that maybe there's some things going on in the underlying economy that are creating some angst among ends users?

Your guess is as good as mine. I mean we just -- we see what we see out there. We know energy is down and we think that will continue for longer period of time than I would have told you two quarters ago. Ag, mining, the heavy Ag, I mean and mining, it's just down and there's a lot of geopolitical things in the future and present that are going to keep it that way. It's kind of an interesting time actually. The demand other than what I just mentioned, it's pretty good. We're -- you know, if the pricing was anywhere near where it should be with the current demand we have and the condition demand we see going forward, not so much in the fourth quarter mostly because of seasonality, we'd be in better shape. Even though we're in good shape now, it's just a matter of the pricing. So we're okay with the demand.

And Tony, we had our semi-annual meeting a couple of months ago. And one thing that was consistent at the meeting, there was like 170 of our managers there, was there really wasn't a lot of sniffling, if you will, about demand, okay, other than the guys in our energy business, they were all at the bar for quite most of the evening. Okay. But demand wasn't really the issue. The issue was pricing. And one thing consistent at that meeting was if we're not, you know, going to be going -- if we're in this environment where prices are dropping so low, okay, we really have to maximize our margins as best we possibly can and given our model with small order sizes, quick turnaround, high value-added processing, they really put the pedal to the metal because they realize that their sales dollars were going to go down, not necessarily their tons because demands reasonable, that they had to make it up in the gross profit dollars. So --

Yes. And I think Tony, there's a comments about some of the specific markets. Of course we're experiencing that to certain extent that at Reliance our diversification strategy that we have tried to build the company around we think helps mitigate that offset because we've got positive markets with growth at the same time that we're experiencing, you know, some potential hesitation in the other markets

I think you guys are obviously doing a lot of the right things and I also like to hear that that you guys continue to be disciplined in terms of the M&A front, so that's very good. I think we'd rather see a buy-back stock if your stock is under pressure. But thanks very much. I appreciate the color.

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

I wanted to dig in a little bit more maybe along the lines of last question in terms of the volume decline year-over-year because I think if you asked us a year ago we would never have anticipated that. So just to understand it, I'm sure some is energy, some is destocking at your customers, some is maybe some other aspects. Can you go through and give us, like, a little more granularity on some of the broader trend and what contributed to the volume decline?

Overall, the volume decline wasn't that bad. You know, tons were down and in the third quarter compared to the second quarter -- only 1.5% which was frankly a little bit of a surprise to us, given the fact that generally third quarter is down somewhere in the neighborhood of 3% to 5% compared to the second quarter. So we felt pretty good about that. So granularity, okay, automotive and our toll processing is doing well, aerospace is doing well, non-res is improving. Albeit slowly, not as quickly as we would like it to. But we're up over last year. And our basic carbon industrial business is doing pretty good. We're still doing strong in the bridge, bridge building, barge, wind tower, transmission tower. Those businesses are all still doing quite well. When you get into the Ag, it gets a lot of press and rightfully so. They're announcing lay-offs and closure of plants at CAT [ph] and all that. But when you get into the large combines and whatnot, that business is really down a lot. And a lot of I think the Ag manufacturers are suffering from is because of the strong dollar. They're not exporting to the extent that they should. However when you get into the mid-sized tractors and industrial lawn equipment and whatnot, we're doing well in that portion of the Ag business. Mining, that doesn't have to really even be discussed. It's been down since its peak in 2011. So Lord knows when that's goings to come back. But that's been a non-event for several years now [indiscernible].

I was just going to point out too it is true that I think we had anticipated some growth this year and we do think is off the markets are growing but probably more slowly than we'd anticipated. But given the pricing environment where we've had prices declining each month, had a what happens is at our customer base, they're only buying the minimum quantities so maybe some of that customer restocking that was built into anticipated volume growth this year hasn't been happening because of the volume, even though the underlying demand is still slowly improving in most areas.

That was going to be my follow-up, just to clarify. So if you hadn't had falling prices all year, what do you think volumes would have looked like or if you hadn't had the energy sector, you know, crashing, what might have volunteered liked like?

Yes, I mean -- it's kind of tough to quantified. I mean energy was about 10% of our sales dollars, not pounds, but dollars and their volumes are down over 40% this year compared to last year. So certainly that took away a bit from us. I don't know if we can quantify what demand would be, but what I think we can say is that with the demand levels that exist which we still think are generally healthy, if it weren't for the imports in the U.S., we think that pricing would be higher because we think the demand is strong enough to help support pricing absent the import activity we've seen.

Okay. If I could just ask one more, I wanted to understand, the timing of the changes in your energy sector exposure and the write-downs there is. Should we have think about this warehouse delivery general and administrate decline that you is he conventionally as kind of a good run rate going forward? Has that all been incorporating as of the third quarter or are more cuts going to be reflected going forward?

And the SG&A line you really don't see much there from the actual impairment charges. Those are mainly non-cash picked up in that impairment line and there'll be a little more amortization expense going forward. Pretax should pick up a bit because of these closures. But SG&A, I mean we've -- the energy businesses have taken out quite a bit already. There are only a couple of locations that we're planning to close and there aren't significant head counts there. We've already I think generally cut expenses. We mentioned down about 38% run rate at our existing energy businesses. So we would expect SG&A on a dollar basis to potentially come down a bit but not significantly from where we were.

We'll continue to be monitor as we always do. Continue to get worse, we'll continue to take the cost down. Bu I can't tell you if that's going to happen.

The next question is from Phil Gibbs of KeyBanc Capital Markets. Please go ahead.

I have a question on the inventory momentum. Are we likely to see more inventory dollar value reductions here in Q4, meaning inventory as a source of cash?

Not to the extent that you've seen it in the second and third quarter. So we would hope to have some reduction in our inventory dollars by yearend. But I would not think that it's going to be close to $120 million and the others that we took out in the third quarter.

Okay. I appreciate that. Is there anywhere on the inventory side where you feel like you're a bit heavy or light? I mean and how does that relate to your end demand outlook potentially for those product there are any?

Yes. I think really the only area that we're a little heavy on remains the alloy products that are going into energy. Even though we jumped on that the fourth quarter very quickly, it's still difficult to lower your inventories when your selling prices are going down and your volumes are going down. We're down 40% basically in energy. So we still have a little bit more inventory for the energy sector than we would like. We're continuing to work that down on a daily basis. But really that's the only area. Our flat roll inventories and all products are turning well. We have long lead times on aerospace key tree plate but that's okay. You know, we do well from a profitability point-of-view on those products. So if we're going to be a little heavy, it would be more on the long lead time items which really the only long lead time items we have in the entire company are the heat replate for aerospace. We're okay on inventory. I'm very, very pleased with our position in inventory as we speak.

Okay.

So we're okay on inventory. I'm very, very pleased with our position in the inventory as we speak.

Okay. And then if I could just kind of piggyback off the Jim this question on the operating expenses. How much of the operating expense reduction in Q3 versus Q4 just specifically talking about SG&A? At least by my numbers it was down by $13 million. How much of that was core take-out versus lower volumes? Thanks.

Most of it was I would say probably core take-out so to speak. I mean we were -- and just general fluctuations. We got the benefit for the full quarter of the majority of the headcount reductions that we took in energy, even though there were some more during Q3 but we got a full quarter's worth of the majority of those. But yes, I don't think there was anything, you know, any isolated specific items in there.

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

Maybe just one more to try and drill down on real demand here in this market because it's been sort of a common refrain that there's buyer hesitancy when inventories are concerned an end so on. I'm just wondering from your just in time customers, is there anything you're seeing unusual outside of sort of normal seasonal trends? This is a short-term focus question so like when you're seeing kind of real-time in October. Is there anything that different from your just in time customers than normal?

No, I wouldn't say so. I think third quarter pretty much panned out on a demand side much what we anticipated. We kind of missed it on the pricing side because we thought it would be more or less stable to up 1% and we had continued to go down. So on the demand with our quick turn-around items, for our customers that are buying smaller quantities and need it tomorrow, we haven't seen any surprises. They're not hearing about any surprises. It's basically kind of business as usual. We're going into the November/December timeframe where. We're going to have less billing days and the holiday's seasons and we anticipate that there's going to be, okay, probably more plant closures in this year's fourth quarter than normal which is reflected on our guidance. Okay? So we're just anticipating that and hopefully we're a wrong. But, you know, how we're. You know, we just prepare for worse and pray for the best.

And then I'm just wondering how we should be thinking about your buy-back pace. I mean, you slowed down a little bit in the quarter from what you had announced in July. I'm just wondering if you can share anything about how you think about it in 2016?

I don't think we necessarily slowed down. And again, you know, we're trying to opportunistically repurchase based on the share price and then also our available cash. So I think we were pretty consistent with the way we executed the share repurchases through the quarter. We do think it's a good use of our cash given the share price that's out there. At the same time, you know, we're also committed to trying to pay down some debt which we were successful and also paying down, you know, over $100 million of debt during the quarter. So we're trying to balance both of those, but depending on how the market treats our stock will depend how active we're in the share repurchases.

Thank you. The next question is from Jorge Beristain of Deutsche Bank. Please go ahead.

My question was just about your M&A strategy given that you guys are about 50% to 60% utilization, the kind acquisition that you're looking to do I'm assuming are sort of new product. But is there any kind of internal harvesting that you can do of your existing facilities to repurpose them to target those markets and would it be a cost savings move to look internally as opposed to doing external M&A?

We're always looking at both. And there's not a whole lot of new different types of products that we can get into very honestly. I think we touch on virtually all metal products in basically every region of the country. And we look at each acquisition on its own merit. We're not out there looking for a titanium customer, competitor to acquire, rather or anything like that. We'll just look at whatever comes in that's profitable and has a great management team. So we really don't have a model where we say we want to get into different products. Now there are preferences, okay. Obviously we would like to be a little bit more heavy in the -- like the aluminum plate business in the southeastern market. But those opportunities will surface when they surface. So I think we're going to continue our M&A activity in the same manner in which we've been doing since we went even before we went public in '94. We'll just see how it goes.

And Jorge, this is Bill Sales and we're expanding. We've got two new locations of AMI that we opened in Turkey and France. We did the acquisition last year of All Metal Services. Both of those obviously aerospace related. So we do like some of those end markets and we'll look at those acquisitions when they're available to us.

Yes. I think also, Jorge, you mentioned utilization and us being about 50% to 60%. And just as a reminder, utilization at the service center level we look at much differently than utilization the way the mills look at it. So being at 50% to 60% kind of a normal capacity rate for us is more about two-thirds or 66% to 67%. So it may not -- we don't at this point we're as maybe underutilized within our facilities as you might think if you're thinking kind of mill targets. So some of our locations certainly like the one servicing auto are running higher than this. Some of our like our non-res might be blow that right now and we expect that business to come back at some point. But to what Gregg said, we do look and we've done some closures recently and some combinations but we're not probably as far off on utilization from the target as you might think.

And the utilization, normally that's rated on seven days a week, okay, 24 hours a day. And we have a few, like, our toll processing operations that are servicing auto appliance and whatnot. They run those shifts seven day as week, 24 hours a day. Our normal service center operates Monday through Friday, okay. Typically it's two shifts running production and one shift doing the loading and whatnot. That's normal for us. So we're a 65% utilization rate during normal to good times is absolutely normal. You'll never hear us say, in my opinion, well, not my opinion, period. You'll never hear us say we're at 80% utilization rate. It's just not going to happen.

And maybe I could follow up on aluminum as well because obviously it's the hot topic and everyone's talking about aerospace exposure now. Can you just quantify or explain a little bit better what exactly you're doing in there by the supplying of the heat treated plate and stuff. Are you guys doing any further conversion or value adding of that metal cutting, sawing, anything like that or are you simply redistributing product mainly from your existing heat treat plate suppliers?

No. Most of what we do is processed. The biggest percentage is in aluminum plate. Very, very high percent like 90%-plus is a plate that we will cut. We also do some pre-machining. And we like that value-added business and are continuing to invest and grow in that area.

And does that come with more sort of fixed price contracts that giving you visibility or is it more like a cost plus so that when you so that you're adding that $300 million revenue, that's like a value add target or could you explain how the margins for that value add service looks going forward?

Yes. Most of that is contractual and so it is more of a fixed price where we have our costs fixed and our price to the end customer fixed. And, yes, obviously the $300 million is what we're estimating the revenue side of that to be. We still do participate in some of that business is spot business, what we call transactional business that would be a customer calling in with an inquiry, we would price it based on that one inquiry.

Sorry, if I could just punch in one last question. I just had a client asking but there was a change in your compensation metrics for the executive management. I think previously you'd targeted about a 13% return on equity and that was recently lowered to 10%. Any comments on why the change?

Yes. I think overall Jorge, when our board reviewed the compensation, the 13% return on beginning equity metric that had been established as target was based on about a 25-year historical average. And I think that our Board believed that the company was doing a lot of the right things and we were performing well at target, that 50th percentile that they equate with target within our compensation peer group. But with the 13% target, we were not being paid that way. So looking at kind of updating the average, looking at current market factors and the way the company has performed, they felt it was appropriate to better align the percentage which they took down to 10% return on beginning equity to really -- to reflect target performance within our compensation peer group.

[Operator Instructions]. And the next question is from Tony Rizzuto of Cowen and Company. Please go ahead.

Karla, I just had a quick question for you on rough feel for 2016 CapEx at this point. And any commentary you can make on working capital as well as we think about 2016?

Yes. So I guess 2016 our CapEx budget, we've been around $200 million on a budget basis the last few years. We've [indiscernible] in this year to. We probably won't hit the $200 million. We'll probably spent more in the $170 million to $180 million range. I think we still see some good growth opportunities out there so I would expect in 2016 that we would probably be pretty close to where we've been recently so somewhere around that $180 million to $200 million level. We haven't gone through the process yet but based on what we see out there, we'd anticipate that. From a working capital standpoint our accounts receivable stays pretty consistent. Inventory is the big item there. Quite honestly, we would hope to have to use cash to build working capital because of prices going up and demand going up. Everything depends on that so we certainly would not expect to throw off the cash that we did this year because as Gregg mentioned earlier, our inventories are in much better shape now than they were early this year which drove part of the strong cash flow. The other element was just the prices have been declining every month so that in and of itself throws off cash from working capital reductions. So we would expect to have positive cash flow next year but certainly not -- given steady up market conditions we're very hopeful for, we would expect it to be much less than in 2015.

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

I had a question on the seasonal cadence on demand. I think you outlined 4% to 5% down. And you said normal seasonality is 5% to 10%. Why do you see it better I guess relative to what you typically see?

Well, I think that third quarter which is normally down 3% to 5% and it was only down 1.5% for us, that gave us a little bit of a guidance that maybe fourth quarter tons are not going to be down as low as the typical years that we've seen over the past five years. And then also because customers are buying smaller quantities, they need it quicker. The quick turnaround has become even more important to them because they're watching their inventories because of pricing going down and whatnot that that will bring in business for us probably a little better because our tonights were down 1.5%, MSCI was down 2.9%. So evidently we're doing something right. And we attribute it to be the money that we spent on capital equipment. We've got excellent quality that's going out I think much better than many of our competitors do because they haven't spent the money on newer equipment. So I think just overall because of the quality that we have, the short turnaround and the smaller quantities which is our sweet spot, I don't think we're going to see as much of a decline in the tons in the fourth quarter as we had seen in other quarters.

And last one and I'll jump off. Jim, I just wanted to clarify something you said earlier. Did you say that you saw construction equipment orders from your perspective or demand for metal picking up? I just wanted to be sure I heard that right.

Yes, I did say that. It's an uptick but in a certain segment. I think big equipment, doing road work, cranes that type of thing.

So basically the heavy equipment, okay, in Ag, we see absolutely no improvement on. We have had a little bit of an uptick when it comes to the mid-size tractors, ancillary equipment that are used in that and lawnmowers, industrial mowers for whatever reason. We're actually selling more metal into that segment than we had last year. And I think Kubota announced like a 10% increase in their volumes this year. So we've benefitted from that. And certainly the equipment that are going into the industrial areas with respect to supporting highway construction and whatnot, we've benefitted in that particular area also. But if you took Ag overall, you know, combined, it's certainly not doing as well as it did and the forecasts are for 2016 to be weaker than they are even this year.

Thank you. And with that, I would like to turn the conference back over to Mr. Mollins for any closing comments.

Okay. Well listen, thanks again for all your support and for participating in today's call. We'd like to remind everyone that in November, we will be in New York City presenting at Cowen and Company's Sixth Annual Global Metals and Mining Conference and at Barclay's Industrial Forum. We hope to see many of you there and thanks again for joining us and have a great day.

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.