Reliance Steel & Aluminum Co. (RS) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Reliance Steel & Aluminum Company’s First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now 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 2016 financial results. I'm joined by Gregg Mollins, our President and CEO; Karla Lewis, our Senior Executive Vice President and CFO; Jim Hoffman, our Executive Vice Presidents and COO; and Bill Sales, our Executive Vice President of Operations. 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 may 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, 2015 under the caption Risk Factors and other reports filed with the Securities and Exchange Commission. The press release and the information on this call speak only as of today's date, and the company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Gregg Mollins, President and CEO of Reliance.

Good morning, everyone, and thank you for joining us today. We were pleased to see that our positive momentum demonstrated throughout 2015, continued into the first quarter of 2016. Once again, strong operational execution by our managers in the field contributed to FIFO gross profit margin expansion. During the first quarter, our FIFO gross profit margin reached 29.4%, up 400 basis points from the first quarter of 2015, and marks the fifth consecutive quarter of gross profit margin expansion. Overall, we are extremely proud of this achievement, particularly considering the challenging metal pricing environment that has existed over the past year, coupled with uncertain macroeconomic conditions that have constrained general economic growth. Importantly, for the first time in well over a year, we’ve begun to experience rising metal pricing for carbon steel products as well as stainless steel flat-rolled products. This pricing improvement, which accelerated towards the end of first quarter, was mainly result of the recent trade case filings by U.S. steel producers. We continued to support these trade actions which seem to be having a positive impact on reducing the overall level of imports in the United States marketplace and on metal prices. We believe this more positive pricing environment contributed to our expanded gross profit margins during the first quarter of 2016. Although mill price increases were announced during the quarter, which we believe to be a very positive development, our average selling price per ton sold decreased by 2.4%, as compared to the prior quarter and was still 15.6% lower than first quarter of 2015. We expect the price increases will have a more meaningful impact on our average selling price per ton sold in the second quarter as the more recent price increases work their way through the market. The rising scrap prices we've seen so far this quarter are another positive indicator for pricing. With respect to customer demand, we experienced a sequential increase in tons sold of 8.9% in the first quarter of 2016, which was slightly better than our expectation of approximately 6% to 8% over the fourth quarter of ‘15. The increase reflected both the normal seasonal increase in shipping volumes compared to the fourth quarter, as well as the additional volume from our acquisition of Tubular Steel on January 1, and once again we outperformed the MSCI industry average increase in tons sold of 6.2% for the six quarter as compared to the fourth quarter of ‘15, which reflects Reliance’s expanding market share. On a year-over-year basis, our same-store tons sold were down 3.7% compared to the MSCI industry average decline of 9.1%. Turning to M&A. As previously announced effective January 1, 2016, we acquired Tubular Steel, a distributor and processor of carbon, alloy and stainless steel pipe, tubing and bar products, based in St. Louis, Missouri. In addition on April 1, 2016, we acquired Best Manufacturing, Inc., a custom see metal fabricator of steel and aluminum products on both a direct and toll processing basis located in Jonesboro, Arkansas. Best has been serving its core customer market since 1990, including tracking, agricultural and energy, and complements Reliance's existing service center network extremely well given the specialty high-margin products and value-added processing capabilities, specifically Best’s fabrication business is highly profitable and an area we are looking forward to expanding. Both of these acquisitions are consistent with our strategy to acquire well-managed metals service centers and processors that provide high levels of value-added processing and specialty products that diversify our existing footprint. We are very pleased to have both Tubular Steel and Best Manufacturing join the Reliance family of companies. Regarding our capital allocation priorities, we will continue to support growth through both strategic M&A opportunities and organic initiatives. Our balance sheet remains strong and has enabled us to return capital to our shareholders through quarterly cash dividends that we have paid consistently now for 57 years. In summary, I'm very pleased with our performance in the first quarter, which is a testament to the resiliency of the Reliance business model in both good times and bad, as well less a continued strong operational execution by our managers in the field. This combination has enabled us to expand our market share, generate strong financial performance and execute our growth strategy and stockholder return priorities. In 2016, we will continue our focus on maximizing our gross profit margin to take advantage of the more favorable price environment, while diligently managing our operating expenses and inventory levels to drive earnings improvement, and balancing our capital allocation priorities allowing for growth and continued stockholder returns. I will now hand the call over to Jim to comment further on the operations and market conditions. Jim?

Thanks, Gregg, and good morning, everyone. My comments today will focus both on pricing and demand from our carbon, steel and alloy products, as well as our outlook on certain key end markets we sell those products into, including automotive, heavy industry, non-residential construction and energy. Bill will then address our aluminum and stainless steel products and related end markets. Before turning to our markets and pricing, I would like to say how proud I am of our employees in the field that helped us increase our FIFO gross profit margins in the first quarter of 2016 by 270 basis points over the fourth quarter of 2015, unbelievable. I'm equally proud of our inventory turns of 4.9x based on tons, which exceeds our companywide goal of 4.7x. Demand for automotive, which we service mainly through our toll processing operations in the U.S. and Mexico, remained strong in the first quarter. The construction of our new facility in Mexico, which will aid in increasing our existing toll processing capabilities is nearing completion and is expected to become operational in mid-2016. Given increased activity processing aluminum for the automotive industry, we are also constructing a new facility in Kentucky and expanding two of our existing facilities. We continued to perform very well, processing both aluminum and steel due to our high quality internally engineered processing equipment that we continually invest in to ensure cutting-edge capabilities. As we’ve mentioned in the past, our toll processing business is not impacted by metals pricing given we do not have the inventory risk associated with taking ownership of the metal, and although our toll processing represents a small portion of our total sales dollars, it represents a larger percentage of our overall profitability. First quarter demand in heavy industry, which includes railcar, truck trailer, shipbuilding, barge manufacturing, tank manufactures and wind and transmission tower remained fairly consistent with 2015 levels. As we discussed during our call in February, we anticipate the Five-Year Infrastructure Bill that was passed in December 2015 should help improve demand trends in the road construction equipment market in 2016. Demand in nonresidential construction is continuing its slow but steady improvement despite volume being well below peak levels. We are optimistic that demand will continue to improve in 2016 and beyond, although at a gradual base. Given our outlook for this market, we've been strategically investing in processing equipment over time to position ourselves to absorb volume increases in our existing cost structure, as well as to perform additional value-added processing for our customers as this market improves. In regard to energy which is mainly oil and natural gas, volume continued to weaken throughout the first quarter due to continued low oil prices and related reductions in drilling activities. As our outlook for energy end market remains weak for the foreseeable future, we will continue to be proactive in managing our expenses to help mitigate the negative impact of our overall profitability. Turning to pricing, as Gregg discussed, we are finally starting to experience some pricing improvement for carbon steel products during the first quarter, mainly as a result of increases in raw material cost including scrap and multiple carbon steel trade cases filed in the U.S. We expect to see a greater benefit from the increased carbon steel prices in the second quarter, which should allow us to increase our average selling price over the first quarter levels. Among carbon steel products, plate began to recover during the first quarter. Plate represents the single largest product of our mix at 11% of total sales, followed by carbon steel structural and tubing. Our results are more heavily impacted by pricing on these products versus carbon flat-rolled products, which represents only 15% of our total sales, with hot-rolled at 6%. Flat-rolled pricing also began to recover during the first quarter with multiple price increases announced by the mills in 2016 after having been under pressure for the entire 2015 year. It’s important to note that although we are experiencing pricing recovery and extended lead times, our suppliers have not yet announced capacity increases. We applaud our domestic suppliers on their production discipline. Base prices for alloy products, the majority of which are sold into our energy end markets 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 in large part due to alloy products going into the automotive market. I will now hand the call over to Bill to comment further on our non-ferrous markets. Bill?

Thanks Jim. Good morning, everyone. Before talking about the markets, I'd like to note that demand for our aluminum and stainless steel products continued to be good through the first quarter of 2016. Our managers have done excellent job of managing gross profit margins through the quarter and we are very pleased with their results. To all from that group listening to the call, keep up the good work. Now on the specific markets. Aerospace continues to be one of our strongest end markets. Sales to the aerospace markets represented approximately 11% of our total sales in the first quarter of 2016. Our same-store tons sold to the aerospace market were up 5.3% compared to the first quarter of 2015. Demand in this market continues to be steady. Build rates for some of the larger commercial planes have been reduced but still remain at healthy levels. These build rate reductions tend to impact demand at the mill level more than service centers. The backlog for orders of commercial planes remains robust and mill lead times are extended. As a result, our outlook remains positive and we will continue to look for investment opportunities to expand our aerospace exposure, consistent with our customers’ growth patterns. The majority of the products that we sell to the aerospace market are heat-treated aluminum products, especially plate, as well as specialty stainless steel and titanium products. Given continued steady demand, we expect pricing for aluminum aerospace plate to be relatively stable with modest pressure on margins for the balance of the year. Since we spoke last with you in February, our sales of common alloy aluminum have increased somewhat from a volume standpoint with most of our products being sold to sheet metal fabricators that support a variety of end markets. Demand for our general engineering aluminum plate is strong, driven by general, industrial and semiconductor end uses. We still anticipate a challenging pricing environment due to aggressive import pricing. Pricing on common alloy aluminum sheet follows ingot and we expect some modest improvement as the Midwest spot price trends up slightly. The Midwest spot price has been trading in the $0.79 per pound range with the Midwest premium in the $0.08 per pound range. Turning to stainless steel products. Demand for our stainless steel flat products, which are primarily sold into the kitchen equipment, appliance and construction end markets continue to be strong. Both price increases in the first quarter of 2016 are in place and domestic mill lead times have extended that nine to 14 weeks. The third increase announced last week for May shipments has domestic mill support [ph]. Pricing for stainless steel products is heavily impacted by nickel prices, which continued to decline in the first quarter of 2016. We expect to see some modest improvement in nickel pricing in the second quarter of 2016. I'll now turn the call over to Karla to review our first quarter financial results.

Thanks, Bill, and good morning, everyone. Our sales in the first quarter of 2016 were $2.2 billion, down $451.7 million, or 17.3% from the first quarter of 2015, mainly due to lower metals pricing, compared to the fourth quarter of 2015, our sales were up $136.5 million, or 6.7%, due to normal seasonal trends of increased shipments, along with the incremental sales from our January 1 acquisition of Tubular Steel. Our average selling price decreased by 2.4% compared to the fourth quarter of 2015, and by 15.6% compared to the first quarter of 2015. We had expected our average selling price per ton sold to be flat to up 1.5% from the fourth quarter of 2015, given mill price increases. However, as Gregg mentioned, the price increases were not immediately absorbed by the market and majority of the increases occurred late in the quarter. Our average inventory cost declined during the first quarter of 2016 resulting in a lower average selling price, even as we increased our gross profit margins. We did not record a LIFO inventory valuation adjustment for the first quarter of 2016. Based on current metal price trends, we expect overall metal prices to be higher at December 31 of 2016, as compared to January 1, which would result in a LIFO charge or expense in 2016. However, given our current expectation of higher metal prices, we anticipate that any LIFO expense would be offset by a decrease in a lower cost to market reserve established as of December 31, 2015. We'll continue to update our expectations quarterly based upon our inventory cost and general metals pricing trends. Our gross profit margin of 29.4% in the first quarter of 2016, increased from 25.7% in the first quarter of 2015, and from 28.7% in the fourth quarter of 2015, due to the pricing discipline of our employees in the field. Our average selling price declined less than our inventory cost declined as we continued to receive in lower cost materials during the beginning of the first quarter. Our continued growth in higher margin specialty products and value-added processing, along with our focus on superior customer service also contributed to continued sequential improvements in our gross profit margins. Our SG&A expenses in the first quarter of 2016 included the expenses of Tubular Steel. On a same-store basis, our SG&A expenses decreased by $4.6 million from the first quarter of 2015. As a percent of sales, our SG&A expenses were 20.8% compared to 17.1% in the first quarter of 2015, and 20.4% in the fourth quarter of 2015. The increase as a percent of sales was mainly due to lower metal prices. Our strong gross profit margins and effective expense control resulted in an operating income margin of 6.0% for the first quarter of 2016, which was an improvement from 5.7% in the fourth quarter of 2015, yet below 6.5% in the first quarter of 2015, again mainly due to lower metal prices. Our effective income tax rate for the first quarter of ‘16 was 14.4% compared to 31.7% in the first quarter of 2015, and 27.1% in the fourth quarter of 2015. Our tax rate was significantly lower for the quarter as we favorably resolved certain tax matters that had been under examination. We currently estimate our full-year 2016 effective income tax rate at approximately 27%, down from 31.1% in 2015. Net income attributable to Reliance for the first quarter of 2016 was $92.2 million or $1.27 per diluted share, compared to $101.3 million or $1.30 per diluted share in the first quarter of 2015, and $68.6 million or $0.94 per diluted share in the fourth quarter of 2015. On a GAAP basis, our net income included $17.6 million or $0.24 per diluted share favorable impact due to the lower tax rate. As such, our non-GAAP net income attributable to Reliance was $74.6 million or $1.03 per diluted share, which was above our expectations, mainly because of our stronger than anticipated gross profit margin. This is compared to $101.3 million or $1.30 per diluted share in the first quarter of 2015, and $63.3 million or $0.87 per diluted share in the fourth quarter of 2015. Our earnings release issued earlier today includes a reconciliation of our non-GAAP adjustments. Turning to our balance sheet and cash flow, we generated $155.4 million of cash from operations during the first quarter of 2016, a period during which we typically use cash reflecting continued strong execution by our team. On the working capital front, we continued to manage our receivables well with our accounts receivable days sales outstanding rate at March 31, 2016 at 42.3 days, in line with our historical range. Our inventory turn rate at March 31 was 3.9x based on dollars and 4.9x or 2.4 months on hand based on tons. Our focus on inventory reductions in 2015 resulted in successfully exceeding our companywide goal of 4.7x based on tons. At March 31, 2016, our total debt outstanding was $2.13 billion, an increase of $205.4 million from December 31, as we funded our purchase of Tubular Steel with borrowings on our revolving credit facilities. Our net debt to total capital ratio was 33.4% and our net debt to EBITDA ratio was 2.6x. And as of March 31, 2016, we had $887.1 million available on our $1.5 billion revolving credit facility. We will continue to execute on our capital allocation strategies of both growing the business and returning value to our stockholders, while also using available cash to continue reducing our outstanding debt balance. In addition to the two acquisitions we've completed so far in 2016, we spent $34.4 million on capital expenditures during the first quarter. Our 2016 CapEx budget of $180 million is focused primarily on organic growth, specifically through purchasing new equipments to increase our value-added processing capabilities and opening new facilities. In the first quarter of 2016, we paid quarterly cash dividends totaling $29 million. We did not repurchase any shares of our common stock during the quarter, mainly because of our improved stock price. We will however continue to monitor stock price performance and cash availability and will opportunistically repurchase shares as appropriate. Now turning to our outlook. We are optimistic about metal pricing in the second quarter of 2016 given recent mill price increases and are confident in our ability to execute well in this environment. We also expect continued slow growth of the U.S. economy. As a result, we estimate tons sold to be flat to up 2% in the second quarter of 2016, compared to the first quarter of ‘16. And we expect our average selling price per tons sold in the second quarter of ‘16 to be up approximately 3% to 5% from the first quarter. As a result, we currently expect non-GAAP earnings per diluted share to be in the range of $1.15 to $1.25 for the second quarter of 2016, up from $1.03 non-GAAP earnings per diluted share in the first quarter of 2016. In closing, we are very pleased with our strong start to the year, which is reflective of our proven ability to manage the controllable aspects of our business. We congratulate our managers in the field for their hard work as our operational execution contributed to our fifth consecutive quarter of increased FIFO and gross profit margins. This improvement, coupled with our effective working capital management has helped our cash generation remain strong, enabling us to continue to grow and diversify. 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. We'll now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Tony Rizzuto of Cowen & Company. Please go ahead.

Thank you very much. Hello everyone, Gregg and Karla. And I guess my first question is just to pursue a little bit on the operational execution. It was clearly phenomenal, 29.4%, and I'm wondering how much further juice can you squeeze from that going forward?

That’s a tough question. If you were told all of the management team here that we were at 29.4% first quarter about 90 days ago, we probably would have thought you were crazy. But our guys in the field - there has been a big push from our VP of Operations, Bill, Jim, Steve, Mike on gross profit margin over the past 16 to 18 months, and fortunately our guys in the field have listened and executed. So as far as going up over 29.4%, I really couldn't say that that's probably a good model to use. But as far as being over our typical 25% to 27%, I think that's fair to say that probably 28% is more achievable.

In the current market environment we would expect to be able to maintain at least 28%.

Yes, exactly. So it was a great one and hopefully we can maintain that, but I wouldn't completely count on it. And I hope anybody that's listening to our call from the Reliance team ignores everything I just said. We’d like to go up.

I would expect that you would say that to them privately Gregg. Just a follow-up then, is the same-store tons sold year-over-year, obviously you guys are outperforming the industry, the MSCI data. And if you're looking at the breakout between alloy and carbon et cetera and aluminum and stainless, is the majority of that year-on-year decline on a same-store basis - would the majority of that be related to energy?

Certainly a good chunk of that, Tony, would be energy-related. And then you just see I think in some of the - maybe heavier carbon products, you might see a little bit of a downturn there, but it definitely is impacted by the reduction in energy.

So we've seen, I don't know, about 60%, 70% increase in oil prices, but rig activity continues to contract. Are there any reasons or any reason to be hopeful a little bit as you see things or inventory is just so heavy out there that just no room for improvement maybe this year?

Hey, Tony, this is Jim.

Hey Jim, how are you?

I mean, not really. I mean, it’s - we’d say - we don’t use hope and strategy around here. We kind of just manage what we are dealing with, and there is really nothing that looks great on horizon. However when it does come back and it will, Reliance will be there to serve our customers, but there is really nothing right now that I can point to. It’s right around the corner, I mean, [indiscernible] price being where it is. We had seen pretty good [indiscernible] last weekend maybe some upward movement in the price and seem like the rest of the world trying to do. So we’re just going to deal with what we’re seeing right now.

We’re not counting on any improvement really, Tony, in 2016 period.

Okay. And I am wondering just on the toll processing because you guys are doing a lot of great things there and you talked about construction of a new facility in Mexico. It’s nearing completion. You're expanding some facilities in Kentucky. I know you talk about it's a small portion of total sales, but is there some way that you could give us or frame it for us in terms of the what it is equivalent to in terms of overall profitability. And maybe with these expansions from a volume metric standpoint, if you could frame it in terms of X percent over what you currently have in place, just to help us understand what that may be and how you're looking at the business in terms of its ability to increase your profitability, and what is the high margin product for you?

Yes, Tony, we’re pretty hesitant to give too much detail on individual parts of our business. And I know you guys would love to hear more details on that. But certainly the profitability, as we've said, is meaningful to us, so certainly the growth there will have a positive impact on our earnings as we move forward. But as far as quantifying that, that's not something that we're really going to do. The aluminum - the increase in processing, a lot of that has been in aluminum. Mexico is not geared towards that, but we have seen quite an uptick which kind of moved us - help to move us from that 2% in our total sales dollars to 3% in total sales dollars last year, and we expect to see continued processing or still processing majority of our tons are still carbon tons that we are running through there. So the increased aluminum is meaningful but its incremental increase.

And I think it's important to realize too comment that Karla just made is that we really haven't seen any decline whatsoever on our carbon side of our toll processing operations. So it's not - we have not seen - I'm not saying it's not going to happen, but we have not seen a displacement of carbon steel, okay, because of the expansion into aluminum and that’s - I think that's important for everybody to realize.

Okay. And I guess as a good segue talking about aluminum and steel together, I’d remiss if I didn't ask you about - and get Bill involved here too about the section 201, the petition by the United Steelworkers on the aluminum side. And just your general thoughts, I mean, the industry in terms of the steel mill executives have been very confident about the trade legislation going through, but then at the same time we're hearing more vocal commentary about the section 201, and I just wonder how you see this. Obviously your major buyers from all these players, the mills, and I'm just wondering from your vantage point, how you're sizing this up and how you think this could play out? And is the 201 necessary to ensure these gains that have been made thus far?

Hey Tony, it’s Bill.

Hey Bill.

Hi, how are you doing? We look at that. I think we are seeing. If you look at the Midwest premium or Midwest spot price, we've seen some improvement this morning I think it’s at 82-plus, and I think that - from what we are hearing, a lot of that’s driven by the anticipation of the 201 case. I think if you look at the levels where we've seen, the Midwest spot price, it's been at levels that’s very difficult for a lot of the producers to be profitable, and I think that's what's driving this whole action. But in terms of understanding all of the details around it and the logic behind it, we haven't really gone through that detail. But I think we are seeing some positive impact from a pricing standpoint, but I'm not sure that we could count on that long-term. So from what we hear and read, we see the ramp up now. We may see that back off some too. So we are just watching it closely.

And I guess, Gregg, you mentioned that you were - so far you were very pleased with the discipline on the part of the integrated mills, and it seems to me that that's going to be critical going forward in this whole thing and it seems unreasonable to think that the mills on a steel side would not continue to be disciplined while this all this trade legislation is going through. Is that a fair assessment do you think?

I agree with what you just said, Tony. I just - I think the mills are being driven more by profitability than volume. Their production is going up, I think it's over 70%, may be 71% in production capacity, which is above like 62% in January. But they are not ramping up. They are not starting up facilities that they’ve shut down in the past, so at the end of the day, I think that the mills are going to continue their discipline actions and keep the prices up.

Thanks very much. I appreciate all the comments. Thank you.

Okay. Thank you, Tony.

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

Yes, good morning.

Good morning.

Good morning, Phil.

I had a question for, Bill, just on the comments on the aluminum side. Did you say the pricing momentum in the aerospace plate is moderating, or is that still moving higher? I just - I might not caught all that?

Yes, Phil, it's basically pricing. We look at it - we think pricing is going to be stable with some modest pressure on margins. If you look at today, mill lead times are still extended. They are a little bit shorter than they were a quarter ago. And plate, while it's still relatively tight, it's a little less tight than it was a quarter ago. So I think our outlook right now is it’s a still very positive environment. I think pricing is going to be stable, but there will be a little more pressure on the margin side.

Okay, I appreciate that. And Jim, what's your broader outlook for heavy equipment based on what you're seeing right now?

I'd say flat at a decent low, where demand is really not a problem in it for us right now. It’s always been the price and the price is moving up. So we’re good with the demand we’re seeing, and just got to be the same way throughout 2016.

Great. And just one quick one, on the import offers in general, Gregg. What are you seeing there in terms of the import offers across your varying degrees of products, just your big buckets, carbon, aluminum and stainless, and how competitive or lack thereof the foreign mills are being at this time? Thanks.

I'll let Bill address the stainless and aluminum outlet, but on the carbon side, Jim and I actually were having the conversation with a few of our guys in the field earlier this morning, and the offerings that we are getting on basically all the carbon outside whether it be structural or flat-rolled etcetera are very minimal. The spreads are not to the extent that you would even want to risk going forward and find tons from offshore, but the offerings themselves to your question are very few and far between as compared to even six months ago.

Yes, Phil, on the aluminum side on general engineering plate, we are seeing still aggressive import pricing, and so that's one area where there still is a fairly significant gap between the domestic price and the import. But there is still a fairly strong requirement for domestic plates. So I think the domestic mills are still benefiting on the general engineering side from that product. On common alloy, the gap there is stayed fairly consistent. We are still seeing that. Import is a big part of the common alloy market. Stainless, we'd probably seen a little increase in the spread between domestic and import with these price increases on the stainless side, but that spread is still in a reasonable area and we feel very positive about the May increase. It seems to have domestic mill support and I think it will have support in the marketplace.

Thanks for all the answer I guess. Appreciate it.

Sure.

Thank you. The next question is from Aldo Mazzaferro of Macquarie. Please go ahead.

Hi, good morning.

Hi, Aldo.

Couple of my questions got answered already, but on the import question, you just answered on the carbon steel imports that you are seeing few and far between. Could you just say whether there is any new sources of imports that you might be seeing that we haven't seen in the last few years, like country I mean?

Yes. I'd say not recent but in the last year and a half, we've seen like Japan more involved in the carbon steel plate arena than we have probably in the last 15 years before that. Russian, what are we seeing on the Russian side, Bill?

Yes, I mean, Russians seems to becoming recently. I can tell you one thing, there is a lot less Chinese offers right now.

Is that Russian on - the Russian is carbon plate also?

Yes.

And on the flat-rolled side, you're not seeing anything to replace the Chinese or the...

I mean there is other countries, Korea, Italy. I mean, it's the same as it has been, but the significant impact right now is there is less Chinese offers. Gregg mentioned Japan, but they've been out of the game for seems like years. Then last year, they started coming back in and their offers are there, and they are still there. It's the usual suspects.

Great, okay. And just one follow-up, Gregg. I'm trying to figure out how your gross profit margins would not expand in the second quarter. If I am reading it right, you’ve got - you're going to get a little higher price, but you had a 2% or so lower price in the first quarter versus the fourth. And I'm just wondering, do you think the mills are going to actually squeeze you on the upside that they'll get their cost up to you or your mill cost will be greater than 3% to 5% higher?

No, I don't really think that’s anything to do with the mills, okay. It's just the customer base. When you have 270 basis point increase in one particular quarter, I mean that's - I've never seen that happen in our company and I've been with Reliance over 30 years. So to feel as though you can get an additional increase over that 270 basis points I think is a little bit optimistic.

Yes, and Aldo, we are always conservative and kind of the base cost so to speak of the metal has been fairly low. Our average sell price in Q1 trended down a bit because our average inventory costs trended down even more. So we think our gross profit margin or percent might feel low pressure. We would generate more gross profit dollars if we had higher selling prices which would fall to the bottom line. So even if there is a little squeeze on the margin, if we have higher selling prices, that's positive. And we've also talked about the increase in value-added processing that we are doing at Reliance now because a lot of the investments and things that we've made, and our charge so to speak for the value-adds doesn't fluctuate with metal prices. So if metal prices go up, that processing portion of the charge of the price becomes a little less, so that's why we are just a little hesitant on the guidance on the gross profit margin that you could see a little impact from the higher metal cost.

Great. So great job in this quarter anyway I have to say. I appreciate it.

Thanks Aldo.

Thanks Aldo.

. :

Hey guys. I was just wondering if you could point to what specific metal led you to have your sort of below guidance quarter-over-quarter reduction in price. Was it aluminum? Was it carbon steel? What was it that really led to that kind of quarter-on-quarter pricing miss?

Yes, I think, Jorge, from the guidance that we had given, I think probably the majority of the tons we sell are carbon, so that's kind of the most meaningful. And with some of the increases and the momentum at kind of the end of the fourth quarter, the beginning of first quarter, I think based on that we felt we were going to get a higher sell price. At the same time, there were more price increases especially for carbon during the first quarter than we had anticipated. It just didn't kind of run through the market as quickly as we thought it might.

And carbon steel represents about 52% of our tons sold.

Of our sales dollars.

Yes, our sales dollars, I beg your pardon. I was much more on the tons side. But so that's really what moves the needle for the most part would be carbon. So I have to agree with Karla there that as goes carbon as goes our volume and our margin.

Okay, thank you. And just to drill down to what you think is happening psychologically in the market with your customers who seem to be kind of - as all of us I'm sure sort of calling deer in the highlights with just rapid increase in, at least HRC prices, but is that motivating any sort of change in customer behavior where you’re now getting people to start scrambling a little bit to put in orders that maybe they were thinking of differing. Can you just talk to a little bit of the psychology or people kind of sitting here and watching this price hike and just taking it in stride and seeing how it's going to play out ultimately?

You have to realize that our average order size is about $1,600, so we are dealing with a lot of small to mid-size job shops. That's probably the vast majority of our businesses is not with large OEMs, and so therefore they are really not buying in advance. We have not seen or heard from our guys in the field that anybody is building inventory in anticipation of higher prices. So I'd have to say basically its business as usual with our customer base and we don't see anybody really trying to build inventories ahead of price increases.

And, Jorge, we spend a lot of money over the last five years on value-added capacities, and I think psychologically and realistically when you go through times like this, our customer base, they don't expand their value-added or internal equipment as much as they had. So they look to us to do more processing, and that's a good thing. We anticipated that and we’ll continue to spend money along those lines. We can offer more things to our customers.

We think that was the biggest driver of our margin improvement for the past five quarters is that we’ve, as Jim pointed out, over the last five years, we spent close to $1 billion on CapEx and over 50% of that was in growth orientated initiatives. We are pushing processing throughout the globe actually but in particular in North America, and it's yielding us higher margins.

Great. Thank you.

Thanks Jorge.

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

Yes. Hi. Good morning, guys.

Hi, Timna.

Good morning.

I wanted to ask a little bit to follow-up on your last comment about growth oriented initiatives. It seems like coming off the Steel Dynamics call and looking at Nucor’s results, they’ve got huge cash awards that we haven't seen in years and they also talk about acquisitions and expanding into value-add and processing. So just wondering if you could characterize the M&A environment now and if you anticipate running against them in their endeavors?

We really haven't run into any competition from the mill level on any of our M&A activities. I would imagine there everybody is trying to get into value-added I would guess. But them coming into our space, we have not seen that and frankly don't anticipate that to happen.

Okay, cool. Thanks. And then, Karla, could you elaborate, I didn’t follow - I'm not sure I followed that you mentioned about the buyback plans and you had expanded your buyback program but then commented on not having bought them in the last quarter. Can you just elaborate on that again, please?

Yes, in the first quarter of ‘16 we were not in the market and so we didn't repurchase any of our shares, mainly because of where the share price was. We saw the improvement in the first quarter, although certainly there is still room to go. But we opportunistically repurchased based upon our stock price and our cash availability and just chose not to repurchase during the first quarter.

Okay. Got it. Thanks very much.

Thank you. At this time, I would like to turn the conference back over to Mr. Mollins for any closing remarks.

Okay. Well, listen, thank you very much for your support and for participating in today's call. We want to thank you very much for that, and just wishing you all of you a great day. Thanks for being with us this morning.

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.