Greeting and welcome to the Reliance Steel & Aluminum Company Third Quarter 2017 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow formal presentation. [Operator instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Brenda Miyamoto. Thank you. You may begin.

Thank you, operator. Good morning and thanks to all of you for joining our conference call to discuss our third quarter 2017 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 President 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, 2016 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 as we discuss our third quarter 2017 results. Continued strong execution by our managers in the field drove the third quarter gross profit margin up 28.0%, solidly within our target range of 27% to 29%. Demand in the quarter was stronger than we had anticipated with our tons sold down only 1.2% from the prior quarter. We had expected our tons sold to decline 3% to 5% as a result of the typical seasonal trend of lower shipping volumes due to customer shutdowns and vacation schedules, as well as one less shipping day in 2017 third quarter as compared to the second quarter. On the whole, customer sentiment remained positive throughout the third quarter of 2017. Although many of our businesses experience the normal seasonal trend of lower shipping volumes compared to the second quarter, certain of our businesses servicing the energy and non-residential construction markets experienced an increase in tons sold. While there are uncertainty in the marketplace from the pending Section 232 investigation continues, the level of import has been declining from the elevated levels reached in the second quarter. Solid demand, along with reduced import levels in the third quarter, combined to support stable to higher average prices with the exception of stainless steel products. This resulted in our average selling price remaining relatively flat compared to the prior quarter. Hurricane Harvey and Hurricane Irma impacted certain of our operations in the coastal regions of Texas, Louisiana and Florida in the third quarter. First and foremost, the safety of all Reliance employees remains our top priority and we are extremely grateful to report that none of our employees were injured in these storms. Our thoughts and prayers continue to be with all who suffered personal losses as…

Thanks, Gregg, and good morning, everyone. Before I begin, I'd like to take a moment to thank our folks in the field for the continued hard work. I especially like to recognize our teams that were directly impacted by the recent hurricanes. We are thankful everyone is safe. We are extremely proud your hard work and commitment in continue to support our customers in these regions as they ramp up their businesses. I'd also like to highlight our strong gross profit performance in 2017. Our third quarter gross profit dollars for the third highest in our company's history, exceeded only by our first quarter of 2017 that was our highest ever, and our second quarter 2017 that was our second highest ever. Our combined gross profit dollars for these three quarters of 2017 resulted in $132.8 million more gross profit dollars than in the same period of 2016. We are very proud of that. Now I'll discuss demand in pricing for our carbon steel and alloy products as well as our outlook on certain key end markets, we sell those products into. Bill will then address our aluminum and stainless-steel products and their related end markets. Demand for automotive, which we service mainly through our toll processing operations in the U.S. and Mexico remained strong throughout the third quarter. Increased demand in aluminum processing offset moderate declines in processing of carbon steel due to normal seasonal customer closures including certain extended closures due to model changeover. Over the past year, we've made investments to expand our facilities to support automotive demand for both carbon and aluminum processing. We completed construction of our new facility in Kentucky in the second quarter of 2017, and we are very pleased with this performance today. This facility is currently operating at approximately 50% of…

Thank you, Jim. Good morning, everyone. First, I would also like to thank our folks in the field for their hard work and commitment to Reliance. To our employees, customers and their families in the regions impacted by the hurricanes, our thoughts and prayers continue to be with you as you recover from these events. I'll now review pricing and demand for our aluminum and stainless-steel products before turning to key industry trends in the markets we sell these products into. Our aerospace performance was very strong in the third quarter and remains one of our top performing end-markets. Today lead times for aluminum aerospace plate have shortened slightly to approximately 7 to 9 weeks. The backlog for orders of commercial planes remains strong. And we expect build rate should continue to improve in the fourth quarter led by a single aisle planes. We continue to see an increase in activity for many of our defense customers and our production ramp remains on path with regard to our participation in the five-year $350 million Joint Strike Fighter Program. Further our entry into the aerospace market in India, through our All Metal Services subsidiary in the UK, remains on track to become operational by the end of the year. We are maintaining our positive outlook for the aerospace market and look forward to increasing our market share in this area as overall demand continue to grow. Turning to the semiconductor market, activity remains strong, especially in the U.S. and Pacific Rim regions. We maintain our positive outlook for the balance of this year as well as into 2018 based on solid demand trends and an encouraging outlook from our customers. Moving on to pricing, the majority of our sales into the aerospace market consist of heat treat aluminum products, especially plate,…

Thanks, Bill, and good morning, everyone. Our net sales in the third quarter of 2017 were strong at $2.45 billion, up 12.1% from the third quarter of 2016, with our tons sold up 5.3%, and our average selling price per ten sold up 6.8%, compared to the second quarter of 2017, our net sales were down 1% with tons sold down 1.2% and our average selling price up 0.2%. The combination of overall higher prices and increased shipping levels across all of our commodities resulted in $264.9 million more sales dollars in the third quarter of 2017 compared to the third quarter of 2016. Our gross profit margin in the third quarter of 2017 was 28.0% down from 30% in the third quarter of 2016, and down slightly from 28.4% in the second quarter of 2017. The pricing environment was more stable in the third quarter of 2017 as compared to the third quarter of 2016, when we experienced no price increases that we were able to pass-through before receiving the higher cost metal in our inventory, resulting in enhanced gross profit margins. We're proud of our gross profit margin in the third quarter of 2017 that was well within our target range of 27% to 29%, and produced $685.5 million gross profit dollars, the third highest in Reliance's history trailing only the first and second quarters of 2017. As a result of higher metal prices in 2017 compared to year-end 2016, we expect a net LIFO inventory valuation charge or expense for 2017. However, we have updated our estimate of our annual LIFO expense to $35 million from our prior estimate of $40 million due to softer metal pricing in the third quarter of 2017, and we had previously anticipated and are further expectation that current pricing will continue…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] And our first question is from Novid Rassouli from Cowen and Company. Please go ahead.

Good morning, guys. Thanks for taking my questions. So first on the - on import. I know that you guys historically imported about 5% of your steel. I just wanted to see, given the dynamics of the nearing of international and domestic price spreads, are you guys importing even less than that, right now? Just curious what the dynamics are there?

On the steel front - this is Gregg. We are importing less than the 5% that we generally do in a typical quarter here. How much less? Probably, a couple of percent less. But, yes, we're - the spreads are narrow and the opportunities to buy with short lead times from the domestic producers, we're buying less from offshore and more from our domestic producers, yes.

Thanks, Gregg. And then, just as far as the price increases that we've seen. Going to your press release about kind of the lower activity that you see and not seeing the benefits of that until the first quarter of next year. I mean, is the lower activity going to keep you guys from pushing those through? Or is it just - I'm just trying to get a sense of acceptance from your customers and how that will flow through your P&L?

I think, Jim can comment on this a little further. I think that you're going to the fourth quarter, and I think for maybe the past three or four or five years, we've seen some increases in the fourth quarter, which before that was relatively unusual. Our customers are - they're cautious fourth quarter business slowdowns, less billing days, et cetera, et cetera. So they're less likely to accept an increase as they would when they go into the first of the year. But major resistance our average order size is around $1,500, $1,600 a piece. For us to get increases in our customer base that are non-contractual to basically all spot is a lot easier than others that are participating with 800 pounds gorillas and involved in contracts. But I think those price increases were happy that they're - the mills are increasing them, we look forward to them holding. But we think, we'll see them more in our inventories more into the early part of 2018.

Only thing I'd add is. First off, we think the - our domestic partners they deserve those increases. So we're happy to support that and we always pass increases along immediately to the market.

Got it. Thanks, guys. And then just switching gears to the aero side, I mean, it seems like it's been a very strong end-market for you guys. We have seen some air pockets this year related to some of the destocking in the supply chain. First, I just wanted to see, if that had impacted you guys at all? Or if you guys saw any of that? And then the second thing is, you mentioned about potentially growing this end-market for you guys. Just wanted to see, what ways that you see the best suits you for increasing exposure there? Thanks.

Yeah, Novid, it's Bill. We do see - I mean - we've heard a lot about stocking and destocking. For us, that really doesn't have much of an impact on our business. If you - if our business if we see, where demand is improving, we're going to buy more, if we see demand softening, we're going to buy less. I think, it will impact the mills more - and that comes more from the OEM side of the business. But if you look at our business only aerospace side, it's been strong and consistent throughout the year, it's an end-market we really like, we think there is opportunity for growth. As we mentioned, we've got a location in India that will be operational by the end of the year. And we'll continue to look at those opportunities and look to improve our market share in that end-market.

Novid, this is Gregg. On the inventory side, our inventory turns on the aerospace business is no different than it was a year ago, two years ago. We're very consistent in our inventory turn, pattern in aerospace. About 50% of our aerospace business is contractual, so we have a little bit of more visibility than we do on our normal type businesses. Okay, but nonetheless, we listen to our customers very carefully. We turn our inventories. And we as a company have not destocked, restocked, no stocked or any other stocked, period, okay. We just do what we do every day of the week and we're pretty consistent. So all that terminology coming from the mill on the destocking thing could affect them, it probably does. It has absolutely no impact on Reliance Steel.

Got it. And thanks for taking my questions, guys. Nice quarter.

Thanks, Novid.

Okay, thank you.

[Operator Instructions] And our next question is from Phil Gibbs from Keybanc Capital Markets. Please go ahead.

Hey, good morning.

Good morning.

Hi, Phil.

Hey, Gregg, I had a question on October daily sales momentum and in terms of what you're seeing there, maybe relative to September so far.

It's pretty consistent with what we experienced in the September market, which is good. It's solid. Basically, the attitude from our customer base is very encouraging. So we're having a good ride right now. It's nice to see energy back in the fold, creating earnings for us. Non-residential construction, we had a good quarter in that, our tons up in both of those markets which helped to offset 70% of our business, really add a little bit less, more seasonal impact, which we expected. We were pleasantly surprised that non-res and energy reacted as positively as they did from a demand point of view. So October, it's following the same guidelines as we saw in September. And we're - we feel pretty good about going into the fourth quarter and our guidance of $0.90 to a $1. And we feel confident that it will be within that range.

And, Gregg, just a - I guess a good follow-up to that right now, you say non-res and energy may be a little bit better than what you may have anticipated, call it, three months ago. But we see plate prices falling, beam prices falling, merchant bar prices falling. I think that's alluded to in your guidance on some of the pricing softness.

Right?

Why do you think that is, and particularly in plate, why do we think that is?

Well, if you look at the plate end-markets, okay. There's a tremendous amount of plate that's consumed in railcar, shipbuilding, barge, tank. And those heavy industries are off. Okay. Some of it had to do certainly with oil. Okay, in particular railcar, shipbuilding and the tanks. Okay. So those markets have declined much greater than some of the other markets that we participate in. And it was just, in plate, I'd be perfectly honest with you. It's one of our largest single commodities that we have in the entire company, so we're very - we keep a close eye on plate. But the fact that matter is, those markets are down. We're not losing market share. And they'll be back. But right now plates, it's having a time off. It's just the way it is. As far as the beam pricing going down 80 bucks, there's many mills going down 60 bucks, there was published base prices of there, that were a little bit out of whack with the reality in the marketplace. And the mills felt as though evidently that maybe they were losing some market share. And so, it's an attempt to kind of shore all that pricing up domestically. They chose to make that horrendous move of, okay, which we weren't exactly standing on our tabletops and applauding by the way, okay. Devaluation of our inventory is not the greatest thing that ever happened to Reliance. That's for sure.

But hopefully it created a bottom.

Yeah, there you go.

I appreciate that, and I got a quick one for Karla before I jump off. Thanks a lot. Karla, is it implied within the guidance that the gross margin should be reasonably stable quarter on quarter, that's my first one. And then, just a clarification, I think you said, you had some equipment sales in the third quarter and SG&A of $4.7 million, is that correct? Those are my questions. Thank you.

Yes, on the gross profit margin outlook for the fourth quarter we do anticipate it to stay pretty steady with where we were in Q3. If we see some downward pricing pressure that could squeeze it a little bit that we don't think it would be anything too significant. And then, as far as the equipment sales, yeah, it was $4.6 million pre-tax gain that was an offset to our SG&A expenses in the third quarter.

Thanks very much.

Thank you.

Thank you.

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back over to Mr. Mollins for any closing comments.

Thanks again for your support and for participating in today's call. We would like to remind everyone that we will be in Palm Beach, Florida in late November presenting at Credit Suisse Industrial Conference and in New York in early December presenting at Cowen's Energy & Natural Resources Conference. We hope to see many of you there. Thanks again for joining us and have a great day.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.