Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Reliance Steel & Aluminum (NYSE:RS)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET

Executives

Karla Lewis - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Assistant Secretary

Gregg Mollins - President, Chief Operating Officer and Director

David Hannah - Chairman and Chief Executive Officer

Analysts

Philip Gibbs - KeyBanc Capital Markets Inc.

Anthony Rizzuto - Dahlman Rose & Company, LLC

Timna Tanners - BofA Merrill Lynch

Nate Carruthers - Michelle Applebaum Research

Richard Garchitorena - Crédit Suisse AG

Aldo Mazzaferro - Goldman Sachs

Sal Tharani - Goldman Sachs Group Inc.

Operator

Good morning, ladies and gentlemen, and welcome to the 2011 second quarter results conference call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, David Hannah. Sir, the floor is yours.

David Hannah

Thank you. And good morning, and thanks to all of you for joining our conference call for the second quarter and 6 months ended June 30, 2011. Gregg Mollins, our President and Chief Operating Officer; and Karla Lewis, our Executive VP and CFO, are also here with me today. 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.

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, 2010, and our other reports on file with the Securities and Exchange Commission.

For the 2011 second quarter, Reliance reported net income of $98.7 million, up 60% from 2010 second quarter net income of $61.5 million and up 7% from $92.3 million in the 2011 first quarter. Earnings per diluted share were $1.31 in the 2011 second quarter. That was up 58% from the 2010 second quarter earnings per diluted share of $0.83 and up 7% from $1.23 for the 2011 first quarter.

Our sales for the 2011 second quarter were $2.05 billion. That was up 26% from 2010 second quarter sales of $1.62 billion and was up 7% from the 2011 first quarter sales of $1.91 billion. For the 6 months ended June 30, 2011, our net income was $191 million. That was up 80% compared to net income of $106.2 million for the 2010 first half. Our earnings per diluted share were $2.54 for the first half of 2011. That was up 78% compared to $1.43 in 2010.

Sales for the 2011 6-month period were $3.96 billion, up 29% from $3.07 billion in the 2010 period. We sold 1.04 million tons of metal in the 2011 second quarter. That was up 1% from the 2011 first quarter and it was up 10% from the 2010 second quarter. The average price per ton sold on the 2011 second quarter was $1,965. That was up 6% compared to the 2011 first quarter and up 16% compared to the 2010 second quarter.

For the 2011 second quarter, our carbon steel sales were 54% of our revenue dollars. Aluminum sales were 16%. Stainless steel sales were 15%. Alloy sales were 9%. Toll processing sales were 2% and other sales were 4%.

Our carbon steel sales for the 2011 second quarter were 856,000 tons. That was up 1% from the 2011 first quarter, with average selling prices up 8%. Our aluminum tons sold of 58,000 were up 1%, with prices up 3%. Stainless steel tons sold were 50,000. That was down 3%, with prices up 7%, and alloy tons sold of 58,000 were up 4%, with prices up 5%.

Overall, the quarter ended up pretty much as we expected. The mill prices for most of the metals we sell were decreasing during the second quarter, contrary to the first quarter when prices were mostly rising. Consequently, as expected, we saw our gross profit margins contract a bit compared to the first quarter. Additionally, tons sold did not increase as much in the second quarter compared to the first quarter, in line with historical seasonal trends, as our customers had little reason to buy more than they needed given the downward trend in prices.

Real underlying demand during the quarter did continue to improve, however, at a small but steady pace. Consistent with the first quarter, our strongest markets were in energy, oil and gas, farm and heavy equipment, mining, general manufacturing, aerospace, semiconductor and electronics. Nonresidential construction was still weak but shows some signs of life with spotty improvements. Our auto-related coal processing volumes were negatively impacted by the crisis in Japan but are now recovering nicely.

As I mentioned earlier, prices for most of our metal products have softened from the recent highs early in the second quarter and may decrease a little more during the third quarter, but not to the extent that we're overly concerned. Also, we don't expect any significant changes in demand other than some normal seasonal third quarter slowing.

Given those expectations, we anticipate earnings per diluted share for the third quarter to be in a range of $1.05 to $1.15. Our balance sheet is in excellent shape with net debt to total capital at 25.2% at June 30, 2011. We recently announced the renewal and expansion of our credit facility that provides even more capital to fund growth of our existing operations, as well as anticipated acquisition opportunities.

We're very excited about our acquisition of Continental Alloys & Services and we look forward to completing that transaction soon. Continental brings a great management team and expands our exposure to the attractive energy, oil and gas markets with new products, processing capabilities and international locations.

On July 27, 2011, the Board of Directors declared a regular quarterly cash dividend of $0.12 per share of common stock. The third quarter dividend is payable on September 16 to shareholders of record August 19. We've increased our dividend 16x since our IPO in 1994 and we paid regular quarterly dividends for 52 consecutive years.

The economic recovery is still fragile, but seems to be improving slowly and steadily even in the face of some challenging worldwide economic, social and political hurdles. We will remain alert for changes in those situations that could impact our business.

We have an exceptional group of managers and employees, along with a broad and diverse product base and a wide geographic footprint that positions us well in our industry. We have significant exposure to industries that are poised for growth in the years ahead and have experience and capital available to continue our successful growth strategies.

Thank you for your support. Gregg will now comment further on our operations and our market conditions. Gregg?

Gregg Mollins

Thank you, Dave. Good morning. As Dave pointed out, we are pleased with our results in the second quarter and the first half of 2011 as compared to the same time frame in 2010. Demand continued to improve slightly in the second quarter even with customers keeping inventories at a minimum, expecting prices to soften on most of the products that we stock.

As expected, when prices began to soften at the producer level, so did our gross profit margins. FIFO gross margins in the second quarter were 26.1% compared to 27.5% in the first quarter. We actually felt our managers did a good job managing their margins considering the pricing volatility in many of our products.

Inventory turn remained relatively constant over the past few quarters, turning 4.7x in dollars and 4.9x in tons. Inventory on hand that supports the nonresidential construction business is making it difficult for us to reach our goal of 5.5x. That being said, we still feel we have opportunities within our company that could improve our turns, and we are pursuing them as we speak.

From a demand standpoint, we're pretty optimistic on most markets that we service. As Dave mentioned, our strongest markets are aerospace, oil and natural gas, electronics and semiconductor, heavy industry such as agriculture and mining equipment, barge and tank manufacturers, as well as transmission towers, solar, wind towers and rail cars. Nonresidential construction continues to struggle but we believe it has hit bottom and there have been some signs of modest improvement in certain parts of the country.

We service the automotive industry through our toll processing operations, where we have no metal exposure. We experienced some decline in volumes during the second quarter but have recovered nicely. So we feel good about many of our end-use markets and look for ongoing improvement in demand going forward subject to seasonal changes.

As for pricing, carbon steel prices began to soften in the April-May time frame and continue to do so. With the addition of new capacity and an increasing imports, there has been more pressure on prices throughout the supply chain. The good news is there are plans in place at the producer level for maintenance outages over the next few months which should help the supply and demand fundamentals.

Scrap has traded in a pretty narrow range since the first of the year and iron ore has traded up since hitting lows for the year in March. Service center inventories are very low, and if there is an uptick in demand, we could see prices go up. We shall see.

Midwest spot aluminum ingot is trading in the mid-$1.20 a pound range from -- up from $1.12 a pound in January. Aerospace sheet 'n' plate is very strong, primarily because of the increased build rates and plate lead times are out 16 weeks to 18 weeks.

Aluminum mills have imposed a controlled order entry system so as not to overbook the mills. And they initiated 2 price increases on plate and 4 on coil, all of which held in the first half. The burn rate on the inventory overhang of aerospace plate is moving faster than planned, which is good for both the mills and service centers.

Engineered plate is also very strong. And here again, 3 price increases went into effect in the second quarter. Common alloy sheet demand is pretty strong and lead times are 6 to 8 weeks. We like what we see on the aluminum side of our business.

As for stainless flat-rolled, tons sold in the second quarter were down slightly from the first quarter. Service centers are being very cautious on the buy side as nickel surcharges have declined in the last 4 consecutive months. Stainless bar, which yields much higher margins, is still quite strong, especially products sold into the aerospace and energy markets.

Given the discounts in the surcharge during the quarter, we believe our sales held up quite well. To conclude, for most of our major end-use markets, with the exception of nonresidential construction, volumes are gradually improving. And pricing, although lower than in the first quarter, is still at respectable levels.

We have a strong, proven and effective management team in the field that exercise sound business judgment in all markets. We have strategies in place to grow our business organically and our balance sheet is in great shape to pursue other growth opportunities. We are excited about the future at Reliance.

I will now turn the program over to Karla to review the financials. Karla?

Karla Lewis

Thanks, Gregg, and good morning. For the 2011 second quarter, our same-store sales, which excludes the sales of our 2010 acquisitions, were up 24.1% compared to the 2010 second quarter, with a 7.8% increase in tons sold and a 15.6% increase in our average selling prices.

For the 2011 first half, our tons sold were up 10.9% and our average selling price was up 16.6% compared to the 2010 first half. And on the same-store basis, 2011 first half sales were up 26.6%, with a 9.3% increase in tons sold and a 16.4% increase in our average selling price.

June 2011 was our highest average sales per day since November 2008. However, we are still down 9.6% from that period and down 28.6% from our peak average sales per day, reached in August of 2008. Even with the 10.9% increase in our tons sold in the 2011 first half compared to the 2010 first half, our June 2011 tons sold per day are still 23.9% below our peak tons sold per day achieved in August 2008.

While we continue to see positive trends from the underlying demand from our customer base and expect that to continue, we point out these differences to express the volume and earnings capacity that our company has once underlying demand returns to more normal levels.

Our 2011 second quarter gross profit margin was 24.9% compared to 25.7% in the 2010 second quarter and 26.5% in the 2011 first quarter. For the 2011 first half, our gross profit margin was 25.7% compared to 25.9% in the 2010 first half.

Our gross profit margins continued to fall within our expected range of 25% to 27%. However, given current demand levels and falling low prices, we were at the low end of the range in the 2011 second quarter but remain near the midpoint of 2011 first half.

Our LIFO adjustment was a charge or expense of $25 million in the 2011 second quarter compared to LIFO expense of $10 million in the 2010 second quarter and $20 million in the 2011 first quarter.

Our 2011 first half LIFO expense was $45 million compared to $15 million in the 2010 first half. Our LIFO adjustment is included in the cost of sales and, in effect, reflects cost of sales at current replacement cost.

We currently estimate our 2011 full year LIFO adjustment at $90 million, up from our estimate of $80 million at the end of the 2011 first quarter. Our estimate anticipates no prices to be at or somewhat below current prices at the end of the year, along with lower quantities on hand at that time compared to our current levels.

We measure our operations on the FIFO basis. Our FIFO gross profit margin for the 2011 second quarter was 26.1% compared to 26.3% in the 2010 second quarter and 27.5% in the 2011 first quarter.

During the 2011 first quarter, we were able to expand our FIFO gross profit margins as mill prices increased, and we were able to increase our selling prices and advance receiving in the higher-cost materials. Then as expected, we experienced pressure on these margins in the second quarter as mill prices declined for many products and we received the higher-cost materials into our inventory.

As a percentage of sales, our 2011 second quarter SG&A expenses were 15.3% compared to 16.8% in the 2010 second quarter and 16.7% in the 2011 first quarter. The improvement is due to higher volume in pricing on a relatively consistent cost structure. In the 2011 first half, our headcount increased 4.7% on a 10.9% increase in our tons sold. Compared to the 2011 first quarter, our SG&A expenses in the 2011 second quarter were down $4.8 million or 1.5%, mainly due to lower bonus and commission expense because of reduced FIFO gross profit margin.

Operating income for the 2011 first half was $320.4 million or 8.1% of sales, improved from $194.4 million or 6.3% of sales in the 2010 first half. And again, the improvement was mainly due to our higher volume and our expected expense management.

Depreciation and amortization expense increased by $5.4 million in the 2011 first half compared to the 2010 first half, mainly due to our 2010 acquisition, as well as depreciation expense on our 2010 and 2011 capital expenditures.

Our other income for the 2011 first half was $4.3 million compared to other expense of $1.2 million for the 2010 first half. The change was mainly due to the timing of insurance proceeds and investment return on our life insurance assets, as well as gains on fixed asset sales and other miscellaneous gains in the 2011 first half.

Our 2011 first half effective income tax rate was 34.2% compared to our 2010 annual effective rate of 33.3% with the increase attributable to our higher taxable income levels in 2011.

In the 2011 second quarter, our rate was 35% in order to catch up to our annual rate. In the 2011 first quarter, our effective rate was 33.3%.

Because of improved business conditions in the 2011 first half, we increased our working capital using cash from operations of $85.5 million. However, we actually provided cash from operations at $15.9 million in the 2011 second quarter, mainly due to our profitable business activity, as well as effective working capital management.

Our accounts receivable balance increased $259.9 million from the 2010 year end because of increased sales, and our days sales outstanding rate has remained consistent at 42 days.

Our FIFO inventory levels increased $344 million and our accounts payable and other liabilities increased $480.2 million at June 30, 2011, from year-end 2010. The increased inventory levels for our increased shipment volumes and reflect the higher metal costs. Our inventory churn rate was 4.7x for the 2011 first half compared to 4.8x for 2010.

We spent $66.3 million for capital expenditures in the 2011 first half, which included the buyout of 2 facilities that we previously leased, as well as cost to purchase land and constructing new facilities. Our 2011 capital expenditure budget of about $200 million includes many growth projects.

Our outstanding debt in June 30, 2011, was $1.1 billion, up from $941 million at year end 2010. We had total borrowings of $365 million on our $1.1 billion credit facility at June 30. Our net debt-to-total-capital ratio at June 30 was 25.2%, up slightly from 23.5% at December 31, 2010. The covenants in our credit facility requires us to maintain the debt-to-capital ratio of less than 60% and an interest coverage ratio of at least 3x. Our interest coverage ratio at June 30, 2011, was 8x.

On July 1, 2011, we borrowed on our credit facility to pay off the $60 million senior notes that matured. Effective July 26, 2011, we amended and restated our $1.1 billion unsecured credit facility for 5 years and increased the size to $1.5 billion. The restated credit facility includes an increased option for up to an additional $500 million and includes more favorable pricing terms than our prior facility that would have matured in November 2012. Other than pricing, the terms remained fairly consistent, including the financial covenants.

We are comfortable that we have adequate cash flow and capacity on our new revolving credit facility to fund our debt obligations, as well as our working capital, capital expenditure, growth and other needs in the near future.

Thank you, and we will now open the discussion for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Timna Tanners.

Timna Tanners - BofA Merrill Lynch

I'm with BofA Merrill. Just 2 things. I was wondering, it sounds like you're not able to talk a lot about Continental. But I was hoping you could characterize your appetite for further acquisitions post that deal and given what you've done with the bank lines and the credit facility?

David Hannah

Yes, Timna, we can't really talk anymore about Continental until we get it closed. We are hopeful it will happen here soon. But with respect to our appetite, after that one, we're still hungry. So we got capital available, we just need to find the opportunity and the ones that are attractive to us. So I suspect that as the year progresses, we'll see more opportunity, and we feel pretty good about our position out there in terms of making acquisitions.

Timna Tanners - BofA Merrill Lynch

Great. The other question I have is just in the past, you've talked about your shipments relative to kind of what the MSCI data was showing. And certainly, in the first half of last year, you are well ahead of their track. And this year, when I look at the numbers, it looks like you're running behind with the MSCI data would show, and I'm just curious why that might be. Is it because of, what, the end markets that you serve or the production -- or the product mix? If you can explain that a little bit.

David Hannah

Yes, I think, Timna, and Carlos probably knows more about the details than I do, but you really have to go in and look at the information by product. And the information that comes out of the MSCI is heavily weighted on the carbon side towards flat roll. And as you know, flat roll as a percentage of our business is not that big of a factor. So we have been way behind the MSCI numbers in certain times when flat roll recovered earlier than the rest. And so that's really it. I think when we look at it and compare our different products, then we're more in line.

Timna Tanners - BofA Merrill Lynch

So how would you characterize your market share performance? Holding on? Or are you still -- in the past you've talked about maybe adding to that. How would you characterize market share gains?

David Hannah

I think it's at least holding on. I think it may be growing some. We always feel that we should be able to grow our market share just in regular market conditions through service and quality. And I think there has been a tendency for customers to buy smaller quantities more often, which also works to our advantage because that's the kind of the nature of our business that the company has really been built upon. So we feel good about where we are in the market. We're not out there trying to buy a bunch of market shares but we do expect that we can gain a little bit of share over time just through, as I said, service and quality.

Operator

The next question today is coming from Richard Garchitorena.

Richard Garchitorena - Crédit Suisse AG

Credit Suisse. So I know you can't talk about Continental but I just wanted to ask, the Q3 guidance does not include any impact from Continental because...

Karla Lewis

That's correct because without knowing the date that we would close it, it's hard to include any impact from their earnings.

Richard Garchitorena - Crédit Suisse AG

And then just another question on the quarter -- on Q3 I mean. The LIFO expected $45 million for the rest of the year. How much of that is in Q3 versus Q4?

Karla Lewis

Yes, so it would be $22.5 million in each. We basically looked at what our initial estimate is. We booked 25% of that each quarter. And if we changed our estimate, you get to catch up in that quarter, like we had this quarter.

Richard Garchitorena - Crédit Suisse AG

Okay. And then I guess I just want to touch on sort of the current conditions. You talked about June being the highest average sales per day since 2008. Have you seen that consistent in July? And I know you're expecting some seasonal softness, but maybe you could just tell us how things are going as of today?

David Hannah

I think with respect to the month of July, sales per day are down, which we expected them to be. July is usually the softest month of certainly the third quarter, the softest month of the first half usually. But it's acting the way that we expected it to act, I think, is a good description of what we think is going to happen in that month. So yes, nothing unusual. There's no indication that things are slowing down abnormally or are really taking off abnormally. We still have strength in some really good markets like the energy, aerospace, mining, heavy equipment. That's been really active for us.

Richard Garchitorena - Crédit Suisse AG

Great. And then the last question just on that point, on energy and aerospace. So those are all, I guess, where you're seeing the strongest demand but that's also where you also have the highest margins, is that right? And on that point, the energy business specifically, that is also higher margin?

Gregg Mollins

Yes, both of those areas, aerospace and the energy markets, are very profitable commodities that go in there are the specialty-type commodities that yield higher margins. So those are definitely one of our most profitable areas.

Operator

We'll take our next question from Sal Tharani.

Sal Tharani - Goldman Sachs Group Inc.

Gregg, you mentioned aerospace plate getting destocked faster than expected. Are you having -- are you seeing any tightness on the supply side where you have to go out too far out to order?

Gregg Mollins

Yes, we are, which is actually a good thing. We enjoy that actually. Lead times are out 16 to 18 weeks out and that just shows you how strong that market happens to be. But we like it. If we run out of plate, we're going to raise our margins even higher. So it probably won't be a bad thing. But I don't think we're going to run out of play. We're pretty strong in that with our supplier base. We'd probably buy more on that probably. We'd buy more aerospace-related plate in North America than any other service centers. So we have a good relationship with the supply chain in that and we're pretty much taking care of it.

Sal Tharani - Goldman Sachs Group Inc.

And Dave, you mentioned some patchy improvement or signs of some life in non-res. Okay. Can you give us some geography description where you're seeing it? Or is it across the board?

David Hannah

It's in different. We've actually seen some surprisingly enough out here in California. Our PDM operation has picked up some nice jobs. We've had in the northeast, in the New England, in the northeastern part of the country. That actually started to get a little more active sooner than anything else. And then, of course, down in the South Texas area which that construction activity is related more to the energy industry. So these projects pop up, Sal, and they're not coming yet at the frequency that they have in the past. But at least, we are seeing some things developed. And they're starting to get more. So we think that over time, hopefully, we will see a more meaningful uptick next year.

Sal Tharani - Goldman Sachs Group Inc.

And lastly, you mentioned that customers have destocked. And obviously, if there is an improvement in demand or prices that, could be destocking. But how is your inventory trend going into summer over the next couple of months? How do you see your inventory going for the next few months?

Gregg Mollins

Well, I think we'd sell probably -- not probably, our inventories will be going down a little bit, okay? Because we're keeping our inventories closer to the vest. We anticipate that price data demand picks up, prices could then increase. But we're not going to count on it. So we'll keep our inventories as low as possible and just be prepared for the worst and hope for the best. But our inventories will be going down.

Operator

Your next question is coming from Aldo Mazzaferro.

Aldo Mazzaferro - Goldman Sachs

It's Burke & Quick Partners. And I have a question initially on the oil and gas sector, Dave. I wonder, could you update us on what your percentage of sales is today as exposed into the oil and gas market? And then what specifically is -- as we move possibly into greater drilling in the shale regions and different corrosive types of environments like that, what does that do to the types of products that you sell into that market?

David Hannah

Sure. On the oil and gas side, without Continental, as best as we can tell, we think our exposure into that energy, oil and gas, is about 8%. And that's mostly through our Earle M. Jorgensen operation, including Encore Metals and Team Tube in Canada. So Continental, of course, will end up increasing that exposure for us to a certain degree. And you can figure out kind of what that would do because their volume is 100% related to energy, oil and gas. And with respect to the drilling activity, the shale and that type of thing, we love that. That's something that certainly will have a positive impact on us primarily through our pending acquisition of Continental. If you think about the products that we currently sell into the oil and gas area, as I mentioned earlier, it's mostly through EMJ and Encore Metals. But their products primarily go above the surface. And Continental has similar customers, many times the same customers, but their products tend to go below the surface, whether the surface is land or water. So all of this drilling -- and the deeper it gets, the more brutal environments that they're going through, whether it's through water or deeper into the earth, all plays well for the Continental business.

Aldo Mazzaferro - Goldman Sachs

So this would be more of an alloy content in the metal?

Gregg Mollins

Yes, it's almost all alloy.

Aldo Mazzaferro - Goldman Sachs

And I mean here's a separate question, too. One of your larger competitors yesterday or the day before was talking about an inventory strategy that seems to run counter to the industry where he's suggesting that a lot of the distributors and processors might be missing shipments because they don't have enough inventory. And I'm wondering, if given your strategy to keep inventory tight, I wonder if you can comment on how you see your strategy relative to that different strategy.

Gregg Mollins

I think we're pretty proud of our strategy, okay? And speaking just for ourselves, I can't speak for the rest of the industry, but if we are running out the inventory, the first telephone that would ring would be mine. And we're not running out of inventory, okay? We know how to manage our inventory. We know how to manage our working capital. And it's foolish to carry too much inventory as far as Reliance is concerned.

David Hannah

And you've noticed for a long time, Aldo, we've always focused on just maximizing our inventory turn. Certainly, we're not losing business. And I'm not aware of a lot of other service centers out there that are running out of inventory and losing business either. When people get really tight on inventory, you'll see what we call in the industry buy-out activity increase significantly. And I'm not aware that there's a lot of increased volumes of buy outs among industry participants. So I think -- are people cutting it closer than maybe they have traditionally? Yes. I think some people that used to like to be a little heavier in inventories, after 2008 and 2009, I think that's still fresh in everyone's mind and they're keeping it just as close as they dare with respect to big inventory levels. And it takes a little more work. You have to work a little harder when you trying to turn your inventories more. But as I said earlier, that's kind of the way that we grew up around here at Reliance. So we think it's worked for us. Different people have to do whatever they think works for them. But we like to maximize our inventory turns. We think that has a very positive impact on gross profit margins as well.

Gregg Mollins

The other thing, Aldo, is our company is buying from each other more and more. So that's the one thing, one nice thing, that happened to us in 2009. Maybe the only nice thing that happened to us in 2009 was that our company became much more closer to each other and working with each other. So we trade metal back forth from location to location. We've been encouraging that for the last many years. But now we're doing it on a daily basis. So, being too low on inventory and losing business because of that, that's not a factor to us at all.

Operator

We'll take our first question from Nate Carruthers.

Nate Carruthers - Michelle Applebaum Research

It's Steel Market Intelligence. I was just wondering if you guys could give some commentary on what you're seeing on the import front?

Gregg Mollins

In carbon?

Nate Carruthers - Michelle Applebaum Research

Actually, anything.

Gregg Mollins

Speaking of carbon, okay, where -- the inventories that are coming into the United States from overseas, unfortunately, has been growing and growing and growing. And I think that July, the information that we look at indicates that there's not going to be a dropoff in that supply coming into the country either. So there's a lot of material out there, whether it would be in plate, in beams, hot roll coil, et cetera. I wish I could say just the opposite, but the fact of the matter is it is what it is. And again, imports are higher than we would like them to be.

David Hannah

And a lot of this material, most of it was ordered back when prices here in the first quarter were going up. So it's coming in now.

Gregg Mollins

It may not have been a good buy. And as you know, our position is, and we stated openly, we do not like to buy import. We buy what we certainly keep our fingers in it. We're not opposed to buying it when the spreads are too great, but we prefer to keep our tonnage right here locally in the United States with the domestic producers.

Nate Carruthers - Michelle Applebaum Research

Okay. I guess in what products are you seeing the greatest between domestic and import?

Gregg Mollins

Plate.

Nate Carruthers - Michelle Applebaum Research

Plate?

Gregg Mollins

Yes.

Operator

The next question is coming from Tony Rizzuto.

Anthony Rizzuto - Dahlman Rose & Company, LLC

Dahlman Rose. I've got a couple of questions here. Dave, I was curious about your comments about M&A and as the year progresses, likely see more opportunities. And I'm just wondering what you were thinking in there and why you'll likely see more opportunities? Are you expecting maybe conditions to perhaps worsen and some of the potential targets more attractive? Or you've got an expanded credit line now? And you've not made any large acquisitions since Earle M. Jorgensen and PNA. I'm just wondering, how we should think about the relative size of maybe some of the companies you're looking at right now?

David Hannah

But first off, we haven't not done yet any acquisitions because of money or capital availability. Certainly, that hasn't been an issue. The only issue that's kind of been -- caused us to slow down a bit has been the availability of acceptable opportunities for us. With respect to size, well, I should say first that it's funny because I think that we'll see more opportunities as conditions improve as opposed to if they deteriorate some. I think that we'll actually improve the opportunity -- the number of opportunities out there. So people are certainly doing better. We're doing better. The industry is doing better this year than last year. And certainly, last year was certainly better than 2009. But as Karla pointed out in her remarks, we as an industry and, certainly, we at Reliance are way, way behind with what our capacity is. And there is still a reluctance, I think, by business owners to sell their companies at -- when their numbers aren't where they would like them to be or where they believe they could be. So I think if things improve from a business standpoint, and we do think that absent just seasonal kind of stuff, demand is improving at the kind of a plodding pace. But it is improving. I think that as that continues, we'll see some more opportunities. With respect to the size, yes. There just aren't a lot of billion-dollar companies out in our industry or $2 billion companies like EMJ and the PNA Group. There are some. And who knows what will happen in the future? But I think as far as giving you some feelings about the potential size, I think you shouldn't expect a whole lineup of acquisitions of billion-dollar companies or more. I think that certainly, we would prefer that. As we've gotten bigger, we would like to do larger deals as opposed to smaller transactions. I think from a capital standpoint, we are positioned very, very well to do any deal that could be done in our industry,very honestly. So I think that gives us an advantage, I think, but the reality is that most of the transactions are probably going to be with companies in that $100 million to $500 million revenue area.

Anthony Rizzuto - Dahlman Rose & Company, LLC

Fair enough. And what are your senses to the shenanigans, I guess I'll call it the shenanigans, going on in Washington these days, how would that may be impacting your business and your customers?

David Hannah

Well, it's disgusting to us what's going on there. And it's a shame that everyone in the country that has a 401(k) which are most people now that are working and have a retirement plan have some exposure to the stock market and there's value being destroyed everyday because of those guys in Washington that can't seem to get this settled. So it's really a shame. We're used to it out here in California, Tony. But it's really a shame that the federal government is going through this. If it doesn't get resolved, it could have a really negative impact on the general economy. It could raise interest rates for everyone, which would have a negative impact on the economy. And as you know, we at Reliance and our industry, we're kind of tied to the general industrial economy. And I think it's going to get resolved. As disgusting as it is today, I think the light will go on and the posturing will stop, and I think they will get it resolved. I hope they'll get it resolved. But it's really shameful that they're playing with us the way that they are right now.

Anthony Rizzuto - Dahlman Rose & Company, LLC

Agreed. And I've got one question, a follow-up question. And for Gregg, too. I can't let this one slip by. I was wondering, Gregg, if you could give us a sense of where you think the alley heat treat mills are operating relative to their capacity right now. Clearly, you've got lead times which are lengthening and you mentioned about tightening supply. Any sense for when those mills are operating?

Gregg Mollins

Well, it depends on the products. We do more in bar, okay, than we do in plate. We do a fair amount of plate but we do more in the bar area. And those lead times are -- I mean they're mostly SBQ companies are booked after the balance of this year. There's lead times that are out there that are 12 to 18 months, okay? So they're, Tony, they're going full out, okay? And you'll hear about all the expansion plans, new course made and announcement they want to increase their tonnage in the SBQ product alloys, okay? And as you know, there is just -- by the way, I hope that none of them expand any production capacity because I hope those lead times would lock about 24 months. And you know pretty obvious reasons, right? But they're going full out. The SBQ is by far and away the strongest product line in the carbon steel world and one of our most profitable commodities.

Anthony Rizzuto - Dahlman Rose & Company, LLC

And on the aluminum side too, Gregg, what -- some commentary there.

Gregg Mollins

Aluminum looks great. We'll have to tell you, if you've got to take one product right now, okay, and then basically wish that your whole company was in, it would be aluminum. The heat treat side on plate and sheet is going extremely strong. The mill should be doing extremely well. We certainly are. All indications are that, that market is going to continue to improve. And it's got legs. This could last for years.

Anthony Rizzuto - Dahlman Rose & Company, LLC

We went through that. I remember we went through the period where a lot of those mills expanded capacity. We've obviously been in this destocking mode, gosh, over the, what, last 2 to 3 years. And we've all been waiting for this light at the end of the tunnel. Now it seems like it's here and the prospects look to be very, very positive. Do you think we were at the end of that stage right now, the destocking, and it's truly that demand, that hard demand levels as the build rates increases now really kicking in?

Gregg Mollins

Yes, I think so. It certainly is for us. I mean look at the lead times, Tony. I mean you have 16 to 18 weeks that just speaks in and out of itself. So the increases that were announced in the first half of the year, 4 increases on heat treat sheet and coil, 2 increases on heat treat plate in the aerospace industry. It went through just easily, okay? So I don't think anybody fought it because everybody is just after availability. The engineered product plate, okay, that goes into the commercial business, okay? There are the 3 increases on that. They went through very, very easily. The mills are busy. The service centers are busy. The OEMs are busy. Everybody is busy. It's just really good space right now.

Operator

We'll take our next question from Philip Gibbs.

Philip Gibbs - KeyBanc Capital Markets Inc.

Phil Gibbs, KeyBanc Capital Markets. Question on Continental. Do you have some idea about how much of their sales come outside the United States?

Karla Lewis

Yes, they are right about -- sorry, we're being advised we cannot respond to that question at this time.

Richard Garchitorena - Crédit Suisse AG

Looks I'll like ask another one related to that.

Gregg Mollins

It's a good question.

David Hannah

Yes, it's a good question. It's not the majority of their sales but it's a good amount.

Richard Garchitorena - Crédit Suisse AG

I'm just curious if it's going to further your global capital investment to reach more markets if you want to do more investment in international markets going forward.

David Hannah

Yes, that was certainly one of the more attractive things of the transaction for us, Phil. Their presence in Dubai, which is new for them, but it's an area where we thought that we would have to be in the not-too-distant future anyway. So that gets us there sooner than we had anticipated. And then their locations in Malaysia and Singapore and the U.K., as well as, certainly, Canada and Mexico here in North America, those are all important parts of their business and in areas that we've expanded. Certainly, I think you're aware that we've opened a new EMJ location in Malaysia earlier this year. And so the products that relate to this energy industry are really needed in these other locations. And it's one of the real attractive things of the transaction for us.

Karla Lewis

That's also consistent with what you've heard us talk about for a while now with our international expansion is really targeted industries, targeted products. So it fits very nicely into that strategy that we have.

Richard Garchitorena - Crédit Suisse AG

Now will this get tucked into EMJ given the energy focus? Or are they going to be more of a standalone growth vehicle?

David Hannah

No, they'll operate at Continental as a separate wholly-owned subsidiary of our company. They will certainly communicate well with the EMJ because they have common suppliers and common customers in a lot of instances. So we would expect that there'll be a lot of ongoing communication, but they're going to run their businesses separately.

Operator

Our final question is a follow-up question coming from Sal Tharani.

Sal Tharani - Goldman Sachs Group Inc.

Dave, you mentioned about the non-res. Can you tell us if it's a public or private sector where you're seeing some improvement?

David Hannah

Both, I think. Yes, we've seen -- I guess through this whole slowness in non-res, we've probably seen more on the public side, schools and hospitals and municipal projects. But now we're starting to see some of the private projects pop up.

Sal Tharani - Goldman Sachs Group Inc.

Okay. And the other thing is if you would look at this seasonal slowdown for this year, is it the same stock change as always? Or do you think it's going to be for the lesser degree overall? And also separately on the auto, which is the tolling business you have?

David Hannah

Well, I think the change from second quarter to third quarter with respect to the auto volumes is going to be down left if it's down at all in the third quarter, primarily because the second quarter was impacted negatively by the crisis in Japan. So we are seeing those volumes currently come back nicely to precrisis levels. So that -- carving up the auto side, I think from a regular business standpoint, we are expecting it to be...

Karla Lewis

We expect it to be normal to a little less of a slowdown for 2 reasons. One being there is that kind of continued underlying small demand improvement. And also, second quarter because of the pricing that occurred wasn't the volumes or the ties that we would normally see.

Sal Tharani - Goldman Sachs Group Inc.

And also, inventories are lower at your end users, so probably, they will continue to buy as long as underlying demand stays stable?

David Hannah

Correct.

Karla Lewis

Correct.

David Hannah

Right. as Gregg mentioned in his remarks, if there is an improvement in demand, it could ripple through in a real positive way.

Operator

That was our final question. Do you have any closing comments?

David Hannah

No. We just look forward to talking to you next quarter, and thank you for your support.

Operator

Thank you, 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Reliance Steel & Aluminum's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts