| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 12146 |
PARTICIPANTS
. David Hannah, Reliance Steel & Aluminum Co., Chairman and CEO . Gregg Mollins, Reliance Steel & Aluminum Co., President and COO . Karla Lewis, Reliance Steel & Aluminum Co., EVP and CFO . Brett Levy, Jefferies & Company, Analyst . Timna Tanners, UBS, Analyst . Chris Olin, Cleveland Research Company, Analyst . Mark Parr, KeyBanc Capital Markets, Analyst . Sal Tharani, Goldman Sachs, Analyst . Bob Richard, Longbow Research, Analyst . Yvonne Varano, Jefferies & Company, Analyst . Michelle Applebaum, Michelle Applebaum Research, Analyst . Tim Hayes, Davenport & Company, Analyst
OVERVIEW
RS reported 1Q08 consolidated sales of $1.91b, net income of $107.4m
and diluted EPS of $1.46. Expects 2Q08 diluted EPS to be $1.50-1.60.
FINANCIAL DATA
A. Key Data From Call 1. 1Q08 consolidated sales = $1.91b. 2. 1Q08 net income = $107.4m. 3. 1Q08 diluted EPS = $1.46. 4. 1Q08 gross profit margin = 25.8%. 5. 1Q08 CapEx = approx. $36m. 6. 1Q08 DSO rate for receivables = approx. 40. 7. Share repurchases as of 03/31/08 = approx. 15.2m shares at an avg. cost of $18.41 per share. 8. 2Q08 diluted EPS guidance = $1.50-1.60.
PRESENTATION SUMMARY
S1. 1Q08 Business Review (D.H.) 1. Highlights: 1. Net income, $107.4m vs. $111.7m in 1Q07. 2. Diluted EPS, $1.46 for 1Q08 and 1Q07. 3. Fewer shares outstanding for 1Q08 due to share repurchases during that qtr. and in 3Q07. 4. Sales, $1.91b. 1. Up 4% vs. 1Q07 sales of $1.84b. 2. Up 12% from 4Q07. 5. Volume or tons decreased 1%. 1. Avg. prices increased 5% vs. 1Q07. 2. Volume up 9% and avg. pricing up 3% vs. 4Q07. 6. Carbon steel products, 47% of RS' revenue dollars. 1. Aluminum, 19%. 2. Stainless, 18%. 3. Alloy, 9%. 4. Toll processing, 2%. 5. Remaining 5% was miscellaneous, including:
1. Titanium.
2. Copper.
3. Brass. 7. 1Q08 turned out a bit better than anticipated. 8. Prices of most of the metals Co. sell were going up with largest increases taking place in carbon steel products. 1. These prices have continued upwards since Feb., faster and
higher than expected.
1. This contributed to strong 1Q08 results.
2. Co. passes the increases on to its customers as fast as or
faster than it receives the higher cost materials, leading
to an increase in gross profit margins as reported on a
LIFO basis from 25.1% in 4Q07 to 25.8% in 1Q08.
3. On a FIFO basis, gross profit margins increased to 26.7%
from 25% in 4Q07. 9. In Feb., indicated that Co. was less comfortable with regard to predicting demand given: 1. Uncertainty in many parts of the economy. 2. All the negative rhetoric in media by the politicians. 3. Demand for RS' products remains fairly healthy.
1. This contributed favorably to Co. beating its earlier
guidance. 2. Working Capital: 1. Continued to manage working capital well with: 1. Receivables in good shape. 2. Inventory turn increasing to 4.6 times for 1Q08 or averaging
about 2.6 months on hand. 2. Cash flow from operations was strong for 1Q08, when Co. typically sees a sizeable increase in working capital due to a seasonal pickup in business conditions vs. prior qtr. 3. Regular quarterly cash dividend rate increased 25% to $0.10 per share effective with 1Q08 dividend, which was paid March 28. 1. Co. has raised dividends 15 times since its 1994 IPO. 3. Dynamic Metals International: 1. On 04/01/08, acquired Dynamic Metals International, LLC based in Bristol, Connecticut. 2. Dynamic was founded in 1999 and is a specialty metal distributor of primarily maraging steel. 3. Dynamic's 2007 revenues, approx. $11m. 4. Dynamic will operate as part of Co.'s subsidiary Service Steel Aerospace Corporation, headquartered in Tacoma, Washington. 1. This strategic acquisition expands Co.'s existing Service
Steel Aerospace specialty product offerings in a new market
area.
S2. 2Q08 Guidance (D.H.) 1. Details: 1. Expects prices to be up or flat for most of the metals Co. sell. 2. Demand is more difficult to predict. 3. While Co. does not expect any significant increases or decreases in demand in any of its market segments, there is still a good deal of uncertainty regarding economic activity. 1. Therefore, anticipating demand at levels comparable to 1Q08
and expects continued improvement in gross profit margins
because of the increase in prices.
1. As a result, estimates diluted EPS to be $1.50-1.60.
S3. 1Q08 Operational Review (G.M.) 1. Gross Profit Margin: 1. Saw improvement in gross profit margins to a more normal range of 25.8%. 2. Working diligently to pass price increases on to customers at the time of announcement. 3. Was expecting an increase in margins as prices continue to rise. 2. Inventory: 1. Got a slight improvement in inventory turn to 4.6 times from 4.4 turns in 1Q07. 2. EMJ Company and Yarde Metals [turned] inventory over 4.5 times in 1Q08. 1. A record for both. 2. Expects them to be closer to 5 turns in the near future. 3. Same-store ton sold vs. 1Q07, [delved] 1.4%. 1. MSCI reported number volumes, down 4.8%. 3. Key Industries: 1. Still sees strength in many of the key industries that Co. support, including: 1. Aerospace. 2. Energy. 3. Electronics. 4. Wind towers. 5. Barge and shipbuilding. 6. Railcar. 7. Agricultural equipment. 8. Non-residential construction. 9. Infrastructure. 10. Heavy equipment. 2. Industries that remain weak are: 1. Domestic auto producers. 2. Appliance. 3. Residential construction. 3. Co. does very little volume in the above three areas. 4. Carbon Steel: 1. Most significant change in 1Q08 was the increase in cost of goods for most of the products Co. sells. 2. Carbon steel prices will reach record levels in 2Q08, far surpassing 2004 levels. 3. Factors Impacting Cost of Steel: 1. Skyrocketing raw material costs. 2. Low service in inventories. 3. Low imports. 4. High freight rates. 5. Weak dollar. 4. Carbon plate would have gone from $820 a ton in Jan. to over $1,200 a ton in May-June time frame. 1. Hardly a week goes by without a producer announcing
surcharge increases. 2. Has never seen a steel environment like the one that Co. is
in today. 5. Aluminum: 1. Midwest spot ingot is at $0.21 a pound since Jan. 1. 2. Demand for commercial grade aluminum is flat at what Co. feels are reasonable levels. 3. Aerospace, in spite of the delays of Boeing 787, is still quite strong. 6. Stainless: 1. Stainless demand is soft than a year ago. 1. Many of Co.'s customers were hedging their inventories in
anticipation of higher surcharges in 1H07. 2. This year, Nickel surcharges have continued their roller coaster ride. 1. Not at the same levels Co. experienced in 2007. 7. Summary: 1. Demand in most major industries Co. support is good. 2. Pricing, particularly in carbon steel, is at record levels, with no signs of backing down any time soon. 3. Will continue to focus on: 1. Superior customer service. 2. Managing gross profit margins. 3. Turning inventory.
S4. 1Q08 Financial Review (K.L.) 1. Highlights: 1. Consolidated sales, $1.91b. 2. Same-store sales, excluding sales of 2007 acquisition, were $1.75b, up 0.6% from 1Q07, with: 1. 1.4% decrease in tons sold. 2. 2.2% increase in ASP per ton sold.
1. Both exclude sales of Precision Strip because of the toll
processing nature of its business. 3. In 1Q07, experienced strong demand levels from those markets that Co. sells to. 1. In 1Q08, demand levels have declined from 1Q07. 2. Believes demand could decline further as 2008 progresses. 3. Does not currently expect any sudden and significant changes
in current volume. 4. Increase in ASP per ton sold is due mainly to: 1. Significant increases in carbon steel prices that were
affected in 1Q08. 2. Further increases that have been announced for 2Q08. 2. Gross Profit: 1. $492.3m. 2. As a percentage of sales, 25.8% vs.: 1. 25.7% in 1Q07. 2. 25.1% in 4Q07. 3. LIFO Expense: 1. $17.5m or $0.15 diluted EPS. 2. Currently estimates full-year 2008 LIFO expense to be $17m based on: 1. Significant increases in carbon steel cost in 2008, which
Co. expects to be somewhat offset by flat-to-lower cost for
stainless steel and aluminum products at 2008-end vs.
beginning-of-the-year levels. 3. In 1Q07, recorded LIFO expense of $18.75m or $0.15 diluted EPS. 4. LIFO expense is included in cost of sales. 4. Other Financials: 1. Warehouse, delivery, SG&A expenses: 1. Increased $26.1m or 10.2% from 1Q07. 2. 14.8% as a percentage of sales, up from:
1. 13.9% in 1Q07.
2. 14.3% in 2007. 2. On a same-store basis, SG&A expenses increased $18.5m or 7.6%, mainly due to: 1. Increased fuel and energy costs. 2. Higher personnel-related expenses. 3. Operating profit, $192.4m or 10.1% vs. $200.8m or 10.9% in 1Q07. 1. Operating profit margin decline was mainly due to higher
expense levels in 1Q08. 4. Interest expense decreased $3.5m vs. 1Q07, mainly due to lower: 1. Borrowing rates. 2. Outstanding balances. 5. Effective income tax rate, 37.6%. 1. Up slightly from 37.5% in 1Q07. 2. Consistent with 2007 full-year tax rate. 5. Balance Sheet: 1. AR balance increased $142.3m and inventory levels increased $50.6m at 03/31/08 from year-end 2007 amount. 2. Working capital needs increased in 1Q08, coming off of Co.'s normal 4Q seasonal slowness and because of increased pricing levels for carbon steel products. 3. DSO rate for receivables was approx. 40 days. 1. Consistent with year-end 2007 rate. 2. Has not seen a deterioration in customers' payment patterns
at this time. 4. Inventory churn rate improved to 4.6 times in 1Q08 from 4.4 times in 1Q07. 5. Used borrowings and cash flows to fund CapEx of approx. $36m and stock repurchases of approx. $114.8m, along with increased working capital needs. 6. Generated cash proceeds of approx. $15.1m from the sale of Encore Coils business. 7. Outstanding debt at 03/31/08, $1.1b, including: 1. $262m borrowed on Co.'s $1.1b revolving credit facility. 8. Net debt-to-capital ratio of 33.1% was up somewhat from year-end 2007 rate of 32.4%. 9. Significant availability on credit facility and relatively low leverage position provides: 1. Adequate liquidity for Co. to fund its working capital needs
and growth activities, including:
1. $210m CapEx budget for 2008. 2. Co. can quickly and significantly reduce 2008 CapEx if
needed. 6. Share Repurchases: 1. In Jan. 2008, repurchased approx. 2.4m shares of common stock at an avg. cost of $46.97 per share under the stock repurchase plan. 1. This is in addition to the approx. 1.7m shares repurchased
in Aug. 2007 at an avg. cost per share of $49.10.
1. These repurchases resulted in approx. 5% fewer shares
outstanding in 1Q08 vs. 1Q07. 2. As of 03/31/08, repurchased approx. 15.2m shares of common stock under the plan at an avg. cost of $18.41 per share. 3. Currently has 7.9m shares available for repurchase under the plan. 4. Book value per share was $28.81 at 03/31/08. 1. Up from $28.12 per share at 12/31/07.
QUESTION AND ANSWER SUMMARY
OPERATOR: (OPERATOR INSTRUCTIONS). Brett Levy. Please
announce your affiliation, then pose your question.
BRETT LEVY, ANALYST, JEFFERIES & COMPANY: Jefferies & Company. Can you guys talk a little bit about the working capital build that
you expect as prices move up in the second quarter and what you
expect on a working capital basis for the full year?
KARLA LEWIS, EVP AND CFO, RELIANCE STEEL & ALUMINUM CO.: We
haven't quantified it in a dollar increase, but certainly we would
expect some increases due to the carbon pricing. What we really
monitor are our days sales outstanding for our receivables, which
have been in good shape. And then on inventory, we really focus on
our inventory turn. We were up to 4.6 times in the first quarter,
which is an improvement. We hope to continue to improve that. We're
not planning on anyone buying heavy, so we should see good results in
that. So the dollars will be up, but we should be collecting those
dollars and paying down the debt that we need to fund the increased
pricing on the inventory. So we will have a little more borrowings
on our line, but nothing that we think significant or certainly not
troublesome, especially given the significant availability that we
have on our credit facility.
DAVID HANNAH, CHAIRMAN AND CEO, RELIANCE STEEL & ALUMINUM CO.: The real key there is the improvement in our inventory turns. And
our working capital increase, during any first quarter, is usually
the most significant increase because business tends to tail down in
the fourth quarter, so we see a pretty good increase in receivables
and then in inventories is also to support those higher sales levels.
Actually, the increase in working capital that we just had in
the first quarter of '08 was less than we would have expected, but
helping that was the improvement in our inventory turns. And we
would expect that to continue in a manageable way.
BRETT LEVY: All right. And then, just to get a final level of
granularity, you guys turn inventories a little bit more than once a
quarter each year, which means intuitively, you're long carbon for
the better part of a whole quarter. I'm just wondering why margins
wouldn't be up more. Is the carbon business turning faster than
that? You just think if carbon prices go up $200 this quarter, you
would think that next quarter should be awesome.
DAVID HANNAH: First off, with carbon products, we tend to turn
them faster than our specialty products. So carbon inventories are
turning something much better than five times, if you add up all of
our carbon businesses. So you are looking at about 2.5 months worth
of inventory on hand, on an average basis for carbon.
So the other -- the key in improving your margins is actually,
Brett, passing the increases through before you receive that
high-priced material. And with the magnitude of these recent
increases, it's more difficult to pass through $170, $180 a ton
increase today. We feel very confident that we can get some of that. Whether or not we can get it all on a 100% of our customers, that's
not going to happen. And so we are predicting some improvement in
gross margins. Also, the LIFO impact, as these things turn through
your inventory is a bigger deal.
BRETT LEVY: Alright, and then the last question revolves around
expansion. It looks as if you guys are doing some sort of organic
expansions, i.e., building rather than buying. Can you just talk a
little bit about where your priorities lie in terms of whether you
are looking more to spend money to build or buy to expand?
GREGG MOLLINS, PRESIDENT AND COO, RELIANCE STEEL & ALUMINUM CO.: I don't think we have any preference one over the other. It depends
upon the opportunities that are out there. We have had more
green-field type expansions in the last couple years really than
we've had in quite sometime, because there has been some
opportunities presented by some industry conditions that have allowed
us to do that.
I think you will see going forward that we will always have much
more activity on the acquisition side than on the green-field
expansion type side. But that we will, where opportunity presents
itself, go out and establish ourselves in new areas in a green-field
type manner. But it's going to be quite a bit smaller.
KARLA LEWIS: Yes, because we can get more accretion and more of
an impact typically from the acquisition.
GREGG MOLLINS: Right. Normally the organic growth that we've
had, as Dave described, over the last few years, has been because we
have not been able to find a company that we were compelled to
acquire in those particular regions. And so the obvious thing to do
was to open up in those regions ourselves when we didn't have a good
acquisition opportunity.
BRETT LEVY: Thanks very much, guys.
OPERATOR: Timna Tanners. Please announce your affiliation then
pose your question.
TIMNA TANNERS, ANALYST, UBS: Hope you are doing well. Just
wanted to clarify some of the points that you went over, specifically
talking about demand and your outlook. And in your guidance, as I
understand it, you are talking about expecting flat demand and
margins to improve, prices flat to up for most metals. We are a bit
surprised that you wouldn't have had -- you are making comments about
end market demand being fairly solid and still rising, but also
making comments about concerns. Can you articulate a little bit more
what those concerns might be? Do you see, with prices heading as
high as they are, some pushback for some industries despite some
strong fundamentals that might have more of a difficult time passing
on those higher costs?
DAVID HANNAH: I think, Timna, first off, I think our comments
were that demand has been steady. We didn't see it rising. We
didn't -- I think we said that we didn't expect, we have not seen, in
actually in quite some time, except for the seasonal turndown in the
fourth quarter of last year, demand has been just pretty steady and
that's what we expect going forward.
The second-quarter outlook for us was -- normally you would
expect second-quarter demand because historically it does go up;
business improves in the second quarter. Maybe we are reading too
many analyst reports, or other things that are out there talking
about the poor demand. But the fact of the matter is, we are just
being cautious, and we are not anticipating that demand in the second
quarter is going to increase the same amount that it normally does,
simply because there are some tough spots in the economy out there.
Now, I think you've talked about in some of your stuff and
everyone else has talked about the potential for slowdowns in certain
other areas, particularly non-res construction because of its
relationship to residential and certain other areas. So we are -- we
don't see any slowdown happening at the time.
On the other hand, we don't see anything taking off either. We
think demand is going to be relatively steady through the second
quarter. And we just don't feel comfortable reaching out and
predicting but that demand is going to increase in the next quarter
like it normally does, simply because of all of the different
economic uncertainty things that are going on out there.
TIMNA TANNERS: Okay. That's reasonable. I'm also wondering if
you can comment on the potential for added volumes, perhaps. Because
you mentioned that you didn't expect a decline in your volumes
despite any weakness that you might see later on or at least maybe
that's what I interpreted from Karla's comments. Is that potentially
from the opportunities from taking market share from smaller
distributors that might be having credit problems? Can you talk
about that opportunity a bit?
DAVID HANNAH: Well, I think, yes. We've consistently been able
to improve our share and we feel that through service and quality,
that we should be able to do that on a regular basis. The market now
for metals also is very tight, so it is -- there may be some
opportunities for us to, because of the size of the Company, to
acquire metal from producers that maybe some other people can't get
their hands on. So it's a combination of things, but I think we've
consistently been able to report volume changes that are better, even
if it is -- we are down but we're down less than the industry as a
whole.
Also, I think the industry numbers are impacted quite a bit by
the downturn in the auto and appliance and some of the other things
that Gregg mentioned, and we just don't deal in those markets.
TIMNA TANNERS: Got you. Finally, do you have any comments on
the availability of import? Has that changed any of late?
GREGG MOLLINS: It's actually gotten a little tighter. The very
few offerings that are actually out there, Timna, their pricing is
not attractive, A. And B, the quantities that they are offering are
significantly lower than historical levels. So imports are
virtually, as far as we are concerned, they are gone.
TIMNA TANNERS: Okay, thank you.
OPERATOR: Chris Olin. Please announce your affiliation then
pose your question.
CHRIS OLIN, ANALYST, CLEVELAND RESEARCH COMPANY: Cleveland
Research. I wanted to take the nonresidential construction question
on a different angle. Can you talk a little bit about -- we get the
sense that maybe beam and rebar and any other long product demand,
has been pretty strong in the second quarter related to existing
projects, but then you start getting to the point where potentially
higher raw material costs drive cancellations from your major
customers. Can you talk a little bit about what your actual
visibility is out there and are you hearing about cancellations,
etc.?
GREGG MOLLINS: As a matter of fact, we are not necessarily
hearing about cancellations, but we certainly, our customers are
talking about delays, which should come as no surprise.
Any project that doesn't have a time limitation needs to be met,
they are basically discussing with us that they are going to probably
take it off the table for a period of time and see where this levels
out. I think what we're telling them is that they have to make their
own decisions, but where we are coming from, we just don't believe
that this is a bubble that's going to burst anytime soon. So how
long they have to delay projects just depends on the customer and the
job. But yes, when you are talking about $1000 a ton or $1200 a ton
plus for plate, when it was $800 four months ago, certainly delays
our being considered. There is no question about that.
CHRIS OLIN: When would this -- let's say the delays actually
happen, when would this start hitting your volumes? Would it be more
of a third quarter, fourth quarter, 2009 type of impact?
GREGG MOLLINS: That's -- it's very difficult to answer that
because (multiple speakers)
DAVID HANNAH: The $1 million question.
GREGG MOLLINS: -- they're so -- it depends on the jobs. But we
would anticipate that there would be some delays in the third quarter
and fourth quarter.
CHRIS OLIN: Okay. And then, real quick, can you talk a little
bit about what you are seeing from the "smaller distributors" out
there? Is there any kind of a rational pricing or rational landscape
that could prevent you from pushing these price increases through I
guess even further?
GREGG MOLLINS: No. We buy on the spot, we sell on the spot,
and we've been through this many times before, certainly not at the
levels that they are now. But we explain to our customers; we
provide them with documentation that supports the raw material
increases, the energy-related costs, scrap being sold at levels that
have never happened before, and they recognize the fact that we have
no control over what the prices are. And our salespeople just -- we
explain to them -- and I think this is the most important thing for
our customers to understand -- is that what's more important to them
is the availability of the metal.
And we are a very large buyer of all the products that we sell,
and, as Dave mentioned a minute ago, we have availability to product
at probably more availability than most people in our industry have
through the major mills in North America.
So we just explain to them what we are going to do is make sure
that they have metal. We're going to protect them by not selling to
opportunistic buyers, and we're going to have metal for them when
they need it.
CHRIS OLIN: Thanks a lot.
OPERATOR: Philip Gibbs. Please announce your affiliation and
pose your question.
MARK PARR, ANALYST, KEYBANC CAPITAL MARKETS: It's Mark Parr
with KeyBanc. I didn't get to talk to an operator ahead of time, so
I guess Phil set up the call, so, anyway.
Once again, you guys did a great job. Congratulations on the
results. And I will say that I appreciate your perceived need to
remain conservative in this economic environment. I just want to ask
the same question I asked on the last call because I think Karla --
Karla, it was either you or David mentioned market share gains in
your commentary, and I was wondering if you could talk about that in
the context of just pure internal programs versus some of your
smaller competitors maybe running into some credit availability
issues.
DAVID HANNAH: It's really hard to tell, Mark. I'm not, and I
don't know if Gregg is aware, but I'm not aware of any of our smaller
competitors that are singing the blues because they are being
squeezed from a credit standpoint or unable to pass through
increases. The smaller service centers are all in the same boat that
we are in, and it might actually be more critical for them to get
those increases passed through as soon as possible to their customers
because they are smaller and they do need to turn their cash, and I
don't think the circumstances that they have are really any different
than ours. We are just two different sized businesses. I don't
think they are under any more pressure or it's any easier for them
with respect to get the increases through.
The increases need to go through. If you don't get them
through, then you're going to be selling material for less than what
it's costing you to replace it; and that's not good for us if we do
it that way, and it's certainly not good for the smaller companies
either.
MARK PARR: I know that in the past 12 months you have mentioned
on calls that the competitive environment had ticked up and you were
seeing more competition or less discipline. Could you give us an
update on what you have seen here over the last several months as a
result of all the increase in pricing on the carbon side; and also an
update as far as competitive market conditions in the aluminum and
stainless markets, please.
GREGG MOLLINS: You know, Mark, we have seen more discipline in
the pricing market, okay, across all the regions that we're in, in
the first quarter. I think everybody's a little shell shocked about
what these prices have done, in particular in the carbon side.
To go drop back just a minute to your question about our
improvement in market share, through the last few years, last year,
we spent about $124 million in CapEx spending. We have opened new
plants, obviously, over the last few years. I think part of the
reasons why our improvement in market share has taken place is
because we've got state-of-the-art equipment in almost every
operation that we have, and our quality is second to none. Our level
of service out in the field is also second to none, and you add all
those together when there has been several large companies in our
industry that have not poured in the capital into their property,
plant and equipment that certainly our Company has. And eventually,
that takes -- that provides us with a good opportunity.
As far as stainless and aluminum is concerned, I don't know what
to say there. I think there's some softness -- I don't think; there
is a little bit of softness in stainless. I think some of that has
to do with A, hedging for the first half of last year in anticipation
of those major surcharge increases. The other thing is, is
appliances. Stainless is massive in appliances, as you well know,
and the appliance business is certainly not what it was a year or two
ago in today's environment.
DAVID HANNAH: And just to be clear, what Gregg means when he
says hedging last year, he meant that because the prices of
stainless, because of the nickel surcharges were going up so fast and
so high at this time last year, that people were buying as much as
they could possibly buy, they were building inventory. Because they
knew that if they bought it today, it would be cheaper than buying it
tomorrow. So that's the clarification on hedging. It's (multiple
speakers) were out buying hedge contracts.
MARK PARR: Okay. If I could just ask one more question. On
the -- if you could give us an update on the aerospace market. I
know you had said that was one of the markets that you characterize
as strong. Could you talk about is the aerospace market
strengthening? Is it staying? Is it growing the same rate? Is it
growing at a faster rate? And also, what's the market looking like
in heat-treated aluminum plate? And thank you again. Congratulations on all the progress.
GREGG MOLLINS: Mark, the aerospace business, you have to
recognize at Reliance, okay, our major market in aerospace is in the
defense and military part of aerospace. When you get into the
commercial end of the business, we do very little commercial business
with Boeing. We do with Airbus, okay? But the majority of our
business in that area is with the regional jets and the private jets. Embraer, Bombardier, Gulfstream, Cessna, Beech; those are the
private jet makers and regionals that we're doing business with quite
a bit.
This 787 program, as it applies to Reliance, from the aluminum
standpoint, is really more of a nonevent, okay, for us. Now, when
you get into titanium, which is a little less than 1% of our sales,
it does have an impact there because obviously the 787, it will
probably use about twice the amount of titanium than any other jet
will use. And so we are anxious for that program to get off the
ground for that very reason in that product.
But, from our standpoint, what's happening with the 787 is not a
big deal. Now, from the heat-treat aluminum plate standpoint, what
we've seen is the Alcoas, the Kaisers, etc., what they are not being
able to ship into Boeing for the 787 program, they have made that up
because of armor requirements with the government. So it really --
our conversations with Alcoa and Kaiser, which we are extremely close
with them, is that they've been able to pick up the slack on the 787
with armor requirements. So heat-treat, plate and sheet, there was a
recent heat-treat sheet announcement just on Monday, a 5% increase on
the price of heat-treat sheet. But we're not seeing discounts or --
it's still -- heat-treat plate is still pretty tight.
MARK PARR: Okay, terrific. Thanks again, Gregg.
OPERATOR: Sal Tharani. Please announce your affiliation and
then pose your question.
SAL THARANI, ANALYST, GOLDMAN SACHS: Goldman Sachs. Can you
just give us some color on which part of your business -- you already
mentioned which one you have seen weakness, but where you see further
vulnerability businesses or the end markets which are strong right
now? Is it aerospace or non-res where you think will be the next
sort of a faster weakness, you will see grow faster than the others?
DAVID HANNAH: I think, Sal, our anticipation is, is in the
major markets that we sell to, the strongest is probably the energy,
oil and gas markets. And that is actually getting stronger and it
got stronger last year and it continues to gain strength so far this
year, and we expect that that's going to continue.
Everything else has been pretty steady. Aerospace, for us, as
Gregg just mentioned is -- we think steady on the strong side, and
there's different pieces moving in different directions there, of
course. With respect to -- our major exposure there is in the
aluminum products. And with respect to the Airbus activity, that
should be improving as the year progresses. And with respect to the
Boeing side of things, then, as Gregg pointed out, we are mostly
military and defense there, and we expect that that's going to
continue at a pretty steady pace. So the other major markets that we
sell to, the farm equipment and heavy machinery and that seem to be
pretty steady.
GREGG MOLLINS: Wind tower.
DAVID HANNAH: Wind tower seems to be pretty steady. The one
that maybe is most vulnerable, and we've talked about this I think on
a few calls, the last few calls that we've had, is in the non-res
construction side.
As Gregg also mentioned earlier, we don't see anything at the
moment that's being canceled. There are projects that we expect will
be delayed, if they can be delayed simply because of the pricing. So
we have that exposure onto the non-res side, which is really an issue
caused by the rise in prices and maybe the postponement of certain
projects.
And then we still have to remember that there is a part of
non-res that's connected to residential, so some of the lighter
commercial-type projects. And while we haven't seen a big drop-off
in that, that is also an area where we would expect that in due time,
we are going to see less activity. Because if they are not building
communities or people aren't moving into newly built communities,
then you don't need all of the support structures around those
communities. And logic tells us that that part of the business might
slow down.
GREGG MOLLINS: And Sal, one of things that's working to our
advantage is the weak dollar. So a lot of the companies that are
manufacturing big pieces of equipment that they've never been able to
export in the past or cost effectively are able to do that now. And
with what happened with ethanol -- what is going on with ethanol, I
should say, there's a lot of ag-type equipment that is being
purchased by farmers throughout the United States. And so our plate
business -- this wind tower business is absolutely huge. Obviously,
the mills participate in that more on a direct basis. But we also
participate in quite a bit of that ourselves. So the companies that
are manufacturing goods that could be exported, they're doing it just
the same way as the mills that are producing more metal that they
could sell domestically, they are exporting. So the weak dollar is
actually helping -- is used to our advantage.
SAL THARANI: Okay. And on the inventory side, we certainly see
the [public center] data which appears to be -- continues to decline. But how are you seeing it at the end user side? Are they also
running very lean?
DAVID HANNAH: Yes. From an inventory at our customer level,
yes. The customers have really, for quite some time, just been
buying what they need. They've been pretty cautious all along. We
don't see our customers building inventories.
This environment is different than many that we've seen in the
past, if not all that we've seen in the past, in that the opportunity
to buy more inventory than you need is not really there, whether you
are a service center or whether you are one of our service center
customers.
GREGG MOLLINS: And Sal, that really plays to the advantage at
Reliance. We pride ourselves in having the shortest leadtimes in the
industry, okay? We pound that every day of our lives. And so when
customers are living hand to mouth, they are more inclined to call
you at 4:00 in the afternoon with a need for tomorrow, and they need
that metal tomorrow; otherwise, they're not going to have anything to
keep their people in their shops busy. And we are able to provide
them processed material and delivery it to them the next day, and do
it consistently. So whenever they -- metal goes up and customers are
only buying what they need per job, that really works to our
advantage.
SAL THARANI: However, you said that on stainless-steel, you are
seeing some hedging.
DAVID HANNAH: I think, his comment with respect to hedging on
stainless, Sal, was really --
GREGG MOLLINS: Last year.
DAVID HANNAH: Last year. It meant that we had customers and
also service centers last year at this time because of the rapid and
large price increases that were building inventories. So, certainly
that's not happening now.
SAL THARANI: Got it. And also on the stainless-steel side, the
nickel surcharge you have been able to pass everything in terms of
surcharge and now they have a [com] surcharge, an energy surcharge.
DAVID HANNAH: Yes. We look at the all-in cost of the metal and
we expect to get our gross profit margin on that total cost.
GREGG MOLLINS: We don't separate as a line item to surcharge. We roll the surcharge into the base price of the stainless, and then
market up from there. So yes, we are able to pass along those
prices, and as evident by last year. Last year, nickel surcharges
hit a high of $2.28 a pound in July. And throughout that entire
cycle, when they began in about the $1.20 a pound neighborhood all
way up to $2.28 a pound surcharge only, we were able to pass all
those surcharges on.
SAL THARANI: Okay. And I also heard that some of these service
centers may have -- like you guys always push the prices up as soon
as the company announces the price or the mill announces price
increase and maybe a month later they announce that next month the
price it will go up. You generally try to get your prices up ahead
of that, but I heard that some of the service centers may have been
selling at their sort of current cost. Do you think if that's the
case, and when they go back to place their inventory, you may want to
gain more market share from these people?
GREGG MOLLINS: What happens there, Sal, is that when they are
selling, given the fact that metal is so tight, when we raise our
prices and they sell at their existing cost, they run out of
inventory. When they run out of inventory, then they come to us. And that's why our margins go up. We're not going to sell off of
existing cost. We are going to sell off of replacement cost, and
that's what we do. Does that mean we loose some business here and
there? Yes, it does, but we are very, very disciplined on our gross
profit margin management. And we're not going to take what we
consider to be business that is not intelligently priced.
DAVID HANNAH: And there seems to be a lot of discussion or
speculation that there is a bunch of little service centers out
selling at below replacement cost, and I've got to tell you, we just
don't see that. It's not an issue that we are fighting every day. You always have some players out there that have lower prices pretty
much through all different market conditions. But I don't think it's
any different now than it is normally; is it, Gregg?
GREGG MOLLINS: No, not really, Dave. And as a matter of fact,
they keep talking about small service centers. There are some large
service centers that have that problem.
DAVID HANNAH: Yes, and that can be, as you know, last year, we
were going through something like that, and that can be actually more
disruptive than these little guys.
GREGG MOLLINS: Right.
DAVID HANNAH: So. But we haven't really -- it's not really an
issue that is at the top of our list as being a problem, Sal.
SAL THARANI: Your second quarter is generally your better
demand than the first quarter, in general?
GREGG MOLLINS: In general, that's true.
SAL THARANI: Okay. And lastly on the pricing, you mentioned
flat to slightly up. I just want to make sure. Is that being very
conservative because prices are rising, as you said, almost every
week? And carbon is still 50% of (multiple speakers)?
KARLA LEWIS: You have to remember, Sal, that only -- a little
under 50% of our business is carbon and then there's breakout within
the various carbon products within that. So we are a little
conservative on our ability to pass -- when we will be able to pass
those increases through. But I do expect carbon increases; but on
stainless and aluminum, we're thinking flat, possibly down or down by
the end of the year.
SAL THARANI: Okay, great. Thank you very much.
OPERATOR: (OPERATOR INSTRUCTIONS). Bob Richard. Please
announce your affiliation, then pose your question.
BOB RICHARD, ANALYST, LONGBOW RESEARCH: Good morning and thanks
for taking my call. I appreciate the color you gave on working
capital. Just as a point of interest, of your $950 million in
inventory at the end of the quarter, can you give me just a rough
breakdown on what the product types those are, like between carbon
and aluminum and stainless?
KARLA LEWIS: Yes.
DAVID HANNAH: Hold on just for a second.
KARLA LEWIS: So for the 900 -- it's going to be tough because
-- it's kind of similar to our breakout. Probably about half is in
carbon and then a quarter let's say in stainless. Actually, probably
about 15 to 20% in stainless and about 10% in alloy and then the
remainder at aluminum.
DAVID HANNAH: It's very similar, Bob, to the distribution of
our sales by dollars. So somewhere a little less than half. I think
47% was carbon last quarter. And it's very consistent with that.
BOB RICHARD: That's helpful. Thank you. I guess we could take
this conversation off-line, but I guess with the previous caller,
your sales price is up -- only up 3% from fourth quarter, if I heard
you right. And with what aluminum and plate pricing has done quarter
over quarter, I guess I'm kind of surprised that it didn't improve
more. And with -- I guess we'll take a look at what it does in the
second quarter. But I would have expected your average price to come
up even more than what it did.
DAVID HANNAH: Well keep in mind we've got a lot of different
products out there. And as Karla just pointed out, we've got a
little less than half of our mix is carbon steel products. The
biggest increases have been mostly in the flat-rolled side. Flat-rolled, only about 8% of our business. We've got some stainless
products where the average cost actually came down during the
quarter. Titanium, the prices have come down consistently and when
you throw all of these things into the pot and mix them up, that's
kind of how it all comes down.
Now, the increase in the carbon side, if you look at that
separately, we also would expect that it's going to be a bigger
number, but we are giving you an overall number based upon really the
mix of our entire book of business.
GREGG MOLLINS: The major price increases in the carbon area are
taking place -- are hitting our inventory in the March, April, May
timeframe, June. So those are the huge increases that we've got; the
first two months out of the year, they were going up, but they
weren't going up as ridiculously as they have the past couple months.
BOB RICHARD: I appreciate your color there, and I'm -- not to
beat a dead horse, but aluminum was up pretty good quarter over
quarter too. What are your expectations for aluminum pricing again? I think last quarter, you kind of hoped that it was going to be 110
to 120 for the year. Are your expectations up a little more than
that, or can you add anything to that?
GREGG MOLLINS: Well, we didn't think that Midwest spot was
going to go up to $1.40 a pound, I will tell you that. So -- but we
don't expect it to hold there, either. So I would say, to answer
your question, do we think it's going to be $1.10 to $1.20? Maybe it
will be $1.20 to $1.30 instead of $1.10. Because it went up about
$0.10 to $0.15 a pound, frankly, than what we had thought. But we
just take educated guesses on these things. We're not traders or
anything like that, so I had no idea, frankly, that we would see
$1.44 a pound Midwest spot.
DAVID HANNAH: The other thing, too, Bob, keep in mind that just
if you look at aluminum, we sell a bit more than half of our aluminum
sales are in heat-treat products, and the rest is in common alloy
products, and there's quite a difference in price between those two. So if our inventories are a little heavier or a little lighter in
heat treat versus common alloy, or if we sell a little more heat
treat versus common alloy, if we are selling more wrought and bar
than we are, or plate, than we are sheet product, all of that comes
into play and has a pretty big impact on our -- the average cost of
our inventory, as well as the average cost in our sales prices.
We also, in the aluminum side, have contracts with a lot of
aerospace customers, and those contracts are at fixed prices. And so
if the prices are going up, we're buying at a fixed price from our
mill supplier for that piece of business, that contractual business,
and we're selling it in agreed price to our customer. So you might
not see those increases in those prices in that part of the business
because it's already booked at fixed prices.
So there's a lot of moving pieces when you look at this. It's
very difficult to sit back and say carbon is up X%, so we expect
revenues to be up X% at Reliance because that much of their business
is in carbon products. The distribution of the different carbon
products, as well as in the non ferrous side, all the different
alloys can have a really -- it can make it do funny things. So
there's a lot of moving pieces, is what I'm trying to say.
KARLA LEWIS: And the real way that we monitor and measure
whether or not we are getting our prices up appropriately is our
gross profit margins. And our gross profit margins did improve in
the first quarter, so we are comfortable that we were raising our
prices the way we needed to.
BOB RICHARD: Okay. I appreciate the color and great quarter
and best of luck. Thanks.
OPERATOR: Yvonne Varano. Please announce your affiliation then
pose your question.
YVONNE VARANO, ANALYST, JEFFERIES & COMPANY: Jefferies. Gregg,
it seems that you indicated that prices on the carbon side are likely
to hold here and yet there are a couple things I hear you keep saying
that you are getting push-back from customers, the availability for
you guys, and we've heard this from others, is out there still. And
I guess I'm just trying to understand if anticipation of the demand
could come down, what really keeps prices up here?
GREGG MOLLINS: It's really -- it's all the raw materials. I'm
sure you saw the other day that there was a shipment made of scrap to
Turkey at $650 a ton. China has been buying $620 a ton scrap. You've got the ironwork component, the coke components, all those
commodities. I just personally don't see anything on the horizon
that would make those go down, coupled with the lack of imports
coming into the country. In normal times with prices going out like
this, the service centers across the country would be running
offshore and buying as much material as they possibly could. They
are not doing that now. It doesn't make any sense to do it, and
that's why all the statistics at the MSCI report that industry
inventories are at record lows. Yes, they are at record lows because
nobody can go offshore and buy any material. So given all of that,
you would think that given what you are suggesting, supply-demand
fundamentals, you would think that there would be a pinnacle here
shortly and prices would begin to go down as they have in years past
in the summer months, heading in towards the balance of the year. I
would suggest that I really don't think that's going to be the case
this year only because of all these costs that are going into effect
and lack of imports.
And as long as we don't open up -- the mills don't open up,
okay, the gauge by pricing their material higher than what it is
available in the world market -- and I think they are smart enough
not to do that -- then I don't think we're going to see imports
coming into the country, and I don't think we're going to see raw
material prices, transportation prices, energy prices going down
anytime soon.
YVONNE VARANO: Yes. On the import side, what's the
differential that you think you need to invite imports in?
GREGG MOLLINS: I would say about 8%.
YVONNE VARANO: So we need it to be 8% higher on a pricing?
GREGG MOLLINS: We would need to be 8% --
YVONNE VARANO: Right, U.S.
GREGG MOLLINS: Yes, the domestics.
YVONNE VARANO: And where are we now?
GREGG MOLLINS: We're still -- our prices here in the United
States are still in most cases -- lower than what the world -- than
what they are buying globally.
YVONNE VARANO: Okay. And then I think you said earlier that
volumes just aren't available and not at attractive prices on the
imports?
GREGG MOLLINS: Right. What few offerings, and I underline the
word few offerings that are out there, Yvonne, they are just not at
attractive prices, and even if they were, the quantities that are
being offered are very, very small.
YVONNE VARANO: Where do you see offerings being made from?
GREGG MOLLINS: Asia.
YVONNE VARANO: Asia. Anything out of Russia?
GREGG MOLLINS: Very little.
YVONNE VARANO: Okay. Thank you very much.
OPERATOR: Michelle Applebaum.
MICHELLE APPLEBAUM, ANALYST, MICHELLE APPLEBAUM RESEARCH: Michelle from Applebaum Research. I figured out how to use my phone
now.
DAVID HANNAH: Congratulations.
MICHELLE APPLEBAUM: It's only been five years. So I hung up on
myself. So the questions I have remaining are -- your original LIFO
forecast was $60 million for the year, and you raised it to 70?
KARLA LEWIS: Yes, basically, Michelle, what we do is each
quarter we have to look at -- during the year, we have to look at
what we think our annual LIFO expense will be and then book ratably
to that annual amount. So in February, we were thinking probably $60
million was a good number for the year because of the carbon price
increases mainly being higher than we had anticipated. We're
expecting prices to go up, but not to the levels that are currently
announced. And because of that, we have increased our annual
expectations.
MICHELLE APPLEBAUM: Okay. But the first quarter did have the
correct number in it, so you don't need to adjust it, right?
KARLA LEWIS: Right. We estimated that, in February, we are
estimating that in the first quarter we would book $15 million
(multiple speakers)
MICHELLE APPLEBAUM: (multiple speakers)
KARLA LEWIS: We booked 2.5 million more.
MICHELLE APPLEBAUM: Okay, so you beat the number even with more
LIFO. That's pretty cool.
KARLA LEWIS: Correct.
MICHELLE APPLEBAUM: Okay. Then my next question is, and I know
this has been asked around and I was having some trouble with the
call, so I'm not sure if it's been asked quite as explicitly as this,
but when I take my handy dandy little model here, and keep demand the
same in the second quarter and ignore price increases, and ignore the
comments that you made about improving gross margins, I still get a
higher number than your guidance for the quarter.
KARLA LEWIS: (multiple speakers). I didn't do that.
MICHELLE APPLEBAUM: Okay.
DAVID HANNAH: Same number of days in the net from our
perspective, we have the same number of days -- shipping days in the
second quarter (multiple speakers)
MICHELLE APPLEBAUM: I guess one question is, your other income
usually ranges between 2, 3, 4, $5 million. And nobody has asked,
you had a charge.
KARLA LEWIS: Yes, what that was, Michelle, you know our
international business mainly in Canada has increased and with the
changes in the Canadian dollar this quarter, that reversed.
MICHELLE APPLEBAUM: Okay, and what would you expect it to do in
the second quarter, the other income?
KARLA LEWIS: You know, I'm thinking probably a couple hundred
thousand dollars of income. Fourth quarter -- last year, third and
fourth quarter we were getting some pretty significant gains from the
Canadian dollar, and part of that is -- I don't want to get
technical, but is timing because of some debt they are repaying and
that's treated differently, so it doesn't always follow exactly the
current currency fluctuations.
MICHELLE APPLEBAUM: Okay. I understand that question -- I mean
that answer. Okay. Then my other question is, and I'm preempting
Nate who was going to ask this, but since I got in first. You talk a
lot about same-store sales, so how has that trended during the first
quarter? And we seem to be at least part way through the second. How is looking for April?
DAVID HANNAH: I think same-store sales, if we look at the
volume and take the pricing out of it --
KARLA LEWIS: Yes, if you take same-store first quarter this
year, compared to first quarter last year, we were down 1.4%. If you
look at first quarter -- well, it's hard to look at first quarter '07
to fourth quarter of '08 to fourth quarter '07 because of the
seasonal stuff.
MICHELLE APPLEBAUM: Yes, I wouldn't even do that.
KARLA LEWIS: Yes.
MICHELLE APPLEBAUM: Okay. And then, how did it trend month to
month in the quarter? Was March --?
DAVID HANNAH: March was the weakest of the quarters, Michelle. We were actually ahead in -- bear with me and I will grab something
here and answer that.
MICHELLE APPLEBAUM: And then April so far?
KARLA LEWIS: We're --
DAVID HANNAH: April so far has been consistent with what was
going on in March in terms of volume, but it's hard to tell this
early in a month, really, exactly what's going on.
But in January, and we mentioned on our February call, by the
way, I think you probably remember, that our January volume was a
record for the Company in any given month, even on a same-store
basis. So January, our volume, just pure tons shipped was up 3.7%
over January of the prior year. February, we were up 2.7% in tons
over February of '07. And March, we were actually down 8.1% compared
to March of last year. I think also --
MICHELLE APPLEBAUM: That's for the month?
DAVID HANNAH: That's for the month.
MICHELLE APPLEBAUM: Did we have fewer days?
DAVID HANNAH: We had fewer days. Easter was earlier this year,
and March had different days. And I think February, very honestly
(multiple speakers)
MICHELLE APPLEBAUM: Had an extra day -- February
DAVID HANNAH: There was a little bit of a flip between February
and March there.
MICHELLE APPLEBAUM: Yes, February had 21 business days this
year and March had 20, which I don't know that that's ever happened
before.
DAVID HANNAH: Right. It did four years ago.
MICHELLE APPLEBAUM: I'm sorry?
DAVID HANNAH: It did four years ago when there wasn't --
(multiple speakers)
MICHELLE APPLEBAUM: No, it's not just the leap year; it's also
Easter. So it's a confluence of events.
KARLA LEWIS: February and March were pretty close. January was
definitely the strongest on a same-store.
MICHELLE APPLEBAUM: And on an average daily basis, because I do
know you look at those things --?
DAVID HANNAH: Yes, we do.
MICHELLE APPLEBAUM: Can you give me the same numbers, adjusting
for the month?
GREGG MOLLINS: No, I don't have them in pounds.
MICHELLE APPLEBAUM: Okay, was March on a daily basis down from
a year ago?
GREGG MOLLINS: March on a daily -- sales dollars?
MICHELLE APPLEBAUM: No, volume.
GREGG MOLLINS: Yes.
KARLA LEWIS: Yes. We had a lot of heavy stainless buy last
year.
GREGG MOLLINS: Yes, it was.
MICHELLE APPLEBAUM: Okay, because that's -- the MSCI numbers
were I think down 11% year-on-year; but then on a daily basis, I
think it was 2.5. So there was a big difference between -- it was
down for the industry, but nowhere near as bad as the headlines read.
GREGG MOLLINS: Right, right.
MICHELLE APPLEBAUM: But April looks to be down versus April?
GREGG MOLLINS: April so far is about even with March. It's
running at the same rates.
MICHELLE APPLEBAUM: So that would be down again last April,
right?
DAVID HANNAH: Probably, yes. Although Easter was in last
April, so -- if you adjust for all of that stuff.
The whole thing was, we ended up down 0.72% in our tons for the
first quarter compared to the first quarter last year, which we were
pretty happy about that because last year, there was some pretty
heavy buying going on, primarily in the same stainless side of
things.
MICHELLE APPLEBAUM: Okay.
DAVID HANNAH: And then there was a lot of inventory that was
being liquidated. If you remember last year at this time, the
industry had -- too much inventory in it, not only just in the
stainless side, but in the carbon flat rolled side.
MICHELLE APPLEBAUM: For the second quarter?
DAVID HANNAH: It was there in the first quarter.
MICHELLE APPLEBAUM: In the first quarter?
GREGG MOLLINS: It was actually there in the fourth quarter.
DAVID HANNAH: It was a lot of the import material that came in
late in 2006 and it really took the industry almost the first two
quarters to get rid of that.
So there was some heavy selling at that point, so the volumes
were boosted up by that. So we're pretty happy with our volume, very
honestly. We think it's -- relative what we read about the industry
and just from our own expectations, we've been pleased with it.
MICHELLE APPLEBAUM: Okay, so your second-quarter guidance of
kind of flat demand isn't just being conservative. You are actually
reflecting some trends towards the end of the quarter. And I am,
having done this for a long time, I am sort of geared toward second
quarter being the great quarter, and --
DAVID HANNAH: We are too, but we are a little uncomfortable at
this point expecting the demand increases that we have traditionally
received during the second quarter because of what we have been
seeing from a trend line, which I know is what your point is.
KARLA LEWIS: And the other thing that for us too, Michelle, is
companies, Jorgenson and some other companies that we'd acquired,
they historically had had the first quarter as their strongest
quarter. So there's been just within the Company too, there's been a
little bit of a change because of our mix of companies.
GREGG MOLLINS: Yes, it seems as though, Michelle, that the
Midwest and the Northeastern markets, for whatever reason, that their
strongest quarter is the first quarter. So that would be liked Yard
Medals and Jorgenson Steel. Both of those companies' strongest
quarter is the first. And that's about $2.5 billion in sales.
MICHELLE APPLEBAUM: And, do you know why that is?
GREGG MOLLINS: No.
MICHELLE APPLEBAUM: I was afraid to ask that question. I love
your business.
GREGG MOLLINS: They thought it was odd. Both those companies
thought it was odd that our second quarter was the strongest, okay? And we said well, there's more snow back there in January, February,
March. Why are you shipping more product? And again, it's a typical
answer. well it depends on the industry that you are supporting. It
depends on the region. It depends on this, depends on that. At the
end of the day, we are confused.
MICHELLE APPLEBAUM: At the end of the day, most service centers
don't know where the hell their product ends up. Is that fair?
GREGG MOLLINS: That's a very fair statement.
MICHELLE APPLEBAUM: Okay. Been there, done that. Next
question, you were -- I was listening to a lot of the commentary
about small service centers not having problems and maybe some big
service centers who have had problems and we're dancing around an
issue in Detroit. There's been visibility of the carry situation,
which is a large service center, and I think that people might be
assuming that's the tip of an iceberg. And I'm just wondering,
because I've gotten mixed signals. Is that sort of a unique
situation because he was taking big bets?
GREGG MOLLINS: We think so.
MICHELLE APPLEBAUM: Okay.
GREGG MOLLINS: We don't think that's indicative of what's going
to go on through the rest of the country. We think that's unique to
itself.
MICHELLE APPLEBAUM: Because others in your business are kind of
telling me that there are more situations like that coming, but you
don't get that sense? Your credit department doesn't get that sense?
DAVID HANNAH: No, we don't.
KARLA LEWIS: No.
DAVID HANNAH: No, we don't.
MICHELLE APPLEBAUM: Interesting.
KARLA LEWIS: They are certainly aware of what's going on in the
economy, that some of our customers' working capital needs and our
competitors' working capital needs are increasing. Banks are
probably a little more cautious, so we are aware of all of that and
trying to be very aware alert to it, but we are not seeing things to
be concerned about at this time.
MICHELLE APPLEBAUM: Okay. I'm trying to remember in '04, did
you guys have bad debt write-off expense? What was '04?
KARLA LEWIS: Nothing significant.
MICHELLE APPLEBAUM: I was going to say, because others did. Others had exposure to -- in '04, we had that problem, right? The
sudden need for working capital and people couldn't do it and we had
a few blowouts.
GREGG MOLLINS: I think the difference then, Michelle, was the
industry was coming out of 2001, 2002, and 2003, which was very
painful and most companies in our industry lost money and their
balance sheets became significantly weaker during 2001, 2002, and
2003. So they entered this period of 2004 from a weaker position
than they are entering 2008 because the last few years in our
industry have been pretty good. And most people have made money and
done well and strengthened their balance sheet. So it's a different
-- there are some differences.
MICHELLE APPLEBAUM: Okay, yes. That makes a lot of sense. Okay. And it's good to hear -- I just couldn't remember if you had
had exposure. So then you have a good credit department. I'm not
going to worry about that.
KARLA LEWIS: We do.
DAVID HANNAH: We do.
MICHELLE APPLEBAUM: Or multiple good credit departments.
MICHELLE APPLEBAUM: One more. Is that okay?
DAVID HANNAH: Sure.
MICHELLE APPLEBAUM: Okay. M&A -- I thought how to ask the
question anymore, Dave.
KARLA LEWIS: He doesn't have the list.
MICHELLE APPLEBAUM: Yes, I know that, and so one question is
why don't you have the list?
GREGG MOLLINS: Because he ate it.
MICHELLE APPLEBAUM: He ate it is a really good answer.
DAVID HANNAH: I don't need it. I -- I can remember what we're
doing now again, so -- went through a period there where maybe I
wasn't remembering as well.
MICHELLE APPLEBAUM: I see.
DAVID HANNAH: No, there's still a lot of opportunity out there,
Michelle. We continue to see things. We continue to get calls. Rarely does a week go on without at least one of the three of us
getting a call from someone asking about our interest in their
business. So there's still a lot out there. And we will continue to
be selective as we've ever been and we will try to take advantage of
the opportunities that make sense to us.
MICHELLE APPLEBAUM: In terms of -- are you not giving that list
out because -- for compliance legal forward-looking reasons?
DAVID HANNAH: No, truly, I stopped keeping that list. I just
don't --
MICHELLE APPLEBAUM: Okay.
KARLA LEWIS: Yes, I mean Michelle, I think we were --
DAVID HANNAH: (multiple speakers)
KARLA LEWIS: You asked a question and we would then have almost
every investor that we talk to ask us about the list and we were
afraid they had the expectation that we were very actively pursuing
all the companies on that list. And the expectation was that that's
-- whatever, $6 billion or whatever should be happening within the
next 12 months, and that's not the case. As you know, some of those
companies are on there for 12 years.
MICHELLE APPLEBAUM: Okay. So it was a forward-looking issue. I got it.
KARLA LEWIS: Yes. So let me ask the question a different way. Can you tell me how many companies, privately-owned companies are
left in the over $500 million range?
DAVID HANNAH: No. Simply because there's probably some out
there that we don't know.
MICHELLE APPLEBAUM: Okay, so how many -- let me ask it a
different way. How many that you know of, because I know -- everyone
knows. Purchasing magazine's list, is -- and metal service center,
whatever the magazine is called, they are good listers, as good as it
gets, but they always miss people and we laugh about the ones down
the road from me in Elk Grove Village that I miss. Okay? So that's
a disclosure. So how many at least do you know?
DAVID HANNAH: At least would be the number in the Metal Center
News and Purchasing magazine list.
MICHELLE APPLEBAUM: I'm going to kill you guys. Okay. Alright. and what was that number?
DAVID HANNAH: I don't know. I don't have it with me, Michelle. I'd have to go in my room and count them.
MICHELLE APPLEBAUM: Find the magazine.
DAVID HANNAH: Yes. I have the magazine in my office.
MICHELLE APPLEBAUM: Okay. Some people would call this your
pipeline. So it's kind of an important thing given -- you've proven,
believe me, but it's what we kind of have to do as analysts is sort
of look forward and say what's left. And to the extent that it's
very opaque and if I'm sitting here in the middle of Chicago going to
the Boy Scouts and going to the ASD kind of stuff and I still miss a
lot, then we know we are missing a lot and I would think you're a
little bit closer than I am, so.
DAVID HANNAH: But we miss it too. And I think you've heard us
say in the past, Michelle, that Gregg and I will be out in some area
and we will see a truck with a name on it that we don't recognize. Or we will get a call from somebody or we will meet somebody in an
MSCI meeting and we don't -- we really didn't know the size of their
business, so --
DAVID HANNAH: And that's still happening?
DAVID HANNAH: Oh, yes. It happens all the time. So -- it's --
suffice it to say that we have been able to consistently grow the
Company through all market conditions with acquisitions and I don't
see that stopping.
MICHELLE APPLEBAUM: That's a good word. I like it.
DAVID HANNAH: Yes. I don't see that ending, Michelle anytime
--
MICHELLE APPLEBAUM: And you will tell us when you do, right? So we don't have to worry about it?
DAVID HANNAH: That's right.
MICHELLE APPLEBAUM: Okay, so we will see that press release.
Valuation expectations with private equity, a little bit
ratcheted back at least?
DAVID HANNAH: I don't think from our perspective, Michelle,
that that had any impact on the way that we value our transactions
anyway. And I don't see that any perceived credit tightness, if
there is some on the private equity folks has had any impact on their
participation in our space or any, certainly valuations. So we're
going to continue to value things that way that we traditionally have
valued them. We will only do accretive deals and deals that
culturally fit and, that's what we focus on and there's a lot of
stuff yet to do.
MICHELLE APPLEBAUM: Okay, and you've done -- is it up to 40
now?
DAVID HANNAH: It's over 40. I think this last one was 43.
MICHELLE APPLEBAUM: Okay. 11 million. Got it. Okay. I think
I'm done. Thank you so much.
OPERATOR: (OPERATOR INSTRUCTIONS). Lloyd O'Carroll.
TIM HAYES, ANALYST, DAVENPORT & COMPANY: It's actually Tim
Hayes at Davenport. Just a couple of questions. We've gotten used
to getting the same-store figures on a sequential basis. Could you
just give the revenue volume and then unit pricing changes from Q4,
please?
KARLA LEWIS: Yes. The same-store sales for the first quarter
were $1.75 billion. And from the fourth quarter, our tons were up
9.8% and our average selling price was up 2.7%.
TIM HAYES: And then the overall revenues were up how much? On
the same --?
KARLA LEWIS: I think it -- hold on.
GREGG MOLLINS: You had it (multiple speakers)
KARLA LEWIS: I have it in here. Yes. They were -- 0.6%. From
the -- I'm sorry, that was from the 2007 first quarter. From the
fourth quarter, they were up same-store 12.6%.
TIM HAYES: Right. Okay. And then last question, we've seen
the -- the stainless mills raised base pricing in early April. Or at
least some of them have. And then we've seen reports that maybe
they're not sticking or maybe they are. We're not sure. What is,
from your perspective, what is happening with base prices for
flat-rolled stainless? Are they sticking or not?
DAVID HANNAH: They're not.
TIM HAYES: Thank you.
OPERATOR: There are no further questions in queue at this time.
DAVID HANNAH: Okay, great. We will talk to you all again in
July and it looks like it will be a fun quarter. Thank you.
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.
[Thomson Financial reserves the right to make changes to documents,
content, or other information on this web site without obligation to
notify any person of such changes.
In the conference calls upon which Event Briefs are based, companies
may make projections or other forward-looking statements regarding a
variety of items. Such forward-looking statements are based upon
current expectations and involve risks and uncertainties. Actual
results may differ materially from those stated in any
forward-looking statement based on a number of important factors and
risks, which are more specifically identified in the companies' most
recent SEC filings. Although the companies may indicate and believe
that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT BRIEFS REFLECTS THOMSON
FINANCIAL'S SUBJECTIVE CONDENSED PARAPHRASE OF THE APPLICABLE
COMPANY'S CONFERENCE CALL AND THERE MAY BE MATERIAL ERRORS,
OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE
CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE
COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE
OR IN ANY EVENT BRIEF. USERS ARE ADVISED TO REVIEW THE APPLICABLE
COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC
FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.]
[Copyright: Content copyright 2008 Thomson Financial. ALL RIGHTS
RESERVED. Electronic format, layout and metadata, copyright 2008
Voxant, Inc. (www.voxant.com) ALL RIGHTS RESERVED. No license is
granted to the user of this material other than for research. User
may not reproduce or redistribute the material except for user's
personal or internal use and, in such case, only one copy may be
printed, nor shall user use any material for commercial purposes or
in any fashion that may infringe upon Thomson Financial's or Voxant's
copyright or other proprietary rights or interests in the material;
provided, however, that members of the news media may redistribute
limited portions (less than 250 words) of this material without a
specific license from Thomson Financial and Voxant so long as they
provide conspicuous attribution to Thomson Financial and Voxant as
the originators and copyright holders of such material. This is not a
legal transcript for purposes of litigation.]
This is a news service of Thomson Business Intelligence Service ©2006. This content is for your personal use only, subject to Terms and Conditions. No redistribution allowed.
|
