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Executives

David Hannah – Chairman and CEO

Gregg Mollins – President and COO

Karla Lewis – EVP and CFO

Analysts

Timna Tanners – Bank of America Merrill Lynch

Sal Tharani – Goldman Sachs

Michelle Applebaum – Steel Market Intelligence

Richard Garchitorena – Credit Suisse

Luke Folta – Jefferies

Tony Rizzuto – Dahlman Rose

John Tumazos

Chris Olin – Cleveland Research

Mark Parr – KeyBanc Capital Markets

David Lipschitz – CLSA

Reliance Steel & Aluminum Company (RS) Q4 2011 Earnings Call February 16, 2012 11:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the 2011 Fourth Quarter and Year-End Conference Call. At this time, all participants have been placed on a listen-only mode and we will open up the floor for your questions and comments after the presentation.

It is now pleasure to turn the floor over to your host David Hannah. Sir, the floor is yours.

David Hannah

Thank you. Good morning everyone. As you can probably tell I’ve got a bit of bug here, so I’m going to try to get through this without sniffing and snorting too much. Thanks again for joining our conference call for the fourth quarter and our year-ended December 31, 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. And 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 other reports on file with the Securities and Exchange Commission.

For the 2011 fourth quarter Reliance reported net income of $67.9 million, up 72% from 2010 fourth quarter net income of $39.5 million and down 20% from $84.9 million in the 2011 third quarter. Earnings per diluted share were $0.91 in the 2011 fourth quarter, that was up 72% from the 2010 fourth quarter earnings per diluted share of $0.53 and down 19% from $1.13 in the 2011 third quarter. Sales for the 2011 fourth quarter $2.03 billion, that was up 28% from 2010 fourth quarter sales of $1.58 million and down 5% from 2011 third quarter sales of $2.14 billion.

For the 2011 year net income amounted to $343.8 million, that was up 77% compared with net income of $194.4 million for the 2010 year. Earnings per diluted share were $4.58 for the year ended December 31, 2011, up 75% compared with earnings of $2.61 per diluted share for the year ended December 31, 2010. Sales for 2011 year were $8.13 billion, and that was up 29% compared with the 2010 year of $6.31 billion.

We sold $1.06 million tons in the 2011 fourth quarter, up 17% from the 2010 fourth quarter and down 2.6% from the 2011 third quarter. Average prices per ton sold in the 2011 fourth quarter were up 10% compared to the 2010 fourth quarter, but down 2.3% compared to the 2011 third quarter. For the 2011 year we sold 4.21 million tons of metal.

That was up 13% from 2010 with an average selling price of $1,930 per ton, which was up 15% from last year. Our carbon steel sales were 53% of our net sales, aluminum was 15%, stainless steel was 15%, alloy was 10%, toll processing was 2% and the remaining 5% was miscellaneous.

By commodity for the 2011 year, we sold 3.4 million tons of carbon steel products, that was up 12% from 2010 with an average selling price up 18%.

Our aluminum tons sold of 228,000 were up 5% with the average selling price up 7%. Stainless steel tons sold were 207,000, that was up 12% with the average price also up 12%, and alloy tons sold of 269,000 were up 45% with the average price up 13%. Now the large increase in alloy tons sold was due primarily to our August 1st acquisition of Continental Alloys. However, even on a same-store basis our alloy ton sold were up 21%, really reflecting the strength in our energy related sales.

Turning to the fourth quarter for a moment, it started out a bit slower than we expected, as tons sold per day in October were not up as much over September as they normally would be. However, the slowdown in the following two months was also not as steep as usual, so the quarter ended up pretty much as we expected.

The carbon steel mill price increase announcements certainly had a positive impact in December by helping our gross profit margins reverse their downward trend over the first two months of the quarter and by providing some momentum entering 2012.

Overall, we were pleased with our performance in 2011 given the still fragile condition of our economy, still too high levels of unemployment and a lingering unhealthy level of uncertainty caused by our own political leaders as well as unrest in other parts of the world.

The industries that grew the most for us in 2011 were energy, oil and gas, and agricultural, and mining and equipment. Our aerospace, semiconductor and electronics, and toll processing businesses remain solid for us coming of a strong 2010. Even non-residential construction improved some over 2010, but significantly lagged compared to our other markets.

Our balance sheet provides a strong foundation for our operations and our growth strategies with net debt to total capital at only 28.4% at December 31, 2011. Additionally, we had $645 million outstanding on our new $1.5 billion credit facility as of December 31, 2011, which provides ample room for continued organic growth as well as for additional acquisitions.

Currently the prices of most of the metals we sell have increased over their fourth quarter levels and we expect pricing overall to remain relatively strong through the 2012 first quarter. We also expect prices to remain volatile through 2012 with scrap, other raw material input costs and imports playing a major role in pricing trends.

We also believe demand will continue to improve slowly, but steadily except for the energy aerospace, heavy equipment and auto industries where we look for higher than average growth. Given these expectations 2012 earnings should have been higher than 2011 and at this time we currently estimate earnings per diluted share in the range of $1.15 to $1.25 for the 2012 first quarter.

On February 14, 2012 the Board of Directors declared a regular quarterly cash dividend of $0.15 per share of common stock, that represents an increase of 25% in our regular dividend rate. The dividend is payable on March 23, 2012 to shareholders of record March 2. The company has increased its dividend 17 times since our IPO in 1994 and we paid regular quarterly dividends for 52 consecutive years.

Our 2011 sales of $8.13 billion were our second best ever. Our earnings per share were the fourth best and we accomplished that with non-residential construction, our largest market at about 30% of our sales, still near recessionary low levels.

We have tremendous earnings capacity with our broad and diversified product base and wide geographic footprint that positions us well in our industry. We also have significant exposure to industries that are poised for growth in years ahead. Most importantly, we have an exceptional group of managers and employees that have the experience and the drive to continue our successful growth strategies.

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

Gregg Mollins

Thank you, Dave, and good morning. As Dave pointed out, we were pleased with our results in the fourth quarter and year end 2011. Demand was pretty much as we expected in the quarter, with tons down slightly as compared to the third quarter on a same-store basis.

As expected, prices on most of our products softened in the quarter, which had a negative impact on our margins. FIFO margins for the quarter were 24.2% as compared to 24.1% in the third quarter. Inventory turn on a same-store basis, excluding Continental, was 4.6 times in dollars and 4.8 times in tons.

From a demand standpoint, we remain pretty optimistic on most and the major industries that we service. As Dave mentioned, our strongest markets continued to be aerospace, oil and natural gas, as well as electronics and semiconductor.

Heavy industries such as agricultural and mining equipment, barge and tank manufacturers, transmission tower, solar and rail cars are also strong. Our automotive business, service by our total processing operation is also very busy.

Non-residential continues to struggle. However, industrial construction is doing quite well and there have been recent signs of life in the non-residential construction in certain parts of the country. As for pricing, carbon steel prices began to soften in the spring and continued to decline throughout the balance of 2011.

With the addition of new capacity and the imports, there has been more pressure on pricing throughout the supply chain. Modest price increases as compared to last year’s run up were now announced for January and February. Scrap for the most part has traded in a fairly narrow range throughout 2011. Recently, shredded drop $30 a ton, still this is not a significant drop and is (inaudible) flattened out in March.

Midwest spot aluminum ingot peaked in May at $1.28 a pound with steady monthly declines through the balance of the year. Aerospace sheet and plate is very strong, primarily because of increase in build rates. Plate lead times are out 16 to 18 weeks and the price increases that were announced in the first half of the year held firmly. Aerospace is a great space to be in.

General engineering and aluminum plate is still quite strong and lead times are 9 to 11 weeks. Common alloy sheet demand is pretty steady at reasonable levels with lead times of six to eight weeks. We like what we see on the aluminum side of the business.

Demand for stainless flat rolled is fairly strong with the year-to-date tons up over the last year on a same-store basis. Service centers and OEMs are being very cautious on the buy side with nickel surcharges in steady decline since May.

Stainless bar, which yields much higher margins, is still strong especially products sold into the energy and aerospace markets. Given the multiple discounts and the surcharge, we believe our sales and margins held up quite well.

To conclude, we are optimistic about demand improvement in all the major markets and industries that we service. With higher forecast for North American auto production, increased rig counts in oil and natural gas, increased build rates in commercial aircraft, and positive readings in the Architectural Billing Index we expect good things to happen in 2012.

We spent $156 million in property, plant, and equipment in 2011, of which $95 million was targeted towards internal growth initiatives. We have strategies in place, our proven and effective management team in the field and a balance sheet to support all of our initiatives. We believe 2012 will be a solid year.

Now, I’ll now turn the program over to Karla for the financials. Karla?

Karla Lewis

Thanks Gregg, and good morning everyone. For the 2011 fourth quarter our net sales of $2.03 billion increased 20.4% from the 2010 fourth quarter with a 17.3% increase in tons sold and a 10.2% increase in our average selling price. On a same-store basis, which excludes the companies we acquired in 2010 and 2011, our 2011 fourth quarter sales increased 20.6% with tons sold up 12.5% and our average selling price up 8% compared to the 2010 fourth quarter.

On a sequential basis, our 2011 fourth quarter sales were down 4.9% from 2011 third quarter with same-store tons sold down only 3.5% and our average selling price down 2.9%. Typically we see more of a seasonal decline in volume in the fourth quarter than we saw in 2011.

We believe this supports the continued general improvement that we are seeing in the economy. Our 2011 annual sales at $8.13 billion were up 28.9% from 2010 with a 13% increase in our tons sold and a 14.7% increase in our average selling price. On the same-store basis our tons sold were up 9.8% and our average selling price was up 13.5%

Our gross profit margin for the 2011 fourth quarter was 23.4% compared to 24.9% in the 2010 fourth quarter and 23.1% in the 2011 third quarter.

Our gross profit margin for the 2011 year was 24.4% compared to 25.1% for the 2010 year. We believe that generally our gross profit margins will be in the range of 25% to 27%., however we fell below this in 2011. This was mainly because of the downward pricing pressure that we experience midyear on most of our products that we sell. 2011 started out with increasing mill prices for the first four months before they began to fall.

Although mills announced price increases for certain carbon and steel products near the end of 2011, aluminum and stainless prices fell at lower levels in mid-2011 than in 2010 and remained near the low levels through the end of 2011, which also contributed to our lower gross profit margins in 2011.

On a FIFO basis our 2011 gross profit margin was 25.5%, down at least slightly from 25.7% in 2010. In 2011 we recorded a LIFO charge or expense of $85.3 million compared to $34.8 million in 2010. Our higher LIFO expense was mainly because the costs of many metals were higher at the end of 2011 than at the beginning of the year. We had estimated that our full-year 2011 LIFO expense would be $90 million, but our actual charge was $85.3 million, resulting in actual LIFO expense of $17.8 million in the 2011 fourth quarter.

Our LIFO adjustment is included in cost of sales and, in effect, reflects cost of sales at current replacement cost. Our same-store basis, our 2011 warehouse, delivery, selling, general and administrative expenses increased 12.1% compared to 2010 due to our higher volume and profitability levels.

As a percentage of sales, our 2011 expenses were 15.7%, improved from 17.5% in the 2010, and then again mainly because of our higher volume levels, but also due to our continued focus on cost control.

Our 2011 depreciation and amortization are $133.1 million, increased $12.5 million over 2010 due to our 2010 and 2011 acquisitions as well as increased depreciation from our 2011 capital expenditures.

Our 2011 operating income was $572.8 million or 7% on sales, up 58.8% from 2010 operating income, up $360.7 million or 5.7% on sales. Our 2011 operating income margins are improved from 2010 because of higher sale levels and effective expense management.

Interest expense for 2011 was $59.8 million, down 2.3% from 2010 mainly due to the lower borrowing rates as a result of restating our syndicated credit facility in July 2011.

Our effective income tax rate for 2011 was 31.75 compared to 33.3% in 2010. A lower rate in 2011 was mainly due to the favorable impact of increasing our international exposure, as well as the lower state tax rate, mainly due to our acquisition of Continental and also due to changes in certain state tax laws. Our 2011, fourth quarter rate was 29.8%, compared to 32.6% in the 2010 fourth quarter.

Our accounts receivable balance increased $145.9 million in 2011 and our average accounts receivable days sales outstanding rate for 2011 remained consistent with 2010 at just under 42 days. Our 2011 inventory turn rate was 4.4 times compared to 4.8 tons in 2010. Our acquisition of Continental Alloys in August of 2011 impacted our turns a bit, as their items do not turns quickly as many of the other items that we sell. However, we do expect to improve their inventory turn rate somewhat and still have a companywide inventory turnover goal of 5.5 times.

This effective working capital management resulted in cash flow from operations of $234.8 million for the 2011 year was $217.5 million generated in the 2011 fourth quarter. In 2011, we spend approximately $156 million on capital expenditures, our highest level ever.

Our 2012 capital expenditure budget is about $250 million. This again includes several growth activities, as we expand or enhance existing facilities and equipment and also includes the exercise on purchase options on existing lease facilities that will lower our operating expenses.

Our outstanding debt at December 31, 2011 was $1.33 billion compared to $943.1 million at year end 2010. Our net debt-to-total capital ratio at year end 2011 was 28.4% compared to 23.5% at year-end 2010. The covenants and our debt instruments require us to maintain a debt-to-capital ratio of less than 60% and an interest coverage ratio of at least 3 times. Our interest coverage ratio at year end 2011 was 9.5 times compared to 5.8 times at year end 2010.

At December 31, 2011 we had $645 million outstanding on our $1.5 billion credit facility. In July 2011 we restated our $1.1 billion unsecured credit facility for five years and increased the size to $1.5 billion. The restated credit facility includes an increase option for up to an additional $500 million and includes more favorable pricing terms that our prior facility that would have matured in November of 2012. Other than pricing, the terms remain fairly consistent including the financial covenants.

We funded our August 2011 acquisition of Continental Alloys with borrowings on our credit facility of approximately $424 million and also funded our February 2012 purchase of McKey Perforating through our line. We’re comfortable that we had adequate cash flow and capacity on our new revolving credit facility just under debt obligation as well as our working capital, capital expenditure, growth and other needs in the near future.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question is coming from Timna Tanners. Please announce your affiliation then pose your question.

Timna Tanners – Bank of America Merrill Lynch

Hi, I’m with Bank of America Merrill Lynch. Good morning, guys.

Gregg Mollins

Hey Timna.

Timna Tanners – Bank of America Merrill Lynch

I just wanted to ask a little bit more about the gross margin trends. And I think you explained it pretty nicely that there was a decline in prices in the second half but – particularly in non-ferrous.

But especially on the carbon side we’re hearing some people talk about some real competitive environment for products. And I was just wondering if you could characterize that you’re seeing much of that in the products that you sell, if it’s a tougher environment, and there might be some continued margin pressure in more of the carbon side?

Gregg Mollins

Well, I think the – Timna, this is Gregg. I think the competitive environment that we’re seeing today and saw in basically the second half of last year is pretty ferrous. I think for the most part the competition just service centers in general are very concerned about pricing. Pricing has been falling, okay, and so there is a need to make sure that you’re getting your higher cost product out the door as soon as you possibly can.

So that means you’re chasing some volume orders that you might not necessarily chase, okay if business conditions were better and prices were not declining. So, is it competitive out there, yes.

Why there has been quite a bit of imports coming in, that continues to be the case as we speak and with the increase in supply and domestic supply with RG certainly Thyssen, Severstal, et cetera that poses some problems and then of course with surcharge dropping in the stainless market and main-gate prices going down throughout the year now starting to head up opening it and Nickel surcharges which is positive, but is it competitive out there, it most certainly is.

Timna Tanners – Bank of America Merrill Lynch

Okay, that’s helpful. And it’s like you chart on your dot com of opportunities for M&A, I know you have articulated interest in staying more and in hours or more premium products if possible but how you are seeing that opportunities out there in general and how can I get you pursue them?

Gregg Mollins

Well till now we are very keen on pursuing those things that are attractive to us. I think there is a little more opportunity out there certainly then there was last year and the year before but there is still not a lot as we do expect that over time there will be more opportunity going forward it seems that most of the opportunities that we aware of now do happen to be in the energy related areas probably because that’s a pretty hot market and it appears to us based upon what we seen that private equity made a pretty big move in to energy related metal distribution if you like to call it that, back in the 2005 to 2007 time period and probably suffered through one or two difficult years there and now there is a pretty good outlook. We believe there is a great outlook for energy related products.

So, it’s probably good time for them to make an exit. So, I think that’ s why we are seeing a lot in that particular area. But overall I would still say activity is relatively low, but we still think it will get better and we are ready. Our balance sheet in great shape from a debt and capacity standpoint and we just need those opportunities to pop up.

Timna Tanners – Bank of America Merrill Lynch

Okay. Thanks a lot.

Gregg Mollins

Thanks.

Operator

Thank you. The next question is coming from Sal Tharani. Please announce your affiliation, then post your question.

Sal Tharani – Goldman Sachs

Goldman Sachs. Good morning guys.

Karla Lewis

Good morning.

Gregg Mollins

Hey Sal.

Sal Tharani – Goldman Sachs

Couple of things on the – you mentioned, Dave, that non-res construction, you saw modest improvement in 2011, can you quantify what percentage in your business you saw increase?

David Hannah

No, Sal, we can’t. We still think overall non-res represents somewhere around 30%, it used to be a little bit higher, but we’ve grown in another areas and non-res has not grown much so I think that percentage has come down from probably 33 to 30.

But, there is – I have no idea very honestly how much our non-res would have grown last year. I think quality wise our – Gregg and Karla are looking for some information here, but we didn’t have big increases in quantities across the board. It seemed to be more in the East Coast, the Midwest, and we also had some pretty decent activity here in the West Coast. So that – but to put a number on it I don’t think...

Karla Lewis

Yeah, it’s really hard to do, Sal, because the products – some of the products that we sell into non-res also go into other industries, some of which have been really strong for us in the last year. And if you look for instance our same-store structural sales were up about 7% in ‘11 versus ‘10, carbon plate, but that has a lot of end users that we sell it into. Our carbon plate same store was up about 12%, so.

David Hannah

The structural percent increase is probably a better indicator of what it did. And as you can tell that, it was less than half of what our total increase was in terms of tons, so – or about half, so it was lagging, but better.

Sal Tharani – Goldman Sachs

Got you. Also...

(Inaudible)

Sal Tharani – Goldman Sachs

Yeah, go ahead I’m sorry.

Gregg Mollins

I was just going to say, Sal, probably more that had to do with the industrial, industrial construction, okay, and we define that basically as anything related to manufacturing plants. It’s pretty broad, but the manufacturing chemical plants, auto plants, agricultural plants, refineries, anything related to manufacturing. Actually it was pretty good last year. We expect that to continue. So anyway just wanted to add that.

Sal Tharani – Goldman Sachs

Great. Thanks. What’s the embedded LIFO expectations in the 1Q guidance?

Karla Lewis

So the expectation is pretty unclear at the moment. We’re not too far into the year and we had – the timing of us receiving our inventory and versus price increases that are announced, starting to see some pressure on that. So we are thinking it’s going to be at this point a pretty modest potential LIFO charge for the year, may be in the $10 million to $20 million range, that’s for the whole year so you’d only have a quarter of that in the first quarter.

Gregg Mollins

About 5 million in the first quarter, Sal.

Sal Tharani – Goldman Sachs

Got you. And one more thing, Dave, you mentioned about non-res, can you give some idea or maybe color what other – what is your revenue what you call breakdown by other industries like aerospace and energy except right in 2012, out of 2011?

David Hannah

Yeah, the identifiable one, Sal, our aerospace is in that 8% right around in there, it can be higher and we do expect that, that will get higher as aerospace improves over the next few years, it’s been as high as it was when we’re much a smaller company it was a much higher percent. So it’s in that 8% to 10% range. Energy is around – it should be right now in that 7% range for last year, but it probably would be up higher next year to the 9%, 10%, 11% range.

Karla Lewis

(inaudible) full year Continental Alloy which is all energy related next year plus continued growth in that market will take us up.

David Hannah

Yeah. As far as non-res we still think that’s going to be right around 30%. We are not expecting real big things to happen in non-res during the course of this year, we hope we’re wrong. There are some indicators as Gregg mentioned in his remarks that some of the AVI index and some other things are moving in the right direction and we have seen some better activity, it’s just not consistent quite yet.

It’s hard for us to track the heavy industries because we sell so much plate, bars, including alloys and what-not in to the agricultural and mining equipment people and the barge and real cars and what-not. But that’s pretty significant if you add it all that together, I don’t know what percent but it’s got to be pretty higher.

Gregg Mollins

Yeah we recently identified better is by a product that we sell rather than end market and where we’ve see the most growth there both in terms of acquisitions, mostly because of strength in the markets has been in the alloy market.

Karla Lewis

And you can probably remember Sal, that so much of our businesses selling into job shops and fabricators and they buy a variety of products from us and we truly don’t know what they’re doing with it. So, it makes little harder. The more identifiable ones are the ones that we’ve mentioned because of the product and we sell more direct in that area.

Sal Tharani – Goldman Sachs

All right. Thank you very much.

Operator

Your next question is coming from Michelle Applebaum. Please announce your affiliation, and then pose your question.

Michelle Applebaum – Steel Market Intelligence

Hey, Michelle Applebaum with Steel Market Intelligence

Karla Lewis

Hi, Michelle.

David Hannah

Hi, Michelle.

Michelle Applebaum – Steel Market Intelligence

Hi, David you sound bad.

David Hannah

I look worse.

Michelle Applebaum – Steel Market Intelligence

Yeah, let’s note that difference.

David Hannah

Thanks.

Michelle Applebaum – Steel Market Intelligence

Sorry, I like the dividend increase. So, good for you on that. And I hate to ask this question, but it’s – the stock is actually – it’s done extremely well and it’s kind of back up to, close to where it was when you announced your last equity offering. Karla, am I right about that?

Karla Lewis

Actually, we’re close to where we were on the day that we were going to price it and call it off. We were significantly higher that.

Michelle Applebaum – Steel Market Intelligence

On the announcement?

Karla Lewis

Prior to the GAAP.

David Hannah

When we hit the road we were in the mid-60s and we expected to issue above 60.

Michelle Applebaum – Steel Market Intelligence

Okay. So your stock is at the price where you wouldn’t issue equity at that spend , but I have to ask the question. Obviously the world has changed and I think some people took it after that, that you needed the issue equity. You clearly have generated – you fixed the balance sheet from cash flow pretty easily. Should we think about it capital raise here, is that something you’re thinking about?

David Hannah

Yeah, Michelle, I think right now we don’t like where the stock number is. You are absolutely right, it’s better than it was, but it needs to get better yet. We still think it’s undervalued, of course, even with respect to other people in our group there, it doesn’t make much sense to us. So...

Michelle Applebaum – Steel Market Intelligence

It’s a great answer Dave.

David Hannah

Should we think about raising capital, we can borrow, we can match out our line, which is another 800 and somewhat million dollars and our debt to cap would still be 39 point something percent, we’d still be under 40% from a debt to cap.

So the only reason that I can see why we would want to go out and raise capital into the form of equity would be to support a deal. If there was big transaction out there and we didn’t want to tie our hands completely with our line. We do with our size now, we do need to have a fair amount of working capital available to – working capital funding available to us. So that probably is $300 million or $400 million on our revolver that we’d want to have already at all times.

So there is some big transactions that we run across out there or a group or one single one, then yeah, I think we look at raising capital whether it was equity would depend upon what the price of the stock was. We’re not real thrilled where it is today, again, but we would also have the ability to go out and raise some additional debt and still keep our ratios well under control.

Karla Lewis

Yeah. And also on the equity raise and similar to what’ve done when we’ve gone into the market previously, it’s important to note as Dave commented that would be because of some acquisition or growth activity, because we want to be careful not to dilute the shareholder base. So that’s the other reason to do the equity raise tied to some type of growth activity.

Michelle Applebaum – Steel Market Intelligence

Okay. And that’s what you have done in the past. So you are saying you could borrow $800 million and still have a reasonable healthy balance sheet and that would support, that could be as much as – given what you paid in the past, $1.5 billion or $2 billion in incremental revenues, right?

David Hannah

Yeah, depending on the type of company, your typical service center I would guess it would probably be somewhere in that $1.5 billion range of revenues.

Michelle Applebaum – Steel Market Intelligence

Can I ask another question?

David Hannah

Sure.

Michelle Applebaum – Steel Market Intelligence

The question I get most often and it’s weird because, your stock doesn’t sell at a gross multiple, sound like a still stock or little bit that are these days, but not a growth company and it used to. But the question I get a lot about growth is, how big you are and how much growth is left.

And I was thinking one way to address since we can’t talk about the envelop anymore, one way to address that question is. Can you give me some idea and you may not have looked at this, so of what your market share might be in each of the businesses that you’re in and your market share overall in the sector. I think everything still relatively small versus the overall shares there are small isn’t?

Karla Lewis

Yeah, overall in the Michelle, which is probably the best thing that we could comment on, we really don’t know in these other areas, but overall, we’re about 6% from what we understand and what we read. We’re about 6% of the market in North America.

Michelle Applebaum – Steel Market Intelligence

Okay, so that gives it...

Karla Lewis

Pretty small. There is a lot of stuff out there that, that we’re aware of and strangely enough there is, we still today run in the prices that we don’t know. You know that could be a company doing $100 million, $300 million, $400 million worth of revenue, but...

Michelle Applebaum – Steel Market Intelligence

Isn’t that amazing.

Karla Lewis

Yeah, it is amazing to us, but to us.

Michelle Applebaum – Steel Market Intelligence

Me too, and most of the market in Chicago down the block and -Okay, great. Well listen, sorry I’m giggling a little bit, but I do like what you’re doing. So, congrats and thanks.

Karla Lewis

Well, thanks. We love you too. Thanks for the tip.

Michelle Applebaum – Steel Market Intelligence

Yeah, good tip.

Operator

Thank you. The next question is question is coming from Richard Garchitorena. Please announce your affiliation, and then pose your question.

Richard Garchitorena – Credit Suisse

Hi, it’s Richard, Credit Suisse. Good morning, guys.

Gregg Mollins

Hey, Rich. How are you doing?

Richard Garchitorena – Credit Suisse

Good. Congratulations. First question, I was wondering if you could talk a little bit about the trends among the product groups on the demand side and you said things look pretty competitive, I think you are primarily talking about carbon. But if you can talk about your stainless, aluminum and then alloys? And also on that, how is demand turning so far in February, because we saw January shipments come off from NMCI very strong versus December, so, if you can just touch on those points?

David Hannah

Sure. I guess, from the aluminum and stainless side, to begin with aluminum, a large part of our aluminum is in plate stock and going into aerospace, which is very, very strong, and we expect that to continue to grow. So, we are really looking forward to the next few years in the commercial aerospace market.

When you get into engineering plate for aluminum, which is also big with us, a lot of that goes into the semiconductor equipment manufacturers and we saw a little bit of a dip in the second half of the year, but we saw improvement in December and it continued through January and we expect that to continue going forward. So, the aluminum business for us is strong as I mentioned in my remarks, it’s good to be in the aluminum business.

On the stainless side, about only less than 40% of our sales in stainless is in the bar, in load and bar products, which is really a great space. The margins in the bar product as compared to the stainless flat rolled market are much better.

Our growth in both bar and in the sheet products has been very good. Last year, over the year prior, basically half year, we were up on – basically on a same store basis we’re up about 9% in both products and tons, so that’s a good area for us, it was competitive. And because of the surcharge devaluation that began in April, but we moved quite a bit to metal and our margins in spite of the fact that the surcharges were holding this back a little bit what we consider to be pretty good. So that market is – both those markets, stainless and aluminum from demand point of view have been good, good and solid.

Gregg Mollins

And alloy has been the strongest. Last year same store our volume was up 21% on our alloy products and 45% if you include Continental in there which we acquired during the year.

In aerospace, some of those alloy products also go into aerospace, but the majority of it would – and I guess into the farm equipment side. But the majority of it is energy related and we think that’s a really good place to be. We think that energy along with aerospace are going to be the two strongest and fastest growing markets for us this year and probably the following year.

Richard Garchitorena – Credit Suisse

Okay. And then in terms of February trends, anything you could give us on that?

David Hannah

It’s a little early on that but we have not heard anything from the field that indicates that anything has slowed up as compared to January. Our people in the field are positive and they feel good about things. We’re seeing some price increases on the aluminum side, on the stainless steel side.

We saw some increases announced as you know on the carbon steel side and recently a discount on the beginning mini mill products of about $30 a ton, but that’s not a real big deal. So our – we don’t expect that February is going to fall off except for the number of days as compared to January, but on average daily sales basis we expect February and March to continue at a reasonable rate as compared to January.

David Hannah

Might be good time to talk about this price volatility which is – it’s a part of our everyday business. Prices move up and down and today we all read and hear about the price of scrap almost on a daily basis and the price of other input cost and surcharges and people track nickel on a daily basis, and to some extent we know too much because you make – you could be forced to make a decision based upon what’s happening on a particular day. And it’s important for all of you to understand that this price volatility, this price movement is just a – it’s a normal part of our business, we deal with it.

As Gregg just mentioned, a $30 change isn’t a big deal to us. If you have a ten of those in a row then it becomes a big deal or if you have a $150 or $200 adjustment then – like we had back in 2009 then that becomes an issue. But this normal day to day price volatility is really just a normal part of our business and we don’t get too awfully excited about it very honestly, and we wish that all of you understood also that it’s not something that you have to be terribly concerned about.

Richard Garchitorena – Credit Suisse

Great, thanks. Appreciate it. The other question I had was just wanted to touch on the organic growth and then, you mentioned you’re targeting at roughly $250 million on CapEx in ‘12, that’s a fairly substantial increase versus 2011. Can you give us some detailed pictures of where you are investing in, where you think that will increase margins on the cost side versus or is it on value added capabilities, how should we think about that?

David Hannah

Probably both, okay. As Karla mentioned, part of the $156 million that we spent last year, we were buying out some leases. Some of the companies that we have acquired in the past, they lease property, we prefer to own our property and so, we spent quite a bit of money and have the last few years on buying out these leases. We are going to see more of that going forward this year. We are also building operations.

We built operations in Malaysia. Our recent acquisition in Continental. We are building an operation in Singapore, okay. We have been expanding operations. We built a facility in Memphis. We just bought a facility in Nashville, Orlando. We have expanded in the Northeast. We’re building a large facility for (inaudible) in Ohio. Talladega we are increasing by about a third our operation for toll processing operation in Talladega.

So we have just – I could probably go on for five minutes and bore you to death, but our internal growth initiatives are huge. We certainly get a lot of attention, everybody’s attention on the acquisition side, which we understand is a pretty sexy part of our business, but the internal growth areas for our company, they’re big and we very much enjoy to expand our presence in all the different regions and markets that we serve.

I think one of the things that even though we talked about it quite a bit, one of the things that really makes us little bit different than most is our mix, our product mix. Our flat-rolled carbon steel is about 11% of our business, now with Continental it’s probably drop into about 9% to 10% of our business.

But everything that we’ve done over the – essentially we’ve gone public and even when we were private is to get into the richer product mixes. And if you look at the customer base that we support the ag and mining equipment guys, the barge and tank manufacturers, transmission towers, which is huge business and has a lot of legs, the rail car industry, certainly aerospace, oil and natural gas, the energy business and semiconductor I mean those are some very, very solid businesses and they are doing quite well, they’re going to get bigger and better.

We are seeing on the ag side, we’re seeing business coming back from China and Asia in general and plants being built by CAT and Deere and Holland et cetera. So we got a really solid customer base. So I don’t think that just gives as much attention as probably it should.

Gregg Mollins

And overall it’s a smaller part of our growth than the acquisition.

David Hannah

Yeah.

Gregg Mollins

But it’s very, very important to us and it’s important to our people because when we acquire companies, we like to acquire companies that want to grow and have the opportunity to grow and maybe for whatever reason they haven’t been able to grow.

So that the acquisition then turns into kind of an organic growth of opportunity after we acquire and I think the amount of the CapEx budget really reflects the confidence that we have in the business going forward because our maintenance CapEx if you want to call it that as probably around $60 million, $70 million, it’s something where we could ranch it down to that level and or lower.

Actually if you look back in 2009 when things were pretty difficult, we cut the severely and now we are catching up to the certain extend on some of the stuff that we didn’t back then. So it really is an indicator of the confidence that we have in these markets as Greg was talking around.

Richard Garchitorena – Credit Suisse

Okay, great. Thank you.

Gregg Mollins

Thanks.

Operator

The next question is coming from Luke Folta. Please announce your affiliations and pose your question.

Luke Folta – Jefferies

With Jefferies. Good morning everybody.

Gregg Mollins

Hi Luke.

David Hannah

Good morning.

Luke Folta – Jefferies

First question is on imports, you talked about seeing some or expecting to see some increase, I was hoping to get a sense of – I think there is some obvious product categories like flat roll but kind of across your system of products where you are seeing import activities starting to pick up and based on the offers that are out there what sort of magnitude should we be expecting over the next few months?

David Hannah

Well I hope it’s going to go down because January was disgusting. I think January was the second highest month since November of 2008. So there are coming – what products certainly flat roll, but more actually – more in the way of beams and plate because the spreads are fairly significant.

So that’s where you are going to probably see more, even more than flat rolled was going to be in the beam and plate market and it’s coming from all over, it’s coming from Asia, it’s coming from Spain, Germany, South America, so you name it, it’s coming from all over.

But what do we expect, probably what we saw in January is going to be reflective of what’s going to be going on going forward probably through the first quarter and maybe into April and then after that, who knows, I don’t know after that. But there was some buys that were made back in the fourth quarter not by us, but from others that. So it will be a little bit problematic, but it’s certainly nothing that we haven’t gone through over and over, over and over, over and over again. So I hope that answers you question.

Luke Folta – Jefferies

It does, thank you. Also currently you talked a bit about the impact that Continental has had on inventory costs and on the inventory situation. I am just looking at, churns are a bit lower, days on hand are little higher than it has been case. Is that all Continental or did you – was there some, maybe some buying ahead of some price increases or maybe just – did you end the quarter with a little more inventory than you typically would on you base business or is it Continental?

Gregg Mollins

Karla, before you answer that I’d like to make one comment, is that on the energy related product mix the alloys that Dave mentioned were up 40% (inaudible) and Continental 20 plus percent on same store.

Those items do not turn as quickly as flat roll does, it’s just – it’s a way of life. Okay. But the margins are higher which is a great thing, but that definitely, the more that you’re involved in energy and you’re growing in your alloy, it’s going to negatively impact your return. That’s a fact of life.

David Hannah

We think the continental impact was like a point, two points where you probably impact on the overall. We did because of what was going on in the market. We did do a little bit of opportunistic buying at the end of the year for certain products.

So that impacted a little bit, also and just as we talked about earlier, we still have that same target of 5.5 times even with our mix of companies, but to get there non-residential construction is going to have to come back quite a bit because we still have some of our companies that are carrying some of those products that are just not moving that well.

Luke Folta – Jefferies

Okay. Thanks for the color and I just have one more on the stainless market, you talked about surcharge revenues coming back up, but can you give us a sense of what’s happening with base price trends, I know that there had been some announcements in, there was some press that some of them have been retracted, has there been any retraction there, overall?

David Hannah

Well there was a 4% discount, okay, so basically that took it up about 15%, okay, taking 4% off their base price, it all stick pretty much. Okay. So that went in effect in January and I think there is probably some deals being had on particular business that is related to one particular contract or something like that, but on the spot basis, did that 4% hold? Yes, it did.

Luke Folta – Jefferies

Great. Thanks a lot guys and good luck.

David Hannah

Thanks.

Operator

The next question is coming from Tony B. Rizzuto. Please announce your affiliation then pose your question.

Tony Rizzuto – Dahlman Rose

Thank you, Dahlman Rose. Good morning Dave, Gregg and Karla and congrats on all the progress.

Karla Lewis

Thank you, Tony.

Tony Rizzuto – Dahlman Rose

I have got several questions and I just wanted to follow up a little bit, you guys are really knocking the cover off the ball from a ton sold standpoint and based on what sounded to me to be pretty constructive comments on demand and certainly with the caveat on the political situation and a lot of other wild cards. Is it possible you guys could achieve may be closer to 15% kind of growth in ton sold on a same store basis for 2012?

Karla Lewis

Is it possible, yes.

Tony Rizzuto – Dahlman Rose

What would it take to get there, you were right on the mark. I remember I asked this question last year and you said we think we can do 10% to 15% little bit of tailwind from the economy, could be even better than that, but you kind of nailed it with the 13% kind of growth that’s why I’m asking the question.

Karla Lewis

We were lucky Tony, that’s the first time...

Tony Rizzuto – Dahlman Rose

I guess it’s more than luck.

Karla Lewis

It just turned out that way. We just worked out and turned out that way. It could happen yeah I think if we had month-over-month improvements for the 11 remaining months of 2012 like we did in January yes we’d actually be over that 15%. But we all know that the first half of the year is usually better than the back half of the year.

The one thing that could change that is if we had some more meaningful improvement in non-res that’s really the wild card for us to give, way out there is just some – doesn’t have to even be a bunch and just some more meaningful improvement in non-res and I think we could certainly be there. Then, we will be whenever that happens, it’s just what, we just don’t know if it will happen this year, but we do expect that we should still be at least 8% to 10% improvement in volumes this year based on what we know today.

Tony Rizzuto – Dahlman Rose

In that same store?

Karla Lewis

That’s on same store basis.

Gregg Mollins

And, if you just apply 15% growth rate to our revenue dollars which (inaudible) pricing flat, 15% ton that takes us to up to like $9.3 billion of revenue which based on our history, and is certainly achievable, we were about that on a run rate prior to the downturn Greg and as David said that means non-res has comeback somewhat and we’ve also added some good companies since then, will have happened this year, we don’t know that certainly we have the capacity to be above that.

Tony Rizzuto – Dahlman Rose

And just remind me of what, big part of your COGs, has been typically employee related and but, I know you guys, it’s also a big variable cost here, but you seem to be pretty right sized and as you go through the cycles, but, how you sized right now for this potential growth?

Gregg Mollins

We are pretty good Tony, we, as you remember we laid off about 2500, 2400 people back during that late ‘08 and earlier ‘09 timeframe, and we have this year, just over that 2011, we hire back just under 500 people, about 400 people on the same store basis.

Tony Rizzuto – Dahlman Rose

Okay.

Karla Lewis

450.

Gregg Mollins

So 450 higher. And then our total employment went up what about 800-900 people, but the other piece came from Continental and the acquisitions. So we are in pretty good shape. Where we hired people last year were in those businesses of ours that have been growing more rapidly and we are – if we go up 15% in volume whether we have to hire some more folks, yes, you bet, another 5%.

David Hannah

Maybe another 5%.

Gregg Mollins

I was going to say conceivably with all the efforts in the spending and the CapEx that goes to the different locations, you’re obviously from a productivity standpoint realizing a lot of that or achieving lot of that too, so that would mitigate that.

Tony Rizzuto – Dahlman Rose

Yeah, right.

Gregg Mollins

We have some pretty good leverage. As Karla mentioned in her remarks, our SG&A percent of sales has come down and as we recover more and more I think that percentage is going to continue to come down and it’s driven in large part by exactly what you asked, Tony, by the personnel related expenses.

Karla Lewis

Yeah, and Tony just to clarify on, our cost of sales is actually just material and freight cost. The personnel costs are in that operating expense that really the SG&A line, selling, general and administrative, and it’s about – generally personnel costs or about 60% of total SG&A expenses and we were at 15.7% of sales SG& A expenses were for the 2011 year.

We don’t think demand is where it should be based on what we would consider to be a more normal level. So we would expect more normally our SG& A expenses to be about 14.5% to 15% of sales, which demonstrates the leverage that Dave just mentioned that we think we can absorb some more volume there.

Tony Rizzuto – Dahlman Rose

Okay. And if I may just ask one more question, just kind of pursue the pricing environment just on the carbon side and I know flat roll does not the biggest product for you guys but I’m just curious, where you are able to purchase hard roll right now in the marketplace.

And then also, if you think about the fact that we had prices come in international prices are raising if you could kind put on your – give us your crystal ball, where you see the price is kind of may be settling over the next couple of months. Do you still see this – the type of declines that we saw last year and just how you see that playing out may be little bit. And also you could touch on beams and plate too that type of thing?

Gregg Mollins

Okay. Let’s start with flat roll in Tony. The increase is last year. Okay, and in particular in flat roll and plate, beams and mini mill were pretty stable and still are but, flat roll and plate increases last year we are significant, those increases that we have this year have not been significant. So therefore, the decline will not be as great as what we saw last year, we saw about a $280 a ton increase in flat roll from December to April last year.

Tony Rizzuto – Dahlman Rose

Right

Gregg Mollins

And then we saw the same decline from May to December all right. So that’s one of the reasons why our margins suffered a little bit was because of that and plate we saw something similar to that, we’ve seen only an increase on flat roll of about $80 a ton and so it’s up to about 740. There is some waffling going on there because of the extra capacity that’s on stream here as well as imports. So is that 740 a solid number? The answer to that question is no, it’s not.

So, where will – what’s going to happen in the next few months is I think where you’re going with the question. It’s going to go down. It’s soft now and there is just – demand is reasonable, but supply is a little bit out of hand in our opinion. Will it drop to 720, 700? Yes. Will it drop further than that? It’s possible.

But I think that the mills, okay, are going to put likely did this year, they’re going to put a bottom to it and once it goes to 660, 680, I don’t see it falling below that. So (inaudible) 740, okay and now it’s dropping closer to 720 to 700. Is it going to drop down to 680? Yeah, it’s possible, but that’s a $60 a ton spread, that’s not that big of a deal, okay. I don’t see it dropping below 660 and I think they can draw the line at 700. So, that is kind of the carbon story.

When you talk about plate and beams I think there is going to be foreign fighters that are going to have to go through because of the import issue that’s involved with plate and beams, but those are in the port communities. Those aren’t necessarily like in the Midwest, Chicago area. Okay, because you get more of those imports associated with Long Beach and Houston and mobile and up in the Northeast markets, Baltimore.

So plate, there is going to be some room for discounting in plate and beams, I think the beams are going to kind of hold the line, that’s just our gas – that’s just our gas. But there will be some foreign fighters there and that will go into effect at the important communities.

Tony Rizzuto – Dahlman Rose

Listen I appreciate all the color and insight. Thank you. Thank you everybody.

Gregg Mollins

Sure.

Karla Lewis

Okay. Thanks, Tony.

Operator

The next question is coming from John Tumazos. Please announce your affiliation then pose your question.

John Tumazos

Good morning. Thank you for taking my call.

David Hannah

Hey, John.

John Tumazos

It’s great to see how good everything else. How much do you think your apparent revenues and real dollars I guess rise this year due to mix given that aero is ramping up and oil and gas just shale gas in the way and you bought the alloy company et cetera?

David Hannah

Oh gosh John, we haven’t even thought of that.

John Tumazos

No the mills can’t screw up your mix.

David Hannah

No, no that’s – how much of the revenue increases would be mix-relate...

John Tumazos

It was seem like the market could be flat from a price standpoint and you should be 5% to 10% on mix, do you see?

David Hannah

I don’t know there would be that much, the top-end of that, but we could be of 5% because of the mix. But I don’t think it would be 10.

Gregg Mollins

It is generally what happens as we look at more on a percentage basis and surprisingly even with all the variability in the different markets are next byproducts. They fairly consistent that it’s always other than the last recessionary period, it’s typically always growing in absolute dollars. So certainly, probably $400 million to $500 million in those products will see additional sales.

David Hannah

It takes a lot to move the needle John that’s we can – when we acquired continental it had 2 percentage point mix change, I think on the alloy went from 8 to 10 and so and that was a good sized company. So, it takes something pretty substantial to move that branch.

Gregg Mollins

If I could throw a scenario at you it would subtraction I enjoy your reaction as well as your comments on risk management. And the scenario is the U.S. is great, four years’ worth of college graduates move out of our houses. Let’s say volume is up 15% and price is down 15%, for things that aren’t U.S. related like Chinese steel put first 20 days January is down 13%. So iron ore guys are ready to sell 8% more and that doesn’t look like it is good as the iron ore guys say this.

And this week aluminum inventories were up 97,000 tons for the first three days, and copper is down 10% from last year, it looks like it’s the best one and nickel was $13 like it was last April. So that before mix a lot of these things look like they could be down a good bit, maybe not 15, but prices aren’t going to be a (inaudible) and in that scenario you have a big LIFO credit with 15% more volume.

Your marketing and administrative expenses would be more because you’ll be handling more volume in the locations and you would be benefiting from mix. So, my guess would be if commodity prices were down 15%, but your volume was up 15% because the U.S. is good and the rest of the world is so-so. You might show 10% up revenues and up profits?

David Hannah

Okay.

John Tumazos

I know Gregg that you think that mills can draw a line, but the iron ore guys are born themselves up.

David Hannah

Yeah, I think Gregg’s comments on the pricing were probably based on relatively constant scrap and other cost inputs. And certainly, if scrap comes down, iron ore, coke and coal reduce significantly then that changes I think our response to those previous questions.

Yes, John, all the stuff that you mentioned, I don’t know how it all comes back, the risk management – we’re pretty simple around here. We buy this metal, cut it up and sell. And I think from a risk standpoint we turn our inventory.

Our biggest risk is and probably always will be in our inventory management and that’s why we focus so much on it, that’s why we talk every day to our people about turning their inventory, the most they can possibly turn it and it any changes Gregg mentioned earlier some of the products that we have don’t five times or six times, but we have some that turned 8 and 10, and we have some that turned 2.5. So we are on top of that and that’s we manage our risk primarily through our inventory management.

John Tumazos

And following up on earlier question and not the one about you’re talking, it would seem like the need the equity offering that you canceled last year because the year has passed and you’ve retained earnings, and business is good?

Gregg Mollins

That’s true. As it turns out with hindsight it was good that we did not do that, but I guess when we were out trying to get it done, we didn’t anticipate that the cliff that was out of ahead of us was actually there maybe the fact that business dropped down so much really allowed us to reduce our leverage very, very quickly because with P&A on a pro forma basis, I think our debt to cap was up 50% and that’s a bit higher than we’re comfortable with and that’s why we were out doing trying to raise the money, but as it turned out our business started to drop. So it worked out well for us.

David Hannah

And that was in 2008 and so as you mentioned, we have the P&A deal on hand to offset any potential dilution from the equity rates and also the M&A market, which is pretty active at that time that we had a lot of other people talking to us about potential deals so we saw some continued growth there too.

John Tumazos

Thank you. It’s great to see everything so good.

David Hannah

Thanks John.

Operator

The next question is coming from Chris Olin. Please announce your affiliation and pose your question.

Chris Olin – Cleveland Research

Hey, I am from Cleveland Research and most of my questions were answered. I just wanted to do a follow-up on the non-residential data points and what interested me was you highlighted the Midwest and east is driving a lot of this relative strength.

And I am just curious if you guys have ever done any type of analysis on how much the weather benefited your volumes or results and is there any type of indication that there was a pull forward in demand into these last couple of months just because they both trying to get budgets in-house schedule?

Karla Lewis

Very honestly Chris, I think we have no idea. We did have a more mild winter certainly so far I guess it’s not over yet, has it? But compared to a year ago, we actually had some problems of our own a year ago with roofs collapsing and being shut down for more days, that we have not had this year, but have we analyzed that? No.

David Hannah

Yeah it’s hard enough to tell how much of our products goes into non-res, little long to break it down further. I mean we do know that when non-res is busy, the weather can’t impact it, but we have no data on a companywide basis so anything.

Karla Lewis

But last year in January and February we lost 5 billing days okay because of the weather. We just couldn’t ship. Okay and we couldn’t receive. So this year we haven’t had any delays in our shipments and that’s Dave is not going to (inaudible). So we can impact on shipping related basis that if we get down that deep as far as customers pulling in – or is what not very honestly probably our guys in the field could answer that, but we can’t.

Chris Olin – Cleveland Research

Okay, fair enough. Thanks.

David Hannah

Thanks, Chris.

Operator

The next question is coming from Mark Parr. Please announce your affiliations and pose your question.

Mark Parr – KeyBanc Capital Markets

Thanks. It’s KeyBanc Capital Markets. Morning.

Gregg Mollins

Good morning Mark.

Mark Parr – KeyBanc Capital Markets

I think it depends on where you are.

Gregg Mollins

Don’t worry Good afternoon.

Mark Parr – KeyBanc Capital Markets

I hope you feeling better soon Dave- I have – sounded like you are pushing your voice to the max so. I appreciate the effort this morning in light of the good results. One thing – I wanted to try to talk a little more about the 1Q guide I mean it looks like FIFO margins in 1Q might actually be lower than they were in the 4Q, I was wondering based on your guidance commentary and you know with the addition of Continental and with pricing expected to a bit higher in 1Q versus 4Q, I just like got get your take on that?

Gregg Mollins

Yes Mark we are not – we are not guiding lower than Q4 on the margin basis. But we are cautious of that margin in the first quarter with some of the uncertainty around pricing right now and Dave and Greg had talked earlier about earlier how competitive it is out there. So, we are looking not for them to go down, but certainly if the environment got better and margins went up, that would be a positive impact on the guidance that we gave. We are just a little cautious on them staying about the same too modestly up in Q1.

David Hannah

January was good, Mark, and obviously we have those numbers and the margins were up and they are solid. But now we’ve had a little bit of the discussion that Gregg was talking earlier with some price softness on the carbon side. So, we are being cautious as we normally are because we don’t know how things are going to react in the marketplace regarding that. But if we continue through the first quarter like we had in January, then our margin assumption in the guidance would be too low, we’d beat that certainly.

Karla Lewis

And we hope that’s the case.

Mark Parr – KeyBanc Capital Markets

Okay. And then just for clarification, I know you don’t talk about acquisitions specifically, but is this fair to think about Continental as, say, in the profitability spectrum something that might be more toward the higher end of your business mix, is that fair?

Karla Lewis

That’s fair.

David Hannah

Yes.

Mark Parr – KeyBanc Capital Markets

Okay. I appreciate that. And good luck in the first quarter.

David Hannah

Thanks Mark.

Gregg Mollins

Thanks Mark.

Operator

The last question of the day is coming from David Lipschitz. Please announce your affiliation and pose your question.

David Lipschitz – CLSA

Hi, CLSA.

Karla Lewis

How are you doing?

David Lipschitz – CLSA

Good, how are you? Couple of quick questions. You talked about the tube in the energy business doing well, but with gas prices being where they are and with the imports that we’re seeing flooding with the new capacity and things like that, how do you feel about, at least part of the second half of the year, (inaudible) first half might be okay, but do you think the rig count will drop and how do you feel about that?

Gregg Mollins

We feel that the – with the respect to the oil and natural gas, that it’s got lags we think it’s positive. I know that the natural gas prices are low, okay, but as far as we’re concerned even if those rigs go down somewhat, there is going to be a lot more steel used on the horizontal drilling operations as implies to the shale projects. So, from a steel point of view, okay, we expect that consumption is going to be greater going forward than it is today and today is very good.

Karla Lewis

And there is – as Gregg mentioned there is a good chance with the price in natural gas, that just the drilling for dry natural gas is going to go down, but we think that drilling for oil and red gas, will more than offset the decline on the dry side.

Gregg Mollins

Okay. Thank you very much.

Karla Lewis

Thanks.

Operator

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

David Hannah

No, just thank you very much, and we’ll talk to you all again in, I guess in a couple of months. Bye, bye.

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.

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