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Executives

David H. Hannah – Chairman and Chief Executive Officer

Gregg J. Mollins – President and Chief Operating Officer

Karla R. Lewis – Chief Financial Officer and Executive Vice President

Analysts

Timna Tanners – UBS

Michelle Applebaum – Steel Market Intelligence

Mark Parr – KeyBanc Capital Markets

Timothy Hayes – Davenport & Company

Yvonne Varano – Jefferies and Company

Sal Tharani – Goldman Sachs

Luke Folta – Longbow Research

Anthony Rizzuto – Dahlman Rose & Co.

Wayne Atwell – Casimir Capital

Richard Garchitorena – Credit Suisse

Bob Richard – R&S Research

Reliance Steel and Aluminum Co. (RS) Q3 2009 Earnings Call October 22, 2009 11:00 AM ET

Operator

Welcome to the Reliance Steel and Aluminum Company's Third Quarter conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, David Hanna.

David H. Hannah

As usual Gregg J. Mollins, our President and Chief Operating Officer and Karla Lewis our Executive Vice President and CFO are also here with me today.

This conference call may contain forward-looking statements relating to future financial results. Our actual results may differ materially as a result of factors over which Reliance has no control. These risk factors and additional information are included in the company's annual report on form 10-K for the year ended December 31, 2008 and other reports on file with the Securities and Exchange Commission. After the completion of this conference call a printed transcript including regulation G reconciliations will be posted on our website at www.rsac.com in the investor information section.

For the nine months ended September 30, 2009 our net income amounted to $56.1 million compared with net income of $416.5 million for the same period in 2008. Earnings per diluted share were $0.76 for the nine months ended September 30, 2009 compared with earnings of $5.65 per diluted share for the nine months ended September 30, 2008. Sales for the 2009 year-to-date period were $4.04 billion compared to 2008 nine month sales of $6.58 billion.

For the 2009 third quarter, Reliance reported net income of $41.8 million or $0.57 per diluted share compared to a loss of $5.8 million or $0.08 per diluted share for the 2009 second quarter. And compared to net income of $152.5 million or $2.07 per diluted share for the 2008 third quarter. Sales for the 2009 third quarter were $1.24 billion unchanged from the 2009 second quarter and down 52% from 2008 third quarter sales of $2.57 billion.

Our 2009 third quarter results improved significantly from the 2009 first and second quarters. Overall, compared to the second quarter our average daily sales were flat with tons sold and average prices per ton sold, essentially unchanged. We did see, however, a change in the downward trend that had occurred each month during the first seven months of the year. Our august and September average daily sales increased 7% and 5% respectively compared to the prior month.

These increases were supported by increases in our tons shipped per day of 5% and 4% again compared to the preceding month. While we do not believe that these improvements are evidence of any meaningful recovery and real demand, they do add support to the argument that customers are buying again. Not restocking, but at least buying to support the existing low levels of demands for their products.

In addition to the slightly better market for our products, we were able to increase prices to our customers as mill pricing strengthened. Again, mostly in August and September. This, combined with our inventory costs being more in line with current replacement costs, resulted in an increase in our 2009 third quarter gross profit margins of about six percentage points over the prior quarter. This increase in gross profit margins was responsible for the improvement in our 2009 third quarter operating results.

In total, we sold about 866,000 tons of metal during the 2009 third quarter compared to 873,000 tons for the second quarter. By major product group, we sold 727,000 tons of carbon steel products during the 2009 third quarter and that was down 1.8% from the prior quarter with average selling prices down 2.8%. Aluminum sales were 47,000 tons and that was up 1.2% from the second quarter and average prices were down 1.8%.

Stainless steel sales were about 42,000 tons, that was up 5.5% from the prior quarter and average prices were up 6.6%. Alloy sales were 33,000 tons that was up 5.5% with prices down 2.5%. Our aerospace businesses continue to be the top performers and we saw some increased activity in the energy, oil, and gas sector after it slowed a bit during the second quarter.

We've also seen some improvement in the electronics and semiconductor area that we believe will continue into next year. As you already know, business levels relative to private, commercial, and industrial construction are the most challenging and we don't see any improvement in the near-term. We'll remain hopeful that some infrastructure work will begin to appear, as we've seen some increased quoting activity in that area.

Starting in the fourth quarter of last year, we focused our efforts on maintaining our profitability, maximizing cash flow through working capital management, paying down debt and reducing expenses. and we're now satisfied that we've accomplished what we've set out to do. During the first nine months of 2009, we generated record cash flow from operations of $807 million due in part to our profitability but mostly from our reduction in working capital.

We've paid down over $1.2 billion of debt since September of 2008 leaving our net debt to total capital ratio at only 28% as of September 30, 2009. And on a same store basis, our operating expenses for the 2009 nine months are down $209 million or 24% compared to the 2008 nine month period.

Our inventory position continued to improve as we reduced our FIFO inventory by $92 million during the quarter. We still expect some further reductions through the end of the year. In our tons on hand, at September 30, 2009 represented 2.5 months based on September's shipments.

Looking forward, we expect shipments in the fourth quarter to be a little less than in the third quarter due mainly to normal seasonal conditions. Pricing in general is expected to be flat to down slightly compared to the third quarter. Gross profit margins may also contract some as we don't expect support from addition mill price increases like we had in the third quarter.

[Inaudible] surrounding business conditions later in the fourth quarter we're not comfortable providing fourth quarter earnings guidance at this time. We will, as the quarter progresses, communicate any meaningful information with regard to our operations as it becomes available.

On October 21, the Board of Directors declared a regular quarterly cash dividend of $0.10 per share of common stock. The dividends payable on January 6, 2010 to shareholders of record December 4, 2009. The company has paid regular quarterly dividend payments for 49 consecutive years.

In closing, we're still in some challenging economic times, but we seem to have bottomed out as business conditions have improved a little from the low points in July. Our management teams have done a remarkable job positioning the company for the eventual recovery, and we stand on solid footing ready to take advantage of any attractive business opportunities.

Thank you. I'll turn the call over to Gregg for some additional comments on our operations and market conditions.

Gregg J. Mollins

We are pleased with our results in the third quarter as compared to what took place in the second quarter. Average daily sales and volume hit bottom in July and slowly began to inch its way up in the August/September timeframe. It is way too early to call this a trend, especially heading into the fourth quarter. But as they say, pray for the best and prepare for the worst and that is what we intend to do.

We continue to encourage our business units to reduce their inventories and once again, they responded by taking out $92 million worth of inventory during the quarter. Since the first of the year we have reduced our inventory by over $700 million creating outstanding cash flow. Managing gross profit margins has been our greatest challenge this year. Massive destocking and liquidation of inventory during the first half resulted in major pressure on our selling prices and our gross profit margins.

Fortunately, the producers of most all the products that we sell implemented price increases beginning in June, which we were able to pass along to our customers prior to receiving the higher cost material. This contributed to a 6.5% rise in our FIFO gross profit margins in the third quarter. Compared to the second quarter, we increased our FIFO margins to 23.2% from 16.7%. This was huge and we give all the credit to our managers and their teams for the courage to risk volume for profit after coming out of a prolonged period of liquidating inventory in our industry.

What were the bright spots in the quarter? Obviously pricing was number one, but there were a few industries that performed better than others. We saw improvements in bridge building, barge manufacturing, tank builders and infrastructure rebuilds. We continue to do well in aerospace, in particular, military and events. Electronics and semiconductor equipment manufacturers, build rates are improving as we speak, and non-residential construction continues to lag and we do not expect this to change any time soon.

As for pricing, we believe carbon steel will have its challenges in the fourth quarter due to lackluster demand, seasonality issues, and increase in plant closures during the holidays and the real number of actual shipping days in the quarter. Producers matching production to demand will be of vital importance to maintaining reasonable pricing levels. Any significant price reductions will only drive profits down and not gain one extra ton of steel.

Pricing following the ebb and flow of scrap would be beneficial for all. We shall see. Hopefully exporting will be even more attractive for our domestic producers in the coming months. Unlike some others, we believe our domestic producers do exert pricing discipline, given the hand that they are dealt and there will not be any payback from Reliance.

We believe aluminum [inga] is in a comfortable range in the mid $0.80 to $0.90 a pound range on the Midwest Spot Market. This range allows producers and service centers to make reasonable profits and is low enough to help stimulate demand.

Common alloy aluminum coil remains in tight supply, primarily due to the idling of some capacity at the mill level. This has resulted in several conversion price increases that have held in the market. [Heat treat] plate supporting the aerospace markets is readily available and demand is expected to remain soft for the foreseeable future.

Stainless surcharges have rebounded nicely of late hitting bottom in May at $0.34 a pound and closing for November at roughly $0.76 a pound. In addition, there have been three base price increases announced since April all of which have held. We expect pricing to level off at what we believe to be at more than respectable levels in the quarter.

In closing, it is still tough out there and quarter four is still typically challenging and we expect this one will not be any different. Producers matching production to demand and exercising pricing discipline is of the utmost importance to all of our success.

Something for all of you to consider, with the drawdown in inventories throughout the entire supply chain to historical lows, along with the reduction of capacity at the producer level and their ability to export, as well as reduced imports due in part to the weak dollar. Well, it would not take much of an uptick in demand to get this ball rolling and very quickly. Just a thought.

Now I'll turn the program over to Karla to review the financials.

Karla R. Lewis

In the 2009 third quarter, our tons sold decreased 26.4% from the 2008 third quarter and 0.7% from the 2009 second quarter. On a same store basis, which excludes our 2008 acquisitions, including the PNA Group that we acquired in August of 2008, our 2009 third quarter sales were $1 billion with our tons sold down 32.9% from the 2008 third quarter and up 2% from the 2009 second quarter.

Our average selling price per ton sold in the 2009 third quarter was down 34.1% compared to the 2008 third quarter and flat with the 2009 second quarter. And on a same store basis, our 2009 third quarter average selling price was down 29.5% from the 2008 third quarter and down 1% from the 2009 second quarter.

For the first nine months of 2009, our sales of $4 billion were down 38.5% from our record 2008 sales of $6.6 billion for the same period. This includes a 12.7% decrease in tons sold and a 28.6% decrease in our average selling price per ton sold. And on a same store basis, our tons sold were down 35.2% and our average selling price was down 17.5%.

According to MSCI data, tons sold for the first nine months of 2009 were down about 41% for the industry compared to 2008. Our average selling price declined, mainly because of the significant cost reductions for most carbon steel products that we sell from the peak levels reached in 2008.

Our 2009 product mix also contributed to our lower average selling prices. Carbon steel products, which typically sell at lower prices than most of our other products, represent a 56% of our 2009 nine month sales compared to 53% of our 2008 nine month sales, mainly due to our August 2008 acquisition of the PNA Group.

Our 2009 gross profit margins improved significantly in the 2009 third quarter compared to the prior quarters of the year, mainly because our current inventory costs are substantially in line with our current replacement costs. Earlier in the year, we were selling higher cost inventory into a declining price market that significantly pressured our gross profit margins.

In the 2009 third quarter, we were in an environment of improving prices and we began purchasing more metal from mills at current replacement cost as our inventory levels better matched our shipment levels. Our 2009 third quarter gross profit margin was 28.7% compared to 24.3% in the 2008 third quarter and 22.8% in the 2009 second quarter.

For the 2009 nine months, our gross profit margin was 24.6% compared to 25.9% in 2008. And because of the significant decline in our inventory costs and quantities in 2009, especially for carbon steel products, we reported an LIFO adjustment in the 2009 third quarter that was a credit for income of $67.5 million compared to LIFO expense of $79 million in the 2008 third quarter.

In the 2009 nine month period, we recorded an LIFO credit, or income of $217.5 million compared to LIFO expense of $136.5 million in the 2008 nine month period, and our current estimate for our 2009 annual LIFO adjustment is a credit, or income of $290 million and our LIFO adjustment is included in our cost of sales.

Because of the significant decline in business activity levels beginning in late 2008, we have aggressively reduced our warehouse delivery, selling, general and administrative expenses. Our 2009 third quarter expenses are down $76.1 million or 23% compared to our 2008 third quarter expenses. And our 2009 third quarter expenses represent a 20.2% of sales compared to 12.7% in the 2008 third quarter.

Our cost structure is highly variable with about 60% of our expenses personnel related. In 2009 we reduced our headcount by just over 1,600 or 15%, with most reductions occurring in the first six months of the year. Since September 30, 2008 we have reduced our headcount by over 2,400, or 21%.

In addition to the headcount reductions, we have several employees working reduced hours resulting in additional savings. Further, throughout our workforce employees have a significant portion of compensation tied to profitability. Because of the lower profitability levels in 2009, our compensation expense has declined.

Our 2009 depreciation and amortization expense of $89.9 million increased 28.7% over 2008, mainly due to our 2008 acquisition of the PNA group and due to the depreciation of our capital expenditures made since September of 2008.

Our 2009 third quarter amortization expense increased from the 2009 second quarter mainly due to the write-off of $1.6 million of capitalized financing costs related to our term loan that we paid off and terminated in late September. Our operating income for the 2009 third quarter was $74.3 million, or 6% of sales, compared to $269.2 million, or 10.5%, in the 2008 third quarter and $5.4 million, or 0.4%, in the 2009 second quarter.

Although lower sales volumes combined with compressed gross profit margins significantly reduced our operating income margins in 2009 compared to 2008, our operating income in the 2009 third quarter is the strongest we have experienced this year.

Interest expense for 2009 of $51.9 million declined 8.4% compared to 2008. In August 2008 we significantly increased our borrowing for the $1.1 billion purchase of the PNA Group. However, we have been able to quickly reduce our borrowing level because of our strong cash flows over the past 12 months as we have aggressively reduced our working capital levels to better match current business activity.

Our effective income tax rate for the 2009 nine month period was 31.1% and it was 31.6% for the 2009 third quarter, compared to 37.6% in the 2008 period. Our lower rates are mainly due to lower taxable income levels in 2009.

In the first nine months of 2009, we generated a record $807.2 million of cash flow from operations compared to $115.4 million in the 2008 period. In the 2009 third quarter, our cash flow from operations was $125.9 million. Our accounts receivable balance decreased $266.5 million in 2009. Our average accounts receivable days sales outstanding rate at September 30 was about 42.5 days compared to 42 days at December 31, 2008 and down from 43.5 days at June 30, 2009.

In the first nine months of 2009, we wrote off $16.3 million of customer receivables as uncollectible. Our full year 2008 write-offs were $8.1 million. Our allowance from collectible accounts at September 30, 2009 was $21.3 million, which we believe is adequate to absorb any further losses.

Our inventory turn rate for the first nine months of 2009 improved somewhat to 3.5 times compared to 3.4 times in the first half of 2009. Our 2008 inventory turn rate was 3.9 times. As of September 30, our inventory tons on hand were down 32.8% and our FIFO inventory balance was down $709.8 million, or 42.5%, from December 31, 2008.

In the first nine months of 2009 we spent $55 million on capital expenditures. Our 2009 capital expenditure budget is $95 million and we also continue to pay our regular quarterly dividends, which is about $7.3 million per quarter. Our outstanding debt at September 30, 2009 was $1.07 billion down from $1.77 billion at December 31, 2008 and $2.28 billion at September 30, 2008.

Over the past 12 months we've paid down over $1.2 billion of debt with cash flow from operations and we've built cash of about $88 million. Our net debt to total capital ratio at September 30 was 28.3% down from 41.4% at December 30, 2008 and 48.1% at September 30, 2008.

And the covenants in our debt instruments primarily relate to maintaining a debt to capital ratio of less than 60% and an interest coverage ratio of at least three times, and our interest coverage ratio at September 30, 2009 was 3.3 times.

On September 28, 2009, we amended our $1.1 billion credit facility mainly to adjust our interest coverage ratio requirements. With the amendment our pricing was adjusted to market rates and restrictions were placed on certain uses of cash. The adjustments to our financial covenant and cash restrictions are in place until June 30, 2010.

With the amendment of our credit facility, we also extended our term by one year from November 2011 to November 2012 for $1.02 billion of our commitments. Concurrent with the amendment and extension of our credit facility, we also paid of the remaining balance on our term loan of $444 million with $194 million of cash on hand and $250 million of borrowings on our term loan.

We have $146.5 million of debt obligations coming due before our credit facility expires in November 2012 and we are comfortable that we will have adequate cash flow and capacity on our revolving credit facility to fund our debt obligations as well as our working capital, capital expenditure, growth and other needs.

Thank you and we will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Timna Tanners – UBS.

Timna Tanners - UBS

I really wanted to reconcile what David said in the beginning regarding the inventory position 2.5 months on hand. I just was a little surprised because that's higher than what we've seen with MSCI. So, if you could help us understand that.

And along the same lines, I was kind of surprised that you talked about working down inventory further into the fourth quarter and then Greg's comment about how we could see the ball rolling quickly with the supply getting drawn down. So, how do you reconcile working down inventory if you're concerned that there could be a sharp change in market conditions into next year?

David H. Hannah

Timna, I think first off we don't anticipate it that there's going to be a quick uptick in the fourth quarter or maybe even early in the first quarter because typically that doesn't happen. March is kind of the month that is the big catalyst and that's what we have looked towards. But that doesn't mean that we wouldn't see some improvement over the lower activity in November and December of this year that would occur in January, say, of next year. And we even saw that last year when things were deteriorating. We saw January pick up.

I think that we still have 2.5 months on hand with respect to tons and that's based on September shipments. The turn number that Karla gave you is based on an annual amount and it's based on dollars as opposed to tons. But with the pricing changes this year, we've tried to really manage our inventories with more tons in mind and what that represents.

We still have some areas where we need to work down some tons. Some of our businesses are turning 6, 8, 10, 12 or more times depending upon their product, but we have some that are still turning below where we would like them to be. So, those are the places where we believe that we can still get some more money out of our inventories, more tons out of our inventories.

Also, the dollars that we're thinking will come out of inventory are mainly due to even if the tons stay the same we're replacing those tons with cheaper prices today than what we're selling at this time. So, the net effect of that is to have inventory reduced.

In terms of being afraid of what happens when the market ticks up if we're low on inventory, we just don't think we're low on inventory. We are used to running our company with – I mean, before some of the acquisitions we've made with two months on hand, we always had a target of six turns. But since the Jorgensen acquisition and the PNA acquisition and the nature of their products, I think our sights are more towards the 5 to 5.25 turns, which is about 2.3 or 2.4 months on hand.

And we just feel that with our supply being almost exclusively domestic, certainly today, and the relationships that we have with our mills that we're not going to have a problem getting metal. Gregg, you might have some.

Gregg J. Mollins

Timna, you saw the price reductions that were announced last week in carbon steel products. We think that scrap has a better potential than not of going down again in the December timeframe. So we're anticipating some reduction in our costs of goods going forward through the quarter. Because of that, we're going to keep our inventories lean so they don't get hurt as bad if we maintain the present level. So that's one of the reasons for us looking at reductions in inventory.

Again, every year we have a very, very strong cause to get our inventories down to record levels by December 31. This year is no different. We're going to continue to do that. My remarks with regard to some improving fundamentals out there or possible improving fundamentals out there, were more directed towards what would be taking place some time in the first part of the year, or second part of the first quarter I should say.

So I think the stars aligned that it's possible that we could see some very, very positive things happen with respect to an uptick in pricing provided we get just a small uptick in demand. So my comments were not directed towards the fourth quarter.

Karla R. Lewis

Timna, also just quickly on reconciling to the MSCI data, I think you need to remember that the MSCI data has quite a bit of flat-rolled carbon inventory in it that influences their number and at Reliance flat-rolled carbon makes up a very small portion of our inventory.

Gregg J. Mollins

I was just going to follow on what Karla said, our carbon turn we have way over six in terms of our carbon flat-roll. So that would be a bit less than two months on hand for sure.

Operator

Your next question comes from Michelle Applebaum – Steel Market Intelligence

Michelle Applebaum – Steel Market Intelligence

I guess what Gregg was saying is that you were hoping for a pickup in the late first quarter. You're talking about the normal seasonal pickup that we general see starting in February?

Gregg J. Mollins

Yes.

Michelle Applebaum – Steel Market Intelligence

Okay, I just wanted to clarify that. Is there anything in particular going on that makes you think that that would happen this year or are you saying you have visibility until just about January at this point and don't see a pickup yet, but it could come after the visible period?

Gregg J. Mollins

Our visibility really is day-to-day by the nature of our business, so we have little visibility other than the conversations that we have with our customers who generally have a backlog as compared to our companies for the most part not. But we're seeing more quoting activity. Our customers are basically very cautious about their approach to the fourth quarter. But there is some encouraging signs from their end that things will get better.

Well, what does that mean, getting better from what part? Where's the basement at? So I think that there is a potential for not only the seasonality improvement, but there might be the potential for some just extra demand kind of coming about in that March/April timeframe. So we're hopeful that's the case, and if that is the case, I don't there'd have to be much of an uptick for us to see a fairly significant increase in pricing and lead times extending out if that should take place.

Operator

Your next question comes from Mark Parr – KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

One thing I think I missed, Karla, you mentioned comments about charge-offs in the third quarter, or you said your reserve was $22 million.

Karla R. Lewis

Yes.

Mark Parr - KeyBanc Capital Markets

What's the change there relative to the end of the second quarter?

Karla R. Lewis

It's down about $500,000. It was like $22 million down to $21.5 million, but that was the reserve, Mark. So our write-offs in the quarter were just over $5 million.

Mark Parr - KeyBanc Capital Markets

We we're looking, the SG&A number looked like it picked up a little bit more than what you might have indicated maybe a month or so go. I'm just wondering if there's anything unusual in the SG&A number that might not repeat in the fourth quarter, or what color you could give us as far fourth quarter SG&A is concerned.

Karla R. Lewis

So we were up around $3 million to $4 million in SG&A expenses Q3 to Q2. A little bit of that was related to a reserve that we increase a little bit just for some potential legal cost. And then the other part of it was that because we were fortunate enough to increase gross profit margins and profitability at some of our companies, we were paying some commissions and small bonuses in the third quarter that we didn't see in the second quarter. So for fourth quarter, it should be I would say more similar to a Q2 number.

Mark Parr - KeyBanc Capital Markets

Then as far as the tax rate for the fourth quarter, should I think about a 32% kind of a number?

Karla R. Lewis

You know, Mark, that's a good question. Yes, I'm looking at probably 32%. We will have our true-ups at the end of the year. We typically fourth quarter see a little bit of a fluctuation kind of like LIFO where we true everything at the end of the quarter, but I think 32% is a reasonable assumption.

Mark Parr - KeyBanc Capital Markets

And then the true-up on LIFO you made implies about a $72 million to $73 million LIFO credit for the fourth quarter, is that right?

Karla R. Lewis

Correct.

Mark Parr - KeyBanc Capital Markets

Okay, so that's a little bit lower than what we had, but not that much.

Karla R. Lewis

Yes, basically it was before $75 million down to $72.5 million based on our current annual estimate of $290 million. And again, when we get to the end of the fourth quarter that will get trued up, and so we might come in at $288 million we might come in at $310 million. We don't know, but it will be the actual amount as of that time.

Mark Parr - KeyBanc Capital Markets

If I just could ask one more just real quick question, and this will be more for Gregg and Dave. I wonder if you are seeing anything from a mix standpoint. You had talked about a little bit of FIFO margin pressure relative to 3Q, and that's kind of normal. I didn't know if there was anything on the mix side that might make that worse or make that a little better. Is there anything that we can take away from that standpoint?

David H. Hannah

I don't think we're anticipating, Mark, any change in the mix from the third quarter. There is nothing really different that we're expecting in the fourth quarter other than your typical less number of shipping days, lesser number of shipping days.

Mark Parr - KeyBanc Capital Markets

I was thinking about in terms of that perhaps continued weakness on the [inaudible] side and some up side on electronics and some of the defense aerospace businesses.

David H. Hannah

Yes, and that's kind of an extension of what we're seeing right now. The aerospace business has been the strongest of what we have and we expect that to continue through the fourth quarter. It may soften a little bit, but it's sill going to be our best performer.

I think the oil and gas and energy side looks to be pretty consistent. The semiconductor and electronics is actually accelerating a little bit. So we would expect the business in that area to be a little better in the fourth quarter, particularly on a daily basis when you factor in the number of days.

Gregg J. Mollins

Yes, the regions that are affected there primarily are California and the Northeastern markets.

David H. Hannah

And then as far as the non-res/infrastructure, we're just anticipating that it continues to limp along just like it is currently. So no real change, but just kind of bumping along.

Mark, we should say we haven't said yet that we are seeing that public projects are out there. So, in addition to what Gregg had mentioned on the bridge work and barge work and those kinds of things, that there is activity. We're also seeing a fair amount of activity in schools and hospitals and other municipal projects that are really financed with bond funds that have been raised specifically with those projects.

So despite the fact that the state of California isn't in great shape and a lot of the other states are not in very good shape either, there are these bond funds that are out there and they're in place and they're ready to be spent and they are being spent. So, we are seeing activity in that end of the non-res section.

Mark Parr – KeyBanc Capital Markets

Just one final point of clarification, your sales per day probably increased as the quarter progressed, because July was so weak. And so when we think about the fourth quarter, should we think about the September number carrying through or should we thing about the number perhaps coming back down in December to where it was in July?

David H. Hannah

We hope not. Not on a daily basis I don't think, Mark, because we've actually – the margins are better, the prices are better today than they were in July. Despite the fact that we may have some slight pressure if scrap comes down, but that's kind of normal price changing that we're used to dealing with in our industry and in our company on a regular basis.

Gregg J. Mollins

I think what happens is, Dave, the only difference is how many days do people really believe –

David H. Hannah

Yes, and we're talking on a daily basis, Mark, and it depends again like Gregg said, December you can count the days between Christmas and New Years as legitimate shipping days, but are they really? But I think you know that, so the revenues per day that we had during the last quarter I mean they were down in July compared to June, which we had put out in our July release.

But then our average sales per day were up about 7%, as I mentioned earlier, in August over July and on a daily basis up a little bit over 5% in September compared to August. But it all comes out in the quarter to be flat because the second quarter went down, down, down.

Operator

Your next question is a follow-up from Michelle Applebaum – from Steel Market Intelligence.

Michelle Applebaum - Steel Market Intelligence

I wanted to ask you, you said something in your prepared remarks about hoping that the mills keep prices the same and I was just wondering, could you repeat that Gregg? You went really fast.

Gregg J. Mollins

I guess what we're trying to say is that as long as – I think I went over about the evidence level of the scrap. Just recently, as you know, last week there was a price discount announced on many of the carbon steel products a $30 a ton discount, which followed scrap to the T. I think if we continued to do that that would be very healthy for everyone in the metals business.

And I just don't believe if there was any radical move, as there was last year on one occasion in October, and if there was another couple of them done in the first half of this year, which really generated absolutely no tons for anybody. The tons were still there. I don't think anybody's order book improved in any way, shape or form. It's just that we all bled a lot more because the discounts were so significant and that it gained absolutely except red ink.

I think really that was my point. I'm hopeful that the mills will do the same thing going forward because I think we all anticipate scrap will go down one more time this year and it would be nice, comforting I should say, that if we just leveled it off.

David H. Hannah

Just limit any price adjustments to whatever happens with the scrap. So, essentially what he's saying Michelle, is we'd like not to see any base price adjustments, other than just what happens with the scrap surcharge.

Operator

Your next question is a follow-up from Timna Tanners – UBS.

Timna Tanners – UBS

Just wondering, should we interpret the direction of the cost cutting and the overhead of maybe being more, or should I say less to do there. Do you think you've seen most of the cuts to the overhead that you think that you'll see?

Karla R. Lewis

Yes. Timna, we had also commented that at the end of the second quarter that we thought we were pretty much through that. We cut pretty deep into our workforce, so we think for current demand levels we think we're at a reasonable rate with not much more to take out. If there would be a significant drop off we would have to reassess that, but we don't anticipate that at this point.

Operator

Your next question comes from Timothy Hayes – Davenport & Company

Timothy Hayes – Davenport & Company

Just wanted to further ask on the FIFO inventory reduction that you expect in Q4. You said that you expect to bring that down further. In relation to Q3, since Q3 was brought down by $92 million, do you expect that to be smaller than what you would choose in Q3?

Gregg J. Mollins

Yes. It's not going to match that. I think every quarter has been going down and down and we're getting pretty close to bottom, although we do believe that there will be some. I'm not comfortable giving a number with that though.

Timothy Hayes – Davenport & Company

Sure. It seems like that would be the case given that metal prices started to move higher in the summer months. So, assuming that it's going to be smaller and the question is by how much, do you then expect your LIFO inventories to actually go up in value from Q3 to Q4?

Karla R. Lewis

Based on the way that we record our LIFO adjustment, no. We basically said our current annual estimate is $290 million, which we have to bring in to income [routably] over the year. Based on our actual calculations of LIFO, we're basically at that point and anticipating that in real activity in the fourth quarter, it's kind of a net push because some of the higher cost inventory from the mill prices that were announced in the third quarter we'll receive in the fourth quarter.

But we'll also continue to reduce our quantities and we had some higher cost inventory small amounts still in there. So, we're looking at kind of a net push, even though based on the accounting rules, we expect to bring in about $72.5 million of income from LIFO in the fourth quarter.

Operator

Your next question comes from Yvonne Varano – Jefferies and Company.

Yvonne Varano – Jefferies and Company

Just a little bit of follow-up on that and I would guess that will all that going on we would probably see your gross margins come down a little in 4Q from what we saw in 3Q?

David H. Hannah

I think I mentioned that, yes, Yvonne, that we wouldn't be surprised that margins might come down a little bit from the level that we just reported for Q3. So, in Q3 we have the support with the mill price increases, which always helps on our margins and I think those increases we don't think will be there during the fourth quarter.

And we're not that concerned about the decreases and the impact on the margins because they're not that big, or at least those that we anticipate if what happens is what Gregg is hoping to happen. So, yes, the margins might tighten just a little bit.

Yvonne Varano – Jefferies and Company

Gregg, I know you mentioned regionally, California and the Northeast. We know the Midwest is pretty weak, but any commentary you could offer on some of the other regions?

Gregg J. Mollins

Yes, and that was actually specifically directed to the semiconductor and electronics, just so we're clear on that. But, no we're seeing just about the same activity, Yvonne, throughout all the different regions within the country. There's really no region that's incredibly busier, and I wish there was actually, but it's pretty consistent.

We have a little bit in the Pacific Northwest where it's a little bit more difficult than others. But Midwest is holding up, Southeast is holding up California is doing okay. I mean it's all relative I guess but I guess if you were to put a brush on it they're all pretty much close to one another by way of average daily sales profit margins, expenses and etc.

Yvonne Varano – Jefferies & Company

Sure. And then I just wanted to ask on plate specifically whether you think you're going to see the pricing pressure on that product going into year-end because I've heard that it's holding pretty well.

Gregg J. Mollins

It has held pretty well. We don't expect – if any product let me put it this way, if there's any product in the carbon steel area that has more strength than others it would be carbon steel plate. And I believe the mills I mean I'm not a mill executive or anything but I would say that it's probably one of their sacred cows.

They probably make a pretty good profit margin on the plate I would guess, and if that was the case and we were a part of that team we would want to keep that up as best we possibly could, too. So I don't think the pressure there is going to be as great as it would be based on some other products. I hope not. It's a good product for us, too. Trust me.

Operator

Our next question comes from Sal Tharani – Goldman Sachs.

Sal Tharani – Goldman Sachs

Goldman Sachs. Just wanted to get some color on your volume for the quarter which appears to be a little weaker than we what thought because activity in the third quarter really had picked up. I see that the service center shipments went up also 6% granted a lot of it was flat roll.

But is that something particular happen that even though August and September was so strong that July fell off sharply or didn't see much fall of in the beginning of the second quarter which held up the volume the second quarter much better?

Gregg J. Mollins

Sal, I'll mention something and then Dave can jump in here. We made a concerted effort within our company in the third quarter. We met with all of our managers, okay, early in July and said you know liquidation of inventory and all that has been a necessity for the nine-month period prior to the beginning of the third quarter and right now we've got to get back in the saddle again and start increasing prices and selling things for a profit rather than liquidating our inventories.

And that means that we're going to be sacrificing some volume. And if that's the case we've done it before. We're back to managing our company for profitability purposes not for liquidation purposes so I think the reason – the key reason for us to lose some volume in the third quarter compared to the second quarter was exactly what I just stated.

We were more profit-driven. We walked away from business that we would have taken if we had to get rid of inventory and we took the high road and increased our margins by 6.5% on a FIFO basis, a LIFO basis, a FIFO basis – I beg your pardon. And I think we made a heck of a lot more money with that increase than the slight decrease that we had in volume. Is that fair, Dave?

David H. Hannah

Yes.

Karla Lewis

Yes and I think Sal, also you just have to remember our mix as you said a lot of the pickup was from flat roll and we've only got 10% to 11% of our volume in covered flat roll products. We do have a lot of our business with the non-risk construction market which we know there's pressure on that.

But you also have to look back at the second quarter and during that quarter our volume on a per day basis was declining. Every month got worse April, May, June; July actually got worse than June and was our low point and then we did start to see, even with our focus on gross profit margins, we did start to see some volume pick up in August over July and September over August.

So we were actually happy with the volumes that we saw during the third quarter and they were a little better than what we had expected.

David H. Hannah

And then when you put that into what Gregg said our focus on – change in focus on trying to make some money and less on cash flow, I mean when you look at the average daily sales. Why we think third quarter was real positive is you look at average daily shipments and revenue dollars and in the first quarter it was down 28.4% compared to the fourth quarter which is unbelievable.

And then in the second quarter compared to the first quarter we were down 21.5% in sales per day and that's normally our strongest quarter. And then in this third quarter we were actually even. We were up 0.03% but that in our mind was a great sign that particularly when you look at the months in the quarter the changes that we saw in August and September.

Sal Tharani – Goldman Sachs

Can you – Dave you made a comet that we know that service centers haven't build too much inventory. We can see the data but you also mentioned that you don't think customers or end users are building much inventory. Can you give us some color? Do you think that most of this demand increase has been actual final demand increase in the market?

David H. Hannah

Well I think from our shipments I think that's been true because our customers for quite some time have been doing what we've been doing and that's living out of their inventories and now they're starting to order again.

Certainly far from their – whatever their normal order patterns were in the past. But at least they're ordering something now where they either have holes to fill and because they've run their own inventory down.

And they are still doing something, so even to match their order patterns with the lower levels of demand that they have for their products is a positive thing for us. Where for quite a while I mean the same thing was going on there as we were doing. They just weren't ordering.

Gregg J. Mollins

We had customers that were off 50%, 60%, 70% okay in the first half of this year compared to the first half of last year. And it wasn't because we were losing market share. It was because they were assuring us that that they had parts in stock already machined and whatnot that they were told by OEMs they needed to hold onto so they were basically not buying anything, shipping what they had already produced.

And now they're getting back into that mode where all of a sudden the last – basically last two, three months they've actually been ordering for purchases that they need to manufacture something rather than ship inventory out of stock.

David H. Hannah

We've heard a lot of this restocking word that's being thrown on out there and I guess it kind of depends upon what your definition of restocking is. In our minds restocking is kind of whole sale restocking of your shelves.

And we don't see that going on certainly at our company. We don't see it going on in our industry and we don't see our customers doing that either. But are we buying more and are others in our industry buying more from the mills?

Yes, because we've worked our inventories down and we've bought from each other for the better part of nine months. And our customers are doing the same thing so there's not a wholesale restocking going on, but there is some increased order activity because of them having worked through their own inventories.

So I guess the long answer to your question is that yes, I think the activity that we've seen relates to demand, kind of the new low levels of demand that we're seeing right now.

Operator

Your next question is coming from Robert Moffat – Longbow Research

Luke Folta – Longbow Research

This is Luke Folta from Longbow Research. I just had a question regarding your margins in the quarter. Just trying to get a feel for what the impact from the increased selling prices I'm just trying to normalize margins for the quarter.

Gregg J. Mollins

That's a tough one for us to answer because at the same time that the prices were kind of at least lending support to our sell prices that the increase in mill prices. Probably a bigger factor in our margins was actually the reduction of our inventories and the reduction of the high cost inventories in particular.

So anything to add to that Karla?

Karla Lewis

Well, I'm not going to give you a number but we had talked about in the second quarter how we had started to see our FIFO [first] profit margins improving every quarter, a lot of it because of our inventory costs being more in line with current cost. That trend continued in each month of the third quarter basically our six percentage point increase inside the first profit margin was spread out evenly July, August, September.

So you can factor in what you think was happening with mill pricing during that period. We don't expect from an inventory cost standpoint to necessarily continue that trend of 2 percentage point improvement a quarter. Part of that was coming from the kind of mill price increases that were out there. So I think you can make your own assumptions to kind of level off.

Gregg J. Mollins

Yes, our FIFO gross profit for the quarter was 23.2% and that was up from 16.7% in the second quarter.

Karla Lewis

Correct.

Gregg J. Mollins

And 23.2% is, somewhere near there, I would guess, would be sustainable. It could be a little less, it could a little better.

Karla Lewis

And in a more normal environment, 23% FIFO GP margin is low, but we're not in a normal environment yet.

Luke Folta – Longbow Research

Yes, I guess I was just trying to get to the point where you guys probably aren't going to give a whole lot of that gross margin improvement that you achieved a quarter back.

Karla Lewis

We hope not.

Gregg J. Mollins

We better not, yes.

Luke Folta – Longbow Research

And I just had one more follow-up regarding just the overall environment for M&A, have we seen any improvement there or any more willing buyers, or any color you can provide?

Gregg J. Mollins

Luke, there's really not much activity out there. There are some things that are being marketed, just two or three things that are out there. There is nothing that we've seen that is attractive to us. I think there are more distress situations, and those are not the kinds of companies that we like to acquire. So from our perspective for what we like, there's virtually no activity out there at this time.

And we think that it's probably going to stay like that for at least six months after we see some real demand improvement. And so if we start to see some better real demand improvement late in the first quarter of next year, hopefully, then sometime in the second half of next year we would expect some M&A opportunities to present themselves, but nothing right now.

Operator

Your next question comes from Anthony Rizzuto – Dahlman Rose & Co.

Anthony Rizzuto – Dahlman Rose & Co.

Most of my questions have been covered already, but I wonder, we read and hear so much about the tightness in credit out there. I was wondering if you guys could comment about how the tightness in credit may be affecting your customer base. And then I've got another question as well.

Karla Lewis

Yes, Tony, we've seen certainly some examples of some of our customers not being able to get their credit increased or renewed. Those were probably some of the weaker customers. I don't think we've seen it at the level that it's been as much of an impact as you might believe from different media reports that are out there.

We have seen this time, our write-offs are up. We have seen a lot of our customers close their doors. Interesting at this time is that a lot of people have not gone through the process of filing for bankruptcy. They basically just closed their doors and left, which – at a much higher rate than we normally see that. So as our credit manager says, they don't even have the courtesy to do a bankruptcy filing.

So and we have a lot of small customers out there, you've got to remember that too. So credit has been a factor. We actually think that when things start to improve, and people need to increase their working capital – especially because a lot of companies are unsecured or asset-based loans, we think we'll probably see more of an impact from the credit if it's limited at that time than we've seen so far.

David H. Hannah

And Tony I might add something to that. It's interesting because our sales to other service centers, smaller to midsized service centers, has increased rather dramatically, okay, since the beginning of the year.

Frankly, it's been a very big positive for us, but rather than spending $20,000 on a truckload, if they can buy it in smaller quantities from us and spend $3,000 here $5,000 there. But he activity that we have gotten from other smaller to midsized service centers because of cash flow and the credit facilities and whatnot has actually been very positive for us. So that's just a side note.

Anthony Rizzuto – Dahlman Rose & Co.

Well, that's certainly some light at the end of tunnel, definitely. And Gregg, I got another question for you, too, though. And one of my favorite topics here on the heat treatment aluminum plating side, you made some comments about demand continuing to remain pretty lackluster right now. Do you see anything on the margin that it's maybe taking or going to take another leg downward, or just kind of status quo?

Gregg J. Mollins

Margin, meaning our margins or do you think the mills will take a haircut and maybe drop the price a little bit?

Anthony Rizzuto – Dahlman Rose & Co.

I'm saying the latter, more the latter.

Gregg J. Mollins

Yes, I think the potential is for it for to go, Tony, more down than up.

Anthony Rizzuto – Dahlman Rose & Co.

Yes.

Gregg J. Mollins

I think that the mills are exercising as much discipline as they can given the demand standpoint. One of the things that the take or pay programs that they have out which you're familiar with?

Anthony Rizzuto – Dahlman Rose & Co.

Yes.

Gregg J. Mollins

That can be beneficial in the short term, but in the long term I'm not so sure it's good for the mill, the producers, or the service centers because it just forces people to take in and then dump in the marketplace and then cut all their purchases back that they would normally have been doing on a more consistent basis. But if you were to throw a coin up in the air and say heads or tails it's going to go up or down, it definitely has more downside potential than up.

Anthony Rizzuto – Dahlman Rose & Co.

And just one final one here very quick, what price are you guys seeing right now for hot-rolled coil out there in the market? We've been hearing quotes around 530, 540. Is that what you guys are seeing?

Gregg J. Mollins

Yes, we're seeing more 540, okay? If you threw some tons out there you're going to get 520, 530. But I'm not sure anybody is really doing that. More people, I know that we're not. So if was to plug a number into a model, I'd say 540.

Operator

Your next question comes from Wayne Atwell – Casimir Capital.

Wayne Atwell – Casimir Capital

Thanks for all your color on the industry. I was going to ask you about M&As but you answered that question. Let me throw up an open question, or a broad question. Can you sort of describe how the industry is going to change in the future versus where we were? Obviously, we've gone through the worst correction we've had in 40, 50 years.

Is this going to be beneficial to you, i.e. your competition is going to be diminished or even if they're still around, they're going to be crippled? Your customers will be maybe fewer and larger? Or can you sort of describe what you see going forward versus where we've been?

Gregg J. Mollins

Yes, I think we've been through some other downturns, but certainly not like this one. So what we've seen coming out of other downturns, more recently 2001, '02 and '03 is there was increased interest by a lot of the privately owned service centers to sell their companies and protect their family's wealth and gain some liquidity for their estates. And our feeling is, is that that's going to happen again.

And that it won't really start to pick up until after we've seen some improvement in business conditions because people don't like to talk about selling their company when they have a lot of red ink on their financials.

But we also think that different this time is the credit environment that Karla was alluding to. And the same thing for people in our industry, as we expected our customer base that when business conditions do improve, and they will, when they do improve there's going to be a need for capital to fund working capital increases, if nothing else.

And there's probably going to be some need for capital expenditures because a lot of people have postponed capital expenditures during these times. And it's just a natural thing to do. And that capital is going to be much harder to come by now, or in the future, when business conditions improve than ever before.

So I think that's going to cause a lot more activity on the M&A side so I think we'll see our industry consolidate some more. I think it needs that even in our size we're only 6% or 8% of the market.

So it's still very fragmented I think there's room for consolidation and I think that'll happen but not until business really starts to pick up and then we're going to see that added pressure for capital. Other than that I think if the customer base, we're still going to keep things going. It's going to be awhile before we get back if we get back to the levels that we were at in 2007 and '06 and maybe the earlier part of 2008.

I think most of us have learned in our industry again or we've been reminded if we hadn't forgotten about it how important inventory management is in this volatile environment and this has been the most volatile that we've ever seen so I think maybe people who used to stick it out there a little bit farther and speculate a little more are a little less apt do that.

So I think that should be a benefit to our domestic mills and certainly makes for a healthy industry – a healthier industry.

David H. Hannah

I have a comment to make about service centers in general okay our approach has always been to manage our inventories and just turn our inventory, collect a receivable as best we can because we think that that's probably the least amount of risk okay when you go into declining markets.

So you may not make as much if you are speculating and you hit it right but you're not going to lose as much either because if you were speculating and even if you did hit it right and prices drop you can get killed.

So what I think is going to be a fundamental change in service centers is that they're going to take a look at their business models and they're going to say to themselves what can I change to try to minimize my risk going forward because of the beating that most of us took?

Okay, in this 2009 anybody forgets this I can't imagine anybody forgetting this. So I would say and speaking for Reliance ourselves, our model has been very good – as much risk free as we possibly could get it but we're going to take that to another level just because these swings that we've seen in '04 going up '05 going down '06 going up '07 going down '08 going up '09 collapsing, these swings could actually get greater and if they are then you really have to control your risk.

Gregg J. Mollins

And one of the benefits that we think that we have with our size is the fact that we don't have to chase volume and Gregg talked about that earlier about sacrificing some volume for profit and we just don't feel that we have to chase volume.

We don't feel that we have to take risk on accounts receivable which are the two biggest areas of risk for us and we just don't want to do that. We don't feel that we need to do that. We're – if we lost some business but made some more money we're perfectly happy with that.

Operator

Your next question is coming from Richard Garchitorena – Credit Suisse.

Richard Garchitorena – Credit Suisse

Just a couple quick questions I know we're running pretty late here but most of my questions have been answered. One is in terms of lead times for the mill what are you seeing right now has it been increasing with the recent I guess pickup in shipments over the last couple of months. And the other one is also on utilization rates and do you think we're getting a little ahead of ourselves where do you see utilization rates getting next year?

David H. Hannah

Well it depends on a mix and I'm assuming you're talking about carbon steel products is that correct?

Richard Garchitorena – Credit Suisse

That's right. Yes.

David H. Hannah

Yes. The flat roll lead ties have gone out quite a bit some of the mills are all the way into December and for the most part sold out through December, others are not. When you get into the other products whether it be mini mill, structural or plate products or tubular products it's the basic lead times are four to six weeks.

Now when you get into beams and also the big [ton] rolling schedules for large sections and whatnot so it would be much greater than that but it's pretty readily available. Lead times are pretty good as far as the flat rolls are concerned because the cash for clunker program and some automotive pickup.

They've extended out further so but for the other product mixes other than flat roll it's pretty much business as usual as it has been over the past few months.

Richard Garchitorena – Credit Suisse

Great and then just on utilization rates close to 60% now do you think steel mills are in line with demand or in – if it kind of goes to 75, 80 is that a concern going into 2010?

David H. Hannah

Yes I think it is always a concern. I think all of us in the business when we saw some capacity coming on stream form the various mills and whatnot. We – in particular I'm referring to flat roll as a matter of fact specifically I'm referring to flat roll.

All of us were concerned about that and I think rightfully so. But on the other hand we don't know exactly what arrangements they have the car manufacturers, appliance makers and whatnot. I don't think that they just turned the switch on to bring on capacity unless there was some commitments being made by some of the large OEM flat roll users.

So I guess we have to put a little faith in them and then I guess if they overestimated what consumption would be they do have an avenue to export which has improved with the recent even greater weakness in the dollar. So our hope is that they did over hoot that a little bit, which is possible, but they do have an outlet other than reducing the price and selling to us.

Gregg J. Mollins

And we also have to keep in mind that the capacity utilization dropped to levels that none of us imagined. So they've come back up but – so directionally they've come up but they're still not at levels that I'm sure that the mills would like to be at and levels that we would like them to be at because as Gregg said we've got to put some faith in their management teams and they'll do the right things.

And if they're making more, then typically they're selling more which means we're selling more and that's what we all really need right now is we need some volume and some good solid improvement in demand because it's still at very low levels. Even though it's better it's still at very low levels.

Operator

We have a follow-up question coming from Mark Parr – KeyBanc Capital Markets.

Mark Parr – KeyBanc Capital Markets

Is October daily sales – can you talk a little bit about that relative to September?

Gregg J. Mollins

It's tracking about the same as September, Mark.

Operator

We have a follow-up question coming from Sal Tharani – Goldman Sachs.

Sal Tharani – Goldman Sachs

Just wanted to find out what size is the semiconductors electronics business for you guys?

Gregg J. Mollins

It's hard to tell. It's not – it would be somewhere on the low side 3% or 4% and in good times it could probably go up to 6% or thereabouts, but it's not as big as aerospace certainly. At least it's tough to estimate because it doesn't reach out into a lot of different areas.

And if you think about cabinetry, if you think about just 61 plates going into the chambers, vacuum chambers, if you add it all up I guess it could be close to 10% in a good market. But right now it's probably in that 3% to 5% range.

Gregg J. Mollins

Because it is just starting to heat up. We've seen activity in the semiconductor equipment manufacturers began to increase at the latter part of this second quarter and we've seen some steady increases in that industry ever since then on an average daily sales basis. Each month seems to get a little bit better and better.

We watched that filled a book ratio, semiconductor equipment manufacturers and it was as low as – as a matter of fact, it was the lowest I've ever seen it and we've been tracking that since the low to mid-80s. It was like .4 to 1 and the last thing I looked at was yesterday and it was 1.17 to 1, so for every $1 that they're actually shipping they're booking $1.17.

David H. Hannah

We also throw into that area that electronic semiconductor area work that goes into the solar industry, as well as the LTD panel switch has been dead for nine months, but it seems that there's some chatter there that that's going to pickup probably early next year.

Operator

Your next question is a follow-up from Michelle Applebaum – Steel Market Intelligence.

Michelle Applebaum – Steel Market Intelligence

Did you mention what was going on with beam prices in imports?

Gregg J. Mollins

No, but I will. Beam, prices they took the $30 discount as most of the other products did that was announced last week. Imports, imports are not as bad and when you hear about imports coming in from like the European group, Michelle, there used to be maybe two stops at two different ports, the largest being Houston in the past, and now it seems like they're, not seems like now they're hitting many other ports.

So rather than dumping at one port in particular maybe 50% of a 30,000 ton load, they're hitting multiple ports and even going south of Houston and into the Mexico area. So it's not a factor. It's not something that – I mean it gives us a little bit certainly when it lands there's no getting around that. But I think from an overall standpoint when you look back at the whole big picture it's really not that big of an issue at all.

Operator

Your final question comes from Bob Richard – R&S Research.

Bob Richard – R&S Research

The restrictions on the revolver, I think if I heard you right through June of next year, June 30, are those material enough to discuss here?

Karla R. Lewis

We did file that so all the information is out there, but basically on the financial covenant ratios we had our required debt to capital ratio reduced from 60% to 50% and then our interest coverage ratio, which quite honestly is where we were feeling some pressure, we had a minimum requirement of three times and that's now pushed down to two times. Both of those through June 30, 2010 then the step back up to the previous amounts.

Bob Richard – R&S Research

I think if I remember right you're impairment testing for goodwill comes up here in a couple weeks. Any preview on that or just see how it goes I guess?

Karla R. Lewis

We are not aware of any events that have caused impairment.

Operator

There appear to be no further questions in queue.

David H. Hannah

We'll just say goodbye and thank you for your attention and you're support and I guess we won't be talking to you again until February after the fourth quarter closes up and we have our final year numbers.

It's a better environment out there now than it was when we were speaking to you 90 days ago, so we're encouraged. Once again Reliance is on very solid footing. We're well positioned. Our management teams have done an outstanding job and we're back into making money after one small little blip in the second quarter, but we're ready to go and looking forward to next year, really, so thank you very much.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Source: Reliance Steel and Aluminum Co. Q3 2009 Earnings Call Transcript
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