Reliance Steel & Aluminum's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Apr.27.12 | About: Reliance Steel (RS)

Reliance Steel & Aluminum (NYSE:RS)

Q1 2012 Earnings Call

April 26, 2012 11:00 am ET

Executives

David H. Hannah - Chairman and Chief Executive Officer

Gregg J. Mollins - President, Chief Operating Officer and Director

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

Analysts

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Richard Garchitorena - Crédit Suisse AG, Research Division

Michelle Applebaum - Steel Market Intelligence Inc

Arun S. Viswanathan - Longbow Research LLC

Operator

Good morning, ladies and gentlemen, and welcome to the Reliance Steel & Aluminum Sponsored 2012 First Quarter Conference Call and Webcast. [Operator Instructions] Now I would like to turn the floor over to your host, Mr. David Hannah. Sir, the floor is yours.

David H. Hannah

Thank you. Good morning, and thanks to all of you for joining our conference call for the first quarter ended March 31, 2012. Gregg Mollins, our President and COO; and Karla Lewis, our Executive Vice President and CFO, are also here with me today. After 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, 2011, and other reports on file with the Securities and Exchange Commission.

For the 2012 first quarter, our net income was $116.2 million. That's up 26% from the 2011 first quarter net income of $92.3 million and up 71% from $67.9 million in the 2011 fourth quarter. Earnings per diluted share were $1.54 in the 2012 first quarter. That's up 25% from the 2011 first quarter earnings per diluted share of $1.23 and up 69% from $0.91 for the 2011 fourth quarter.

Our sales for the 2012 first quarter were $2.29 billion, up 20% from 2011 first quarter sales of $1.91 billion, and up 13% from 2011 fourth quarter sales of $2.03 billion.

We sold 1.17 million tons of metal in the 2012 first quarter. That's up 14% from the 2011 first quarter and up 11% from the 2011 fourth quarter. Average prices per ton sold in the 2012 first quarter were up 5% compared to the 2011 first quarter and up 1% compared to the 2011 fourth quarter.

For the 2012 first quarter, our carbon steel sales were 52% of our net sales, aluminum was 15%, stainless steel was 15%, alloy was 12%, toll processing sales were 2%, and our other sales were 4%.

By commodity, our carbon steel sales of 937,000 tons in the 2012 first quarter were up 11% from the 2011 fourth quarter with average selling prices up 1%. Aluminum tons sold were 63,000, and they were up 14% with average selling prices flat. Stainless steel tons sold were 60,000, up 15% with average selling prices down 2%. And alloy tons sold of 88,000 were up 12% with the average selling prices up 1%.

Compared to the first quarter of 2011, our first quarter 2012 tonnage increases for carbon steel, aluminum, stainless steel and alloy products were 11%, 9%, 17% and 58%, respectively. Now the large increase in the alloy tons sold was due primarily to our August 1, 2011, acquisition of Continental Alloys.

Once again, the industries that continued to provide the most growth for us where energy, oil and gas, aerospace, heavy equipment and auto through our toll processing businesses.

Semiconductor and electronics and general manufacturing were also strong. We've seen improvements in our non-res construction-related businesses, but it still lags the growth we've seen in the other areas.

As we indicated in our guidance update last week, the quarter, overall, was better than we originally anticipated. Demand was stronger, especially in January and February, aided in part by a more favorable pricing environment for most of our products. Sales dollars per day in March were down slightly from February due to a drop in tons sold per day as the direction of carbon steel pricing became a little uncertain, and stainless steel surcharges decreased.

Our balance sheet is in excellent shape and provides a solid foundation for our operations and our growth strategies. Net debt-to-total capital was 29.4% at March 31, 2012.

There's still some uncertainty regarding the direction of prices for some of the metals we sell, with prices currently moving in different directions for different of our products, but all within manageable levels. We expect volatility to continue through the second quarter, but again, to stay within reasonable ranges. We're very fortunate that Reliance has such a broad range of products and substantial customer diversification. Those attributes have helped our operating results to be less volatile than if we had a more narrow range of products sold into fewer industries.

We believe real demand should continue to improve slowly from existing levels for most of our products, and we expect larger improvements in the aerospace and energy-related industries. Also, our first quarter 2012 earnings included about $0.06 per share related to miscellaneous income, including foreign currency gains that we aren't anticipating in the second quarter. Given those expectations, we currently estimate earnings per diluted share of $1.40 to $1.50 for the 2012 second quarter.

On April 24, 2012, our Board of Directors declared a regular quarterly cash dividend of $0.15 per share of common stock. That's payable on June 22 to shareholders of record on June 1 of 2012. We've increased our dividend 17 times since our IPO in 1994, and we've paid regular quarterly dividends for 53 consecutive years.

On April 4, we announced our acquisition of National Specialty Alloys, a processor and distributor of premium stainless and nickel alloy bars and shapes based in Houston with 3 additional U.S. facilities. NSA's sales in 2011 were about $96 million. NSA has a strong management team, which has continually grown the company with expansion into higher end products as well as new geographic locations. NSA also increases and complements our exposure to the energy market, as well as aerospace, power generation, petrochemical and others.

Reliance has significant earnings capacity with our broad and diverse product base and wide geographic footprint that positions us well in our industry. We also have meaningful exposure to industries that are poised for growth in the 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. Thanks to them and thanks to you for your support.

Gregg will now comment further on our operations and market conditions. Gregg?

Gregg J. Mollins

Thank you, Dave, and good morning. As Dave pointed out, we were pleased with our results in the first quarter. Demand was a bit better than we expected in most all products and regions, which was a pleasant surprise. Tons were up 10.2% on a same-store basis as compared to first quarter 2011, and 10.9% compared to the fourth quarter in 2011. Needless to say, double-digit growth in volume is a good thing.

As expected, price increases were announced in the quarter and discounts were as well, but the pricing swings were not significant either up or down. FIFO margins for the quarter were 25.6% as compared to 24.2% in the fourth quarter.

Inventory turn on a same-store basis, excluding Continental and McKey Perforating was 4.6 turns in dollars and 4.8 turns in tons. From a demand standpoint, we remain pretty optimistic on most of the major industries that we service. Oil and natural gas is the strongest market, and we believe it will stay strong for a long time.

Aerospace commercial build rates have record backlogs, and our companies that support it are going like gangbusters. Heavy industries, such as agricultural and mining equipment, barge and tank manufacturers, transmission towers and railcars, are very strong and getting stronger.

Automotive, supported by our toll processing operations in the U.S. and Mexico, are also very busy. Nonresidential construction is showing signs of life, mainly through industrial construction projects throughout the country. Through our network of over 220 facilities, we are in great position to take full advantage of all of these growth opportunities.

As for pricing, carbon steel long products and plate, which represent 31% of our sales, have been fairly flat throughout the quarter. Carbon flat roll, which represents 11% of our total revenue and carbon steel tubing, which is 10% total revenue, have seen modest increases year-to-date.

Alloy products, which represent 12% of our sales, have also seen relatively modest surcharge increases in the quarter. We don't expect to see any major swings here going forward.

As for aluminum, Midwest spot ingot has traded in the $1 to $1.10 a pound range the past 6 months. Aerospace sheet and plate is still tight, with mill lead times at 16 to 18 weeks. Price increases on these products of 5% were announced in the quarter, and they will undoubtedly stick. As we say, aerospace is a good space to be in.

General engineering aluminum plate is also very strong with lead times at 13 to 16 weeks. Common alloy sheet demand is pretty steady with lead times at 6 to 8 weeks. We like what we see on the aluminum side of the business.

Demand for stainless flat rolled is up 18% on a same-store basis from last year's first quarter. Bar and tube, which yields much higher margins, is up 13% due to our acquisition of Continental Alloys and is up 6% on a same-store basis. Nickel surcharges have not been near as volatile as they were in 2011, trading, year-to-date, in a plus or minus $0.15 a pound range.

To conclude, we feel good about demand going forward. We are well positioned geographically and product wise to support all the major industries we described earlier that continue to grow. We're even more excited to see manufacturing returning to North America. Low domestic natural gas prices and ample availability will provide an edge to North American manufacturing to compete on a global basis.

Huge investments have been announced to build factories that support chemical industries, heavy industrial equipment makers, oil tool makers, et cetera. The future looks bright, and we plan to take full advantage of it going forward.

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

Karla R. Lewis

Thanks, Gregg. And good morning, everyone. For the 2012 first quarter, our sales increased 19.6% over the 2011 first quarter, with a 13.8% increase in tons sold and a 5.3% increase in our average selling price per ton sold. Compared to the 2011 fourth quarter, sales were up 12.5% with an 11.2% increase in tons sold and a 1.3% increase in average selling price.

Comparing our same-store sales, which exclude the sales of our 2012 and 2011 acquisitions, our 2012 first quarter was up 12.9% compared to the 2011 first quarter, with our tons sold up 10.2% and our average selling price per ton sold up 2.6%. Compared to the 2011 fourth quarter, sales were up 12.6%, with our tons sold up 10.9% and our average selling price up 1.7%.

The increase in our average selling price in the 2012 first quarter was partially due to a shift in our product mix to 12% in alloy products compared to 8% in the 2011 first quarter. This was mainly because of the additional sales of Continental Alloys that we acquired in August 2011.

Our 2012 first quarter gross profit was $577.8 million or 25.3% as a percentage of sales compared to 26.5% in the 2011 first quarter and 23.4% in the 2011 fourth quarter. In the 2011 first quarter, there were multiple price increases for carbon steel products that allowed us to enhance our gross profit margins as we were able to increase our selling price in advance of receiving in the higher cost material. Although there were mill price increases for certain of the products we sell in the 2012 first quarter, the increases were not as significant as in 2011, and there was some resistance to the increases, reducing our ability to enhance our margins. However, the price increases, along with continued solid demand, did allow us to increase our gross profit margins over the 2011 fourth quarter.

In the 2012 first quarter, we recorded a LIFO adjustment that was a debit or expense of $7.5 million compared to $20 million in the 2011 first quarter and $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 costs.

Our current estimate of our 2012 full year LIFO adjustment is a charge or expense of $30 million. This compares to $85.3 million for the 2011 year. Our 2012 estimate assumes that our inventory cost at the end of 2012 will be slightly higher than they were at the beginning of the year. At the end of the 2012 first quarter, our FIFO inventory cost on hand was up less than 1% from the beginning of the year.

Our 2012 first quarter warehouse, delivery, selling, general and administrative expenses of $357.7 million increased $39.2 million or 12.3% from the 2011 first quarter but as a percentage of sales, declined to 15.6% compared to 16.7% in the 2011 first quarter, reflecting our ability to leverage our costs in a higher volume environment. On a same-store basis, our expenses were up $26.2 million or 8.2% from the 2011 first quarter on a 12.9% increase in sales. Our same-store headcount in the 2012 first quarter was up 5.5% from the 2011 first quarter on a 10.2% increase in tons shipped.

Our 2012 first quarter depreciation and amortization expense of $35.5 million was up $2.5 million from the 2011 first quarter, mainly due to the additional expense from our acquisitions. Operating income for the 2012 first quarter was $184.6 million or 8.1% of sales, up $28.9 million from the 2011 first quarter, with a consistent return on sales at 8.1%.

Our gross profit margin was 1.2 percentage points lower in the 2012 first quarter. Our effective expense control allowed us to maintain our operating income margin at 8.1%.

Other income in the 2012 first quarter increased $6.3 million from the 2011 first quarter, mainly due to redemptions on life insurance policies and foreign currency gains, adding approximately $0.06 to our diluted earnings per share.

Our 2012 first quarter effective income tax rate was 33.2% compared to 33.3% in the 2011 first quarter, and our 2011 annual rate of 31.7%. The increase in our effective tax rate is mainly because of our higher income levels. Our net income of $116.2 million and our earnings per diluted share of $1.54 in the 2012 first quarter are up approximately 25% from our 2011 first quarter results and are our highest since the 2008 third quarter when our net income was $152.5 million and our earnings per diluted share were $2.07.

In response to the improved business conditions in the 2012 first quarter, we increased our working capital using cash from operations of $63.2 million compared to $101.4 million in the 2011 first quarter.

Our accounts receivable balance increased $143.6 million or 16% since our 2011 year end because of increased sales activity. Our average accounts receivable days sales outstanding rate has improved slightly to 41.2 days from 41.6 days in 2011.

Our FIFO inventory levels increased $189.7 million or 13.4%, and our accounts payable and accrued expenses increased $97.9 million at March 31, 2012, from our 2011 year end. Our inventory levels increased to support our higher shipments. However, our inventory turn rate fell to 4.3x in the 2012 first quarter compared to 4.7x in the 2011 first quarter. Our 2011 full year turn rate was 4.4x.

Most of the decline is due to our acquisition of Continental Alloys in August 2011. Due to the nature of Continental's product mix, we expect their turn rate to be lower than our company-wide rate. However, we expect substantial improvement from their current levels. Part of their inventory build was to support their significantly higher sales levels in the 2012 first quarter.

We spent $34.6 million for capital expenditures in the 2012 first quarter, which included the purchase of land, buildings and equipment for replacement purposes and growth, as well as the buyout of facilities that we previously leased. Our 2012 capital expenditure budget is $250 million.

Our outstanding debt at March 31, 2012, was $1.43 billion, up slightly from $1.33 billion at year end 2011. We had net borrowings of $100 million on our revolving credit facility in the 2012 first quarter to fund the acquisition of McKey Perforating, as well as our increased working capital needs and capital expenditures. Our total borrowings on our $1.5 billion credit facility at March 31, 2012, were $745 million, with a net debt-to-total capital ratio of 29.4%, up slightly from 28.4% at December 31, 2011.

In early April, we funded our acquisition of National Specialty Alloys with borrowings on our revolving credit facility, increasing our pro forma net debt-to-total capital ratio to 30.9%. This provides ample liquidity given our expected positive cash flow in 2012 as we improve our working capital management, as well as capacity on our revolving credit facility. This will allow us to continue to fund our working capital, capital expenditure, acquisition, dividend and other cash needs in the near future. We also believe that we can successfully access the capital markets for additional funding if there were a need.

Thank you. We will now open the discussion for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Sal Tharani with Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Can you give us some view of what's going on in April about the tons per day sold? How is that trending?

David H. Hannah

Sal, they're right around where March was in most cases. Maybe overall, they're -- and we haven't seen the end where billing tends to catch up a little bit towards the end of the month. But so far, in the month, it looks like it's just slightly below March. But we'll probably end up about where March was.

Karla R. Lewis

And early April was a little difficult, because for a lot of our company's customers, they may have been closed for Good Friday, which there's a little catch-up then from that.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Okay, so generally, what is the trend historically? Is March better than February? I know some of this got pulled forward this year.

David H. Hannah

Yes, usually, Sal, and that's why we made the comments earlier that March is the biggest month of the first quarter in terms of tons per day and income really. This year, it was not. So -- but what we did have was a surprise in February, where February turned out to be -- not just because of the extra day in February this year, but also, business was just much stronger in February than we had originally thought. It was up from January. And then we didn't get that normal bump in March on a per-day basis that we usually get. And then going forward, April is usually somewhat close to March. And like Karla said, it depends on the Easter and Good Friday, because some of our -- and it's kind of normal in some areas of the country, people close down for Good Friday, in other places, they don't. And then May is usually a good strong month for us. And then June is probably -- what would you say, Gregg? Maybe more like April?

Gregg J. Mollins

April.

David H. Hannah

Yes. So that's kind of the trend, yes.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Okay. Do you think this has to do with the weather or this has to do with the -- because prices peaked in February and came down, so people just stopped buying in March? Or do you think it was the weather which pulled it forward in January really because we had a more warmer winter this year?

Gregg J. Mollins

Yes, I think it's a combination of both there, Sal. I think there were some pull-in a little bit on like construction projects and whatnot because of the weather conditions back East in particular. But also, the price discounts, there were -- I think everybody was looking for the price increases to fade away. And so like ourselves, for example, I mean, we try to keep our purchase order book in the drawer, if you will, okay, in anticipation that prices will get a little soft. And I don't think we were the only one. Some of our customers felt the same way.

David H. Hannah

The important thing, I think, Sal, is that we don't believe that real demand has changed or decreased. We think real demand continues to improve slowly in some areas and a little more than slowly -- better, much better in certain other areas. But the change in the pricing, as Gregg just discussed, will cause our customers' buying patterns to shift a little bit. So our tons per day in March were down about 3%.

Karla R. Lewis

From February.

David H. Hannah

So -- compared to February, the month prior. So that's not a big deal. And it's, we think, more driven by the fact that prices had turned direction, or there were at least some uncertainties that came up regarding the prices. And our customers, instead of buying as much as they could afford to buy, and we still don't think our customers are building inventory, but if they have jobs in their shop and they know prices are going up, they'll buy as much as they can afford, because it's going to be to their advantage to do so for the -- to support the work they have in their shop. If prices are flat or if they think they're down, they'll wait and they'll buy it next week and the week after and the week after that, because they think they can -- they just won't pay more for it and they might pay less. So I think that causes demand or shipments per day to move a little bit even though real demand hasn't changed.

Operator

We'll take our next question from Timna Tanners with Bank of America Merrill Lynch.

Timna Tanners - BofA Merrill Lynch, Research Division

So just wanted to ask you about your plans for uses of cash again, your comment on M&A activity picking up. You've talked in the past about being focused on the oil and gas industry. Are you continuing to seeing opportunities there? Certainly, you have less leverage to your balance sheet than you historically had, so if you could just give us an update on how you're thinking about uses of cash?

David H. Hannah

Yes, I think certainly, there's a bit more acquisition opportunity out there. We're busier this year at this time of year than we were last year, just looking at opportunities. And we expect that that's going to continue and perhaps even accelerate as business continues to get better. And in terms of -- we think we have plenty of liquidity and availability on our line to support the things that we're looking at now. In the event that something big did come in front of us, it would depend -- maybe we would go back to the market and look at different capital raises, or perhaps we could use stock in a transaction if it makes sense to do so. But we don't like to go to the equity market unless we have a deal in hand, so to speak, where we won't dilute earnings on a per-share basis. And very honestly, I don't think we foresee right now any of those things jumping in front of us in the near future. In terms of other uses of cash, we'll continue our growth initiatives organically, so that's supported by our capital expenditure programs. We have a pretty good budget for that this year, $250 million. The year usually starts out slower. It did this year in terms of spending, but that will be picking up. And we'll continue to pay our dividends, and we have raised the dividend consistently when it makes sense to do so, and we'll continue to evaluate those opportunities and then, of course, pay down debt. That's the rest of it. So...

Timna Tanners - BofA Merrill Lynch, Research Division

Okay, great. Then, if I could, a second one. You talked nicely about the aluminum market, which has been quite strong in the first quarter. But I was just wondering if you could give us a little bit more color on the stainless market, which has been under pressure for so long now. Is there a supply reason? Is there a demand reason? Is it a little bit of both? Is it imports? What are you seeing on stainless?

Gregg J. Mollins

Kind of all of the above. There is a great deal of imports that have been coming in. From a demand point of view, that's -- it's actually -- we're pretty pleased with demand. Our flat rolled was up 18% in tons compared to the first quarter of last year. You've got the nickel situation, which is anybody's guess what drives that. It just hasn't been as volatile certainly this year as it was last year. But it went up pretty dramatically the first 3, 4 months of the year last year and then proceeded to slide the balance of the year with the exception of September. I think September had a little bump of about $0.06 and then it dropped again in October, November, December. But it's volatile. Timna, it's always going to be volatile. When you've got that nickel surcharge there, it's -- what are you going to do? It's just going to go up. It's going to go down, and you've got to play the game. So -- but they did have some base price increases that were announced and followed by everyone, so there was a 4% reduction in discounting back in January. And that held -- well, I should say, 2% of it held. And there was another discount announced in April. So hopefully, that will stick. So far, so good. But it's the most volatile product mix that we have in the company is stainless. There's no question about it.

Timna Tanners - BofA Merrill Lynch, Research Division

Okay. So just -- and would it be fair to say that your strategy continues to be to move away from the more commodity kinds of products and continue to move into more specialty, less margin-sensitive or economically sensitive areas? Is that still kind of where you're focusing your energies?

Gregg J. Mollins

Yes.

David H. Hannah

Yes. We would -- and along the way, certainly, Timna, we'll pick up some of the more commodity stuff along the way, because there aren't many people out there that are only involved in those specialty products. There are some, but they're supplemented by other products as well. And we like, within our stainless group, put a bar, about half a bar, maybe a little bit...

Gregg J. Mollins

Yes, a little bit more.

David H. Hannah

Half of our stainless activity in bar products. And that's volatile, but it's not as volatile as the flat rolled side on the stainless. So we like that. And stainless, from a volume standpoint, it's been good for us. It's just a little more volatile, so we have to -- you have to pay attention to your inventories there so you don't get hurt.

Gregg J. Mollins

You got to churn your inventory like a son of a gun on a stainless flat roll in particular. But on the bar said, your margins are much better, okay, and it just -- you're able to pass the increases through. And when prices go down, you're able to keep your prices up for a longer period of time in the iron flat roll. So that's why we always point out that bar stock -- we're real proud of the fact that more than half of the tons sold on stainless steel is in the bar and tube area, much more profitable.

Operator

We'll take our next question from Tony Rizzuto with Dahlman Rose.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

I wanted to -- listen, I just -- it was about a year ago, I guess, that the economy, that the wheels kind of fell off in the economy. And I was just wondering, from a standpoint of your diverse business mix that you are involved in, how would you view with the economy today from a stability standpoint? And it seems like we -- since our -- the recession we went through where we've had these many cycles, it appears that you're feeling better about the stability and sustainability. And I don't want to read too much into what you're seeing, but Gregg made some comments earlier about the industrial side of non-res construction beginning to show some signs of life, if you will. But could you elaborate a little bit in terms of how you see the economy today versus maybe a year ago or the last couple of years?

David H. Hannah

Overall, Tony, I think you're absolutely right. We do feel -- we're not ecstatic, and there's still a lot of uncertainty out there. And I would say our economy is still fragile. We still have a lot of people out of work, which is holding the economy back significantly. But compared to last year and the year before that, I think it has improved. We've got a long way to go, but things are better. And I would say that we are more optimistic. We've seen more improvement in more of our areas that seems today more sustainable than maybe it seemed last year. Now hopefully, we won't hear the old double-dip talk, which we -- we've had a lot of things jump out mid-year, really, from April to June in the last couple of years -- or April to July in the last couple of years that have almost derailed what little recovery we were having. And we had the whole European deal, we had our own debt and issues with the debt ceiling. We've had the tsunami in Japan that had an impact on certain industries over here. So there've been a lot of things that have happened. And, hopefully, we won't have any of those big events this year. And the last 2 years, those things have caused talk of double-dip coming back. And we just have our fingers crossed that, that won't happen again.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

All right. And if I could just follow up, Gregg, you went through the aluminum lead times pretty well and I -- but somebody stuck their head in my office door, and I was a little side tracked. If you could go through that again a little bit for me in terms of both the heat treat side and also the general engineering side, I would be greatly appreciative.

Gregg J. Mollins

Sure, no problem, Tony. As far as the aerospace sheet and plate, it's still very tight. And lead times are out 16 weeks to 18 weeks. There was a price increase, Tony, of around 5% that was announced during the quarter, and that definitely will stick, okay? So the Aerospace business is extremely strong, very tight. You might call it allocation, if you will, okay? But fortunately, we have -- we're a very, very significant buyer of that product with all of the mills. So we're able to get -- have availability at Reliance. The general engineering plate is also very strong. Lead times there are 13 to 16 weeks. The mold makers that buy the heavy plate are busy. Certainly, the semi-conductor equipment manufacturers like Applied Material and whatnot are also very busy. We support their needs globally. So it's -- general engineering plate is strong. Common alloy sheet is pretty steady. Lead times are 6 to 8 weeks. The problem there is there is quite a bit of imports available at fairly significant discount to the domestic producers. So that's about it with aluminum.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Would you care to comment a little bit in terms of where you think the mills are operating to supply those products? Because I know we've got somewhat of a limited supplied base, and I'm just wondering where you think their operating rates are at this point.

Gregg J. Mollins

God, I don't have a specific answer for that, Tony, but I wouldn't be surprised if they were operating anything below 85% capacity. I'd be in shock if they were because look at those lead times, it's pretty telling. And I will tell you this, based on your question earlier about the stability of the economy and whatnot, the space that we're in with heavy manufacturing, the oil and natural gas business, Caterpillar, mining, all of those are transmission towers, barges, railcar producers. We're in a pretty good space with respect to our customer base and the industries that we service. And we're very comfortable that they're going to grow. And automotive, I mean, we're hearing 14 million, 15 million units. And obviously, we don't sell any material directly into auto. Okay, but we toll process it, and our -- we had a record month at our precision strip operation in the month of March, okay? So -- and that's about 60% auto with that particular subsidiary company of ours. So life is pretty good. It's just a shame to pick up a newspaper.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

You're right. And that Worthington acquisition that you guys have announced, has that closed now?

David H. Hannah

Not quite.

Karla R. Lewis

Not yet.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Okay, and that is -- correct me if I'm wrong, but is that mainly auto tolling processing?

David H. Hannah

It'll be appliance and auto, both, yes. Precision Strip's 2 biggest industries are the automotive first and appliance, second.

Operator

And we'll take our next question from Richard Garchitorena with Credit Suisse.

Richard Garchitorena - Crédit Suisse AG, Research Division

So my first question, a bit of housekeeping. Just on the $6.3 million of other income, can you tell us how much of that was a foreign currency gain? And also, where did that come from? Is that all from the Malaysia office?

Karla R. Lewis

So on foreign currency, right around $2 million of the total was related to foreign currency gains. Actually, it's mainly related to our Continental acquisition last August. We took a hit last August when we put in the intercompany notes, and the U.S. dollar versus the Canadian dollar was the biggest impact when it gained and then it reversed a little bit. So we're really kind of getting back the expense we had to book last year.

Richard Garchitorena - Crédit Suisse AG, Research Division

Okay, great. That's helpful. And then on the National Specialty Alloys, that -- it's closed already, I guess. Is that right?

Karla R. Lewis

Yes, that was closed April 3.

Richard Garchitorena - Crédit Suisse AG, Research Division

Okay. But you're still going to get more proceeds from that, I guess, in the second quarter, because on the cash flow statement, it only shows $10 million net of...

Karla R. Lewis

Right. So that -- yes. So on the cash flow for the first quarter, that was for the McKey transaction that closed February 1. And I think I had commented, so we had to borrow the funding on the lines beginning of April and then completed the purchase on April 3. So the NSA acquisition will show in the cash flow in the second quarter.

Richard Garchitorena - Crédit Suisse AG, Research Division

Got it, great. Okay. And then my last question, just again touching on in terms of the overall outlook. Obviously, your current run rate, very strong for the first half of this year. And then you look back at '08 and, obviously, very similar, but you've done over $1 billion in acquisitions since then. I guess just -- is there any way you can sort of frame how -- where the potential opportunity of upside going forward? Because, obviously, non-res construction continues to remain weak. You have additional capacity, and peak earning's probably much higher than we've seen in the past. So maybe if you can just can walk through that.

Karla R. Lewis

Well, I think -- you're right, Richard. And part of the reason we had put, it was in my comments, we kind of referenced back to the third quarter of '08, which -- yes, first half is strong now. I wouldn't say we think we're at first half 2008 levels on either demand or pricing fronts, but it is positive. Third quarter of 2008, we made $2.07 a share. We have added quite a bit through our acquisitions since then. So certainly, we would expect it to be north of that. But the markets aren't at the same level, and pricing is not at the same level as it was in 2008.

David H. Hannah

The only real areas, Richard, where we've had record performances, where our businesses have had all-time records, were in the semiconductor and the electronics side -- since 2008 have been in the semiconductor and electronics. And I would say in the energy side, because we didn't have as much energy back in 2008, so we're making more money there than we ever have before. But even with the recovery in the manufacturing and all the different areas that Gregg cited before, we just -- we're not back to pre-recession levels yet. We're better than we have been since 2009, but we're not back, particularly on the non-res side, which we're still probably 20% off from a volume standpoint where we would have been in the first half of 2008. And that volume, remember, was down from 2006 and '07. So 2008 first half volume wasn't record volume. Pricing certainly was, but the volume was not. The 2006 actually was, looking back, the best environment from a volume and pricing standpoint than -- that we've had. So we still have a ways to go, and there is -- thanks for bringing that up. There's great upside, we think, in our earnings potential. We've got a lot of untapped earnings here just based upon what we own today as a company. So we're just waiting for the opportunity. And again, the biggest catalyst there is the non-res construction side.

Operator

We'll take our next question from Michelle Applebaum with Steel Market Intelligence.

Michelle Applebaum - Steel Market Intelligence Inc

I have 2 questions for you. First, on the M&A front, we used to have this thing, Dave, where we talked about -- or I always used to say that I would continue recommending your stock as long as there were -- what was it, a dozen names on the envelope in your pocket? Can I get at that at different way? Can you talk about -- you're running about $8 billion in sales right now or a little bit higher. Can you talk about what the total market for service centers is in the United States in terms of dollars and what your share is in your top 3 markets and then how many dollars of markets you're just not in? Is that too much?

David H. Hannah

Yes.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. Can you do it a different way? You know where I'm going. So...

David H. Hannah

Well, I'd say it's only because we really don't know. We're going -- if you look at the first quarter, we're going at approximately a $9 billion clip. We think the industry is probably somewhere in the $160 billion range. So that makes us, what? Somewhere around 5% or 6%.

Karla R. Lewis

Yes, 4% to 5%.

David H. Hannah

Something like that.

Karla R. Lewis

And just -- and Michelle, the numbers -- the sources of where those industry numbers have come from have changed recently. So there's a bit of a gap. So we used to think we were 6% on the old numbers. On the new reference numbers we're using, it's more like 4%.

David H. Hannah

So the difference was -- Purchasing magazine, when it existed, you probably remember, did a survey every year and came up with what they thought the total industry was. We don't know if that was -- there was a measure that was there, and they did it consistently. We don't know, really, what it is today. We've got a different source now that we use in our filings. So it's the IBISWorld industry or something like that, but it's for the U.S. So we're still a pretty small piece, I guess. That much we know, is that we're in mid-single digits in terms of market shares as best as we can tell from a revenue dollar standpoint. We also know that there are -- every time we travel, it seems Gregg and I will see companies that we didn't know existed before, or we'll get a phone call or we'll get a book or a teaser sheet on a company that we've never heard of that does $100 million or $200 million in revenue. So that makes us wonder how good these estimates of the market really are. But all we know is that there's a lot of opportunity out there. As you know very well, we're very selective, and we are not going to acquire someone that's going to upset what we have here at Reliance, which we think is pretty special. We run our company a different way than most others in our industry. And we have to find companies that aren't identical because there aren't a lot of them out there that would be identical, but they need to be compatible with the culture that we have here. And we've been able to find a lot of those companies, and I think we're going to continue to find a lot of those companies. I kept keeping that list that you mentioned, because it changes so much, but there are a lot of opportunities out there. That's all we know. And because they're private companies primarily, you just have to maintain relationships and be in the right place when those owners want to talk. So we've been very successful doing that. We've acquired 50 companies now since our IPO in 1994, and we think we know how to do it and do it well. And we're going to continue to do that going forward.

Michelle Applebaum - Steel Market Intelligence Inc

Just remind me -- and this is still part of the same question, how many did you do before your IPO? And then what was your -- what would you say your average debt level, debt-to-capital before your IPO?

David H. Hannah

Oh, gosh. I know from 1981 until the IPO -- so that was -- the IPO was in '94, that was 13 years. We averaged 2 transactions a year. And I started at 1981, because that's when I joined a company. So I know that we did, on average, 2 a year for those 13 years beforehand. The acquisitions in those days though were a little different. They tended to be mostly troubled companies that needed to be fixed. And we either have the management or we could combine them with one of our other operations, or they had some financial issues that we could solve. In terms of our debt-to-cap, in those days -- geesh.

Karla R. Lewis

It ranged a lot.

David H. Hannah

Yes, probably from 30% to 50%, which is pretty much the range that we have been since the IPO. We've been up to 50%, maybe 52% on a pro forma basis. But now, we don't want to be at 52% so -- because times have changed. So we think we don't have to curve any activities that might come in front of us though, because we do have access to various forms of capital out in the marketplace.

Michelle Applebaum - Steel Market Intelligence Inc

Well, you did an amazing job paying off all that debt in the end of '08 and '09 without doing equity. And so, obviously, there's a high level of confidence going forward. Can I ask a question about imports? I know we keep going back and forth on that. So are you seeing -- we've always talked about 2 different types of imported steel. Demand pull for the most part is when prices are more attractive for whatever reason, and people start buying. But we see supply push from time-to-time, which is typically oversupply in another region where people will price at whatever price just to get it out of the home market. I guess that's dumping. So have you seen any more of the supply push kind of imports going on in the last month or so, last couple of months? And do you think that's going to be a problem going forward? Because China has been producing so much.

Gregg J. Mollins

In certain products, there certainly could be. There's a -- in particular, plate, there's a tremendous amount of imported plate that has come in and is coming in. The spreads between domestic and imports are -- they're over $100 a ton, which certainly makes it attractive. There seems to be a bigger push by other countries that have been basically out of the United States for quite some time. And I guess because Europe is slower than it has been and we're -- the United States is more attractive because our demand here is -- has improved when others has not. So, yes, the imports -- I mean, we're seeing imports now at a rate similar to what was coming in, in 2008, which is not a good thing as far as we're concerned. But it is what it is. You can't stop it. It's coming.

Michelle Applebaum - Steel Market Intelligence Inc

Is there any competitive disadvantage because you guys typically buy less imports?

Gregg J. Mollins

I don't think it's a disadvantage. We have relationships with our domestic suppliers that provide us with some of our inventories at foreign-fighter levels. So I think they support us, recognizing the fact that when imports are coming in at the rate that they are, and we're not participating to a large extent with them, they understand that. They appreciate it. They step up, and they provide us with competitive pricing, because if we lose market share, they lose market share, and it's a bad thing for both parties. So I don't think we're at a competitive disadvantage at all.

Karla R. Lewis

Yes, we can keep our supply, our cost competitive. The problem is the whole market comes down from a margin standpoint. So there is an impact -- a negative impact, but no worse for us than others.

Operator

And we'll Take our next question from Arun Viswanathan with Longbow Research.

Arun S. Viswanathan - Longbow Research LLC

I guess I just have a question on the inventory side. We've seen typical service in our inventories come down a lot over the last several years. I mean, is this kind of a structural change? And do you think that inventories will ever get back to where they were, say, 5 years ago? Or are we kind of now in, perennially, a lower level, customers are just holding lower inventories?

David H. Hannah

You're talking about the industry?

Arun S. Viswanathan - Longbow Research LLC

Yes.

David H. Hannah

Yes, I think the industry has changed in a good way. I think we're much more efficient as an industry with our inventory management than we were before. And some of that change, I believe, has been forced upon us because of the supply situation. It's just harder to bury yourself in inventory today than it was years ago, unless you run offshore and want to take that gamble and buy very large quantities of material. But pricing, if you look at -- just on hot rolled, you look at pricing, the chart goes back 30 years, and it's pretty -- it's volatile, but not all that much until 2004, and then it looks like an earthquake chart or something hit in 2004. So I think a lot of us in the industry realize that pricing has been volatile, will continue to be volatile, and it's not a wise thing necessarily to make those big bets on inventory 6 to 9 months out.

Arun S. Viswanathan - Longbow Research LLC

And so because inventories are low, the pricing volatility has been driven more -- or less by inventory and more by just demand is kind of what you're saying.

Gregg J. Mollins

More by raw materials, okay? It's the iron ore. It's the scrap, okay, coking coal, that type of stuff. It's driven by the raw materials. That's why back in 2003, we had prices on hot rolled of $260 a ton. I don't think you'll ever see those days come back, okay? Dave?

David H. Hannah

I hope not.

Gregg J. Mollins

And right now, the mills, because of the raw material prices being so far up as compared to those days in the early 2000s, it would make it down to $650 a ton. They're not making any money. So it's basically the pricing volatility. Whether it's in carbon steel, aluminum or stainless, it's all driven by raw material costs. And our customer base, you -- Dave referred to the service centers, looking at their inventory and being more cautious, in particular what happened with -- the last part of 2008 and certainly 2009. I mean, we -- service centers that bought offshore, they took a licking. I mean, no question about it, I mean, a severe licking. So -- have they changed their buying patterns maybe for the foreseeable future? Sure. But our consumers have learned also that they really don't need to rely on having inventory on their floor. They can call and get it delivered the next day by us in many, many occasions. And so there's no need for that. And they were hurting for cash, many of them, and the first thing they turn to is their inventory situation. And they realized that they were able to fare very well with very little inventory and just getting that delivered on a daily basis. So I think the buying patterns of our customer base have also changed.

Arun S. Viswanathan - Longbow Research LLC

Okay. I just had one more question. On the regional side, are there any pockets where you guys are more focused on anywhere else from an acquisition standpoint? And do you see anything more unfolding in the next year, regionally speaking?

David H. Hannah

There's no one reason that we're focused on where we want to do -- where we want to spend our attention there. We really look at each opportunity on its own merits. And we will evaluate that based upon what businesses we might already have in that region, particularly if they're in similar products. But no, we'll look at each opportunity on its own merit and then evaluate it on that basis.

Operator

Ladies and gentlemen, we'll take our last question today, a follow-up from Sal Tharani with Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Dave, you mentioned that you are seeing a bigger pool of M&A opportunity and that things could accelerate. Has it to do with -- that the tradition sellers are more inclined to sell? Or is that because your pool has increased because of the -- of your involvement in the energy market?

David H. Hannah

That's a good question, Sal. And the answer is, is that I think when we acquired Continental Alloys, it put us in front of a different group of companies that don't necessarily view themselves as service centers. They view themselves as being involved in the pipe and tube and oil services business. And a lot of the activity, to your point, has come from those kinds of companies, and so we've spent time looking at that. Certainly, National Specialty Alloy was one of those companies that didn't really run around in service center circles, you might say. But I think because of our Continental acquisition, we popped up on somebody's radar there. So yes, you're absolutely right, Sal. We are -- the pool of the industries that we're recognized in has expanded, and I think that's been a benefit for us and will continue to be.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

And Dave, how do you value these? I remember, I mean, when we -- when you looked at the traditional company, you always value on a -- sort of a normalized number, which is based on what your normalized estimates are for your own products. These are new products, and generally, these companies trade at a higher multiple, and I'm just wondering, how do you value that? And do you have to pay a higher multiple than where you're trading although, of course, these have higher margins in the end?

David H. Hannah

Yes, I think in general, Sal, we're valuing them the same way that we valued before. We look at their business through a cycle, their financial performance through a cycle. We do, though, have to pay some attention to the state of the market. And that doesn't mean that we believe their projections, because all of these projections are like hockey sticks. They go way up forever. And one thing we do know -- because EMJ had a pretty significant energy-related business, and we do know from them that, that business is volatile, and it can stop and start fairly quickly. And right now, it looks like we're in a pretty extended upswing, but that's not to say that there aren't going to be some peaks and valleys along the way. But in general, we think growth will be upwards. So we do pay attention to the state of the market, and we have paid, and we most likely will pay at the higher end of that normalized range of multiples that we typically would pay in the past. From an EBITDA multiple, usually we've been paying 4 to 6x. Not many pure service centers at 6x, but some of these energy-related companies I think were at that 6 or maybe just slightly over that, too.

Karla R. Lewis

That's right. If you look at the way we do it and the multiple that the pretax or EBITDA line, like Dave said, it's still consistent towards the higher end, where you see the bigger change is even though we've never valued this way. I think people had -- it used to be kind of common that you could look at the revenue dollars of a normal service center we would buy, and our purchase -- equity purchase price was usually 40% to 50% of that. That's not going to be the same for these higher value-add companies, because their pretax returns and EBITDA returns are much higher than in a traditional service center, so the ratio to sales is different.

David H. Hannah

Yes, their returns could easily be 50%, 60% higher than what our normal company returns would be.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

And this is over the cycle, 50% to 60% higher?

David H. Hannah

Yes, yes, right.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Okay. Not just right now that things are very good?

David H. Hannah

No, not just right now but through a cycle, yes.

Operator

I am showing no further questions in queue.

David H. Hannah

Okay. Well, thank you, all, very much for your support. We look forward to talking to you in another few months. Thanks very much again. Bye-bye.

Operator

Thank you very much, ladies and gentlemen. This concludes today's presentation. You may disconnect your lines 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!