reliance steel & aluminum 2008_q3_conference_call_transcript

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Conference Call Transcript

RS - Q3 2008 Reliance Steel & Aluminum Co. Earnings Conference Call

Event Date/Time: Oct. 16. 2008 / 11:00AM ET

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Oct. 16. 2008 / 11:00AM ET, RS - Q3 2008 Reliance Steel Earnings Conference Call



C O R P O R A T E P A R T I C I P A N T S David Hannah Reliance Steel & Aluminum Co. - Chairman of the Board & CEO

Gregg Mollins Reliance Steel & Aluminum Co. - President & COO

Karla Lewis Reliance Steel & Aluminum Co. – EVP &CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S Brett Levy Jeffries - Analyst

Timna Tanners UBS - Analyst

Mark Parr Keybanc - Analyst

Tony Rizzuto Dahlman Rose & Co - Analyst

John Tumazos John Tumazos Very Independent Research - Analyst

Jane Hough Dwight Asset Management Company - Analyst

Tim Hayes Davenport & Company - Analyst

Bob Richard Longbow Research - Analyst

Yvonne Varano Jefferies - Analyst

Michelle Applebaum Analyst

P R E S E N T A T I O N

Operator

Good morning, ladies and gentlemen, and welcome to the Reliance Steel & Aluminum Co. sponsored 2008 third quarter financial results conference call. At this time, all participants have been placed in a listen-only mode, and we'll open the floor for your questions or comments following the presentation. It is now my pleasure to turn the floor over to your host, David Hannah. Sir, the floor is yours.

David Hannah - Reliance Steel - Chairman of the Board & CEO

Good morning and thank you for taking the time to listen to our conference call for the third quarter and nine months ended September 30, 2008. Gregg Mollins, our President and Chief Operating Officer, and Karla Lewis, our Executive Vice President and Chief Financial Officer are also here with me today.

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For the 2008 third quarter, net income was $152.5 million, up 63% compared with net income of $93.6 million for the 2007 third quarter. Earnings per diluted share were $2.07, compared to $1.22 for the 2007 third quarter, and $2.12 for the 2008 second quarter. 2008 third quarter sales were a record $2.57 billion, an increase of 42% compared with 2007 third quarter sales of $1.81 billion, and up 23% from the 2008 second quarter. For the nine months ended September 30, 2008, net income amounted to a record $416.5 million, up 27% compared with net income of $328.0 million for the same period in 2007. Earnings per diluted share were a record $5.65, compared with earnings of $4.28 per diluted share for the nine months ended September 30, 2007. Sales for the 2008 year-to-date period were a record $6.58 billion, an increase of 18% compared with 2007 nine month sales of $5.55 billion. For the 2008 third quarter, our volume increased 27% and average prices increased 13% compared to the 2007 third quarter, due mainly to our August 1 acquisition of PNA Group. Our volume was up 25% and average pricing was down 1% compared to the 2008 second quarter, again due to our PNA acquisition. For the 2008 third quarter, carbon steel products were 60% of our revenue dollars, aluminum was 14%, stainless steel was 12%, alloy was 8%, toll processing was 2%, and the remaining 4% was miscellaneous, including titanium, copper and brass. Let’s think about business conditions. Most importantly, it is not as bad out there as you probably think given nothing but non-stop negative news about “buyer’s strikes” and “demand destruction” and all the other things that could go wrong with the economy. I would like to make sure that our third quarter results are viewed in the proper perspective. The third quarter, as reported, was the second best quarter for net income and earnings per share in the Company’s history, behind only the second quarter of 2008, and would have been the best quarter ever by a pretty good margin on a FIFO basis. Please note that we run and evaluate our operations on a FIFO basis. If we reported on a FIFO basis, we would have reported EPS of $2.74(1) for the third quarter and $6.80(1) for the year-to-date period ended September 30, 2008, compared to $1.32(1) and $4.65(1) for the comparable 2007 periods, and to $2.46(1) for the 2008 second quarter. Our third quarter did benefit from the acquisition of PNA on August 1, but acquisitions are a normal, recurring part of our growth strategy. We have acquired over 40 companies since our IPO in 1994, all immediately accretive to our earnings, and all bigger and more profitable companies today than when we acquired them. We fully expect to continue with our acquisition strategy after we work through this uncertain economic period and pay down the debt incurred in connection with the PNA deal. Through the nine months ended September 30, 2008, we have already exceeded the previous full year records for net income and EPS, despite all the negative rhetoric we have been hearing about poor and weakened business conditions for about the last two years. So, all in all, 2008 has been pretty good for us. Demand hasn’t been quite as good as the last couple of years and, overall, neither has pricing. But we have still been able to post record results. We have also been able to grow the Company significantly. We are comfortable with our balance sheet and we expect free cash flow to increase and debt to decrease over the near term. Looking forward, there is no doubt that the business climate will be even more difficult over the next couple of quarters than earlier this year. We saw sales volume start to decrease noticeably in September, which also relates to the time when expectations of carbon steel price reductions became a reality. It certainly appears that the fourth quarter, almost always a down quarter due to seasonal issues, will be more challenging than usual. However, we have worked through more difficult times than this before and we expect to be able to do so again. Our focus, as usual, is maximizing profits and managing our working capital efficiently to maximize cash flow and reduce debt. We do not know if we are in a recession or not, or just what the real economic environment will be over the next couple of quarters. What we do know is that wherever there is business activity, be it energy, infrastructure, electronics, aerospace, manufacturing, construction or elsewhere, we are positioned to support that activity through our product and customer diversification and our wide geographic footprint, which have served us well. We believe we will successfully manage whatever comes our way and, just as we have done in the past, we expect to outperform our peers by a wider margin through these more difficult periods. Because of widespread uncertainty regarding the economy going forward, which is complicated even further by the currently unknown impact on the industrial economy of the troubled credit markets, we are not comfortable providing fourth quarter earnings guidance at this time. We will, during the course of the quarter, communicate any meaningful information regarding our operations as it may become available. As I mentioned earlier, effective August 1, we completed the acquisition of the outstanding capital stock of PNA Group Holding Corporation, a national steel service center group. Karla will tell you more about the financing of that transaction. PNA’s subsidiaries include the operating entities Delta Steel, LP, Feralloy Corporation, Infra-Metals Co., Metals Supply Company, Ltd., Precision Flamecutting and Steel, LP and Sugar Steel Corporation. Through its subsidiaries, PNA processes and distributes primarily carbon steel plate, bar, structural and flat-rolled products. PNA operates 23 steel service centers throughout the United States, as well as five joint ventures with seven additional service centers in the

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United States and Mexico. We are very excited about this large acquisition, led by an experienced management team, which expands our carbon steel business in the products and areas that we like. In September we acquired the assets, including the inventory, machinery, and equipment, of the Singapore operation of HLN Metal Centre Pte. Ltd. (HLN Metal). The primary business of Singapore-based HLN Metal involves the processing and distribution of custom machined materials and the sawing of metal products and components. The purchase price of the assets was approximately $2.6 million. The business will operate as Reliance Metalcenter Asia Pacific Pte. Ltd. (RMAP). We are very pleased to continue to grow our international presence.

On July 16, 2008, the Board of Directors declared a regular quarterly cash dividend of $.10 per share of common stock. The 2008 third quarter dividend was paid on September 12, 2008 to shareholders of record August 22, 2008. The Company has paid regular quarterly dividends for 48 consecutive years. Once again, we look forward to the challenges of the current business environment and are confident in our ability to continue our industry leading performance. I will now turn the floor over to Gregg for some additional comments on our operations and market conditions. Thank you. Gregg?

Gregg Mollins - Reliance Steel - President & COO

Thank you. Dave and Good Morning. We are very pleased with our record sales in the third quarter. Our Gulf Coast companies made it through hurricane Gustav and Ike with minimal damage to our plants. More importantly our employees remained safe. As expected, the market was, and continues to be, a very competitive one but we believe our managers are reacting well to the changing conditions. We are also pleased with the results of our most recent acquisition, the PNA Group, and the individual companies that make it up. Their profits were very close to our expectations and we believe their performance will improve as they become more familiar with our operating model. Our internal growth initiatives in the Midwest, Northeast and Southern regions are progressing well and we are excited about those continuing opportunities. Our biggest challenge in the quarter, from an operational standpoint, was managing our gross profit margins. Prices on most of the products we sell fell during the quarter. As a result, service centers scrambled to reduce their inventories, which obviously have an impact on gross profit margins, and it did. Our inventory turned four times when you include the PNA Group. On a same store basis, we are slightly below our first half turn levels, but are confident that PNA and the rest of our operations can improve their turns. From a demand point of view, things pretty much played out as we expected with no real surprises. Our major end use markets, which include energy, wind towers, ship and barge building, mining, rail car, non-residential and industrial construction, agricultural equipment, as well as infrastructure and aerospace, are all relatively strong. Year-to-date tons sold, on a same store basis, are down slightly over two percent compared to the first three quarters of 2007. The weakest industries continue to be domestic auto producers, appliance makers and residential construction, where we have very little exposure. As for what lies ahead, that is very difficult to predict. We estimate that the North American carbon steel flat rolled producers have taken three to four million tons of production out of the system in the fourth quarter. We also believe they have the discipline to continue reducing production going forward in flat and other products as well. These same producers have lowered their prices enough to keep in a competitive range with foreign offerings, thus eliminating the need to buy offshore. Even with the recent rounds of price discounting, prices on carbon products are still at relatively high levels. As for aluminum, Midwest spot ingot began the year at $1.14 a pound, peaked at $1.54 a pound, and will likely end the year near that $1.14 level. Aerospace plate continues to be a relatively stable product from a price perspective. Stainless surcharges continue to be volatile and have been for some time and we see no reason for this to change. To sum it up, we believe the fourth quarter and the first quarter of 2009 will continue to be challenging. My view of industrial America is not nearly as pessimistic as what I read in the papers or see on the news. We have navigated our way through much more difficult markets than the one we are in now. Remember our results during the 2001 – 2003 time frame, when industrial America was truly in a prolonged recession. . Now I will turn the program over to Karla to review our financial statements. Karla?

Karla Lewis - Reliance Steel - CFO

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Consolidated sales for the quarter were a record $2.57 billion, an increase of 42.0% from our 2007 third quarter sales. Our consolidated year-to-date sales of $6.58 billion were also a record and were 18.5% higher than in the 2007 nine-month period. Our 2008 consolidated sales include $421 million of sales from the PNA companies that we acquired on August 1, 2008. Same-store sales, which exclude the sales of our 2008 and 2007 acquisitions, were $1.98 billion in the 2008 third quarter, up 18.6% from the 2007 third quarter, with a 4.4% decrease in our tons sold and a 25.2% increase in our average selling price per ton sold. For the 2008 nine-month period, our same-store sales were $5.7 billion, up 9.3% from 2007, with a 2.1% decrease in our tons sold and a 12.2% increase in our average selling price per ton sold. Our 2008 third quarter same-store sales increased 2.5% from our 2008 second quarter, with tons sold down 7.3% and our average selling price up 11.0%. The decline in our tons sold in the third quarter as compared to the second quarter of 2008 was in line with our expectations, which factored in the normal seasonal slowness along with general slowing in all markets. Our same-store average selling price has increased significantly throughout the year mainly because of increased costs for carbon steel products, with the most significant increases in the 2008 second quarter. Our selling prices for most of our aluminum products have also been higher in 2008 because of increased costs. Stainless steel prices and costs have been lower in 2008 as compared to 2007. Our 2008 third quarter gross profit was $624 million, or 24.3% as a percentage of sales, the same as in the 2007 third quarter but down from 28.0% in the 2008 second quarter. For the 2008 nine-month period our gross profit margin was 25.9%, up from 25.4% in the 2007 nine-month period. Our 2008 third quarter gross profit percentage was significantly impacted by our LIFO adjustment, which I will discuss in a minute. Overall, our gross profit margins narrowed in the third quarter as compared to the second quarter, which is typical for us in the current environment. During the second quarter of 2008, when the carbon steel mills were announcing significant price increases for carbon products we were able to increase our selling prices to our customers before we received the higher cost metal into our inventory, which allowed us to expand our gross profit margins. During the third quarter we continued to receive higher cost material into our inventory that increased our average cost and lowered our gross profit margins from the second quarter levels. In addition, because of the uncertain economy and because carbon steel prices started to decline, competitive pressures also caused us to narrow our gross profit margins somewhat from second quarter levels. Our gross profit margin was further impacted by our acquisition of PNA on August 1st. Historically, the PNA companies have operated at lower gross profit levels than the Reliance companies. Excluding the PNA companies from the 2008 third quarter would have resulted in a gross profit margin of 25.7%(2), 1.4% higher than our consolidated margin of 24.3%. Our 2008 third quarter LIFO expense, which is included in our cost of sales and in our calculation of gross profit, was $79 million, or $.67 per diluted share(1). This amount includes $24 million, or $.20 per diluted share(3), of LIFO expense for the PNA companies. At the end of the second quarter, we had anticipated annual LIFO expense, excluding the PNA companies, of $115 million for 2008, or $28.75 million in the third quarter. We have increased this estimate to $150 million for the 2008 year plus an additional $60 million of LIFO expense related to the PNA companies for a total estimated 2008 LIFO expense of $210 million. This results in an estimate of $73.5 million of LIFO expense for the 2008 fourth quarter. We increased our LIFO estimates mostly because of the acquisition of PNA. The PNA companies currently carry higher inventory levels and turn their inventory more slowly than we typically do at Reliance. We also increased our LIFO estimate excluding PNA because carbon pricing stayed higher longer into the third quarter, especially for plate and heavy structural products, which will cause our year end average cost in inventory to be a bit higher than we had previously expected. LIFO expense in the 2007 third quarter was $12.5 million, or $.10 per diluted share(1). In the 2008 nine-month period we have recorded LIFO expense of $136.5 million, or $1.15 earnings per diluted share(1), compared to $45.0 million, or $.37 earnings per diluted share(1), in 2007. Our 2008 warehouse, delivery, selling, general and administrative expenses have increased $135.6 million, or 17.6% in the year-to-date period. The increase is mainly due to our acquisition of PNA. As a percent of sales, our 2008 third quarter expenses were 12.8% compared to 13.9% in the 2007 third quarter and for the 2008 nine-month period were 13.8% compared to 13.9% in the 2007 period. The acquisition of the PNA companies favorably impacted our SG&A expenses as a percentage of sales as they have operated at a lower historical expense level than the Reliance companies. Our 2008 depreciation and amortization expense increased $12.4 million over 2007 in the nine month period mainly because of our 2007 and 2008 acquisitions. The purchase price allocation for the PNA companies is preliminary at this point, which may impact our depreciation and amortization expense assumptions going forward, as we finalize the valuation. Operating profit for the 2008 third quarter was $268.6 million, or 10.4%, compared to $168.2 million, or 9.3% in the 2007 third quarter. The improvement was mainly because of the higher carbon steel pricing

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and because of our lower expense levels as a percentage of sales in 2008. However, our operating profit margin is down from 12.8% in the 2008 second quarter because of our lower gross profit margins discussed earlier. Interest expense for the 2008 nine-months was 5.9% lower than in the 2007 nine-month period because of lower outstanding borrowings and lower interest rates during most of the 2008 period as compared to 2007. However, due to our $1.1 billion acquisition of PNA on August 1, 2008 our borrowing levels have increased significantly. Our interest expense in the 2008 third quarter was 47.9% higher than in the 2008 second quarter. Borrowing costs also increased during the 2008 third quarter. I will discuss our debt levels and costs more in just a minute. Our 2008 effective income tax rate was 37.7%, consistent with our 2007 effective tax rate for the year, although we booked at a rate of 37.5% during the first nine months of the 2007 year. The acquisition of PNA was accretive to our earnings in the 2008 third quarter, adding $.12(4) to earnings per diluted share for the two month period ending September 30, 2008. Net of acquisitions, our accounts receivable balance increased $230.2 million and our inventory levels increased $294.2 million at September 30, 2008 from our year-end 2007 amounts. Our accounts receivable days sales outstanding rate was approximately 41 days for the 2008 year-to-date period, up slightly from 40 days earlier this year. This is impacted somewhat by certain of the PNA companies that have a higher DSO rate. We continue to closely monitor our receivables and are cautious given the tight credit conditions and economic uncertainty; however, we have not seen any meaningful changes in the credit quality or payment ability of our customers at this time. Our inventory turn rate including the PNA companies was 4.0 times at the end of the 2008 third quarter. Excluding the PNA companies, our inventory turn rate was 4.3 times, down somewhat from 4.4 times in 2007 and 4.5 times at the end of the 2008 second quarter. Excluding the PNA companies, our inventory quantities declined by about 2% as of September 30th compared to June 30th, which was at a lower rate than the 7% at which our shipping levels declined during the quarter. We are currently very focused on meaningful reductions in inventory levels, especially given the demand uncertainty of our customers. Although our working capital needs have increased during 2008, our solid profit levels provided net cash flow from operations of $115.4 million in the 2008 nine-months. However, operating cash flow in the 2008 third quarter was a negative $13.0 million because of the working capital increases from the PNA companies during the quarter. We expect to generate significant cash flow from operations in the 2008 fourth quarter as our working capital declines due to reduced inventories and the normal seasonal slowness. Our outstanding debt at September 30, 2008 was $2.28 billion. On August 1, we increased our borrowings by $1.1 billion to purchase PNA. We funded this with $500 million from a new term loan and with borrowings under our credit facility. As of September 30, 2008, we had $915 million borrowed on our $1.1 billion syndicated credit facility. Our net debt-to-total capital ratio was 48.1%(5) at September 30, 2008, up from our year-end 2007 rate of 32.4%(5). The $1.1 billion transaction value for the purchase of PNA included the refinancing of $725.3 million of their outstanding debt at closing. This included a secured credit facility as well as $250 million of 10.75% outstanding fixed rate notes and $170 million of outstanding floating rate notes at LIBOR plus 700 bsps. Our debt cost during the 2008 third quarter under our credit facility was LIBOR plus 55 bsps and the cost of our new $500 million term loan was LIBOR plus 225 bsps for a weighted average cost of 4.3% during the quarter. Although LIBOR rates increased in the 2008 third quarter, we experienced significant savings by tendering for the PNA Notes and refinancing PNA’s debt. In the 2008 nine months we used our borrowings and cash flow to fund our increased working capital needs, capital expenditures of $119.5 million, acquisitions of $329.4 million (excluding debt assumed) and stock repurchases of $114.8 million. At September 30th, we had $185 million undrawn on our syndicated credit facility. We are comfortable with this level of liquidity in light of our plans to significantly reduce working capital during the 2008 fourth quarter and beyond. Although we believe the fundamentals of our business and ability to generate cash flow are strong, because of the global credit tightening, we are limiting our uses of cash to the most important capital expenditure items and maintaining dividends to our shareholders. Our free cash flow will be used to reduce debt. Our book value per share was $32.86 at September 30, 2008, up from $28.12 per share at December 31, 2007. Thank you. We will now open the discussion for questions.

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Regulation G Reconciliations

(1) LIFO expense is included in cost of sales. The per diluted share effect is calculated as follows (in thousands, except for share and per share data):

Three months ended September 30: Earnings per diluted share $2.07 $1.22 Per share effect of LIFO expense .67 .10 Earnings per diluted share - FIFO $2.74 $1.32

2008 Three months ended June 30: LIFO expense $ 40,000 Tax rate 37.7% Net LIFO expense $ 24,920 Weighted average shares outstanding – diluted

73,757,864

Per share effect $.34 Three months ended June 30:

Earnings per diluted share $2.12 Per share effect of LIFO expense

.34

Earnings per diluted share - FIFO $2.46 (2) The gross profit margin excluding the PNA companies is calculated as follows (in thousands):

2008 2007 Three months ended September 30: LIFO expense $ 79,000 $ 12,500 Tax rate 37.7% 37.5% Net LIFO expense $ 49,217 $ 7,813 Weighted average shares outstanding – diluted

73,775,991

76,476,928 Per share effect $.67 $.10

Nine months ended September 30: LIFO expense $ 136,500 $ 45,000 Tax rate 37.7% 37.5% Net LIFO expense $ 85,040 $ 28,125 Weighted average shares outstanding – diluted

73,686,248

76,613,307 Per share effect $1.15 $.37 Nine months ended September 30:

Earnings per diluted share $5.65 $4.28 Per share effect of LIFO expense

1.15

.37

Earnings per diluted share - FIFO $6.80 $4.65

2008 Three months ended September 30: Gross profit $ 624,048 Less: Gross profit attributable to PNA companies 71,350 Gross profit excluding PNA $ 552,698 Net sales $ 2,572,836 Less: Net sales attributable to PNA companies 421,497 Net sales excluding PNA $ 2,151,339 Gross profit margin excluding PNA companies 25.7%

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(3) The per diluted share effect of LIFO expense related to the PNA companies is calculated as follows (in thousands, except for share

and per share data): (4) Earnings per share related to the PNA companies is as follows:

(5) Net debt-to-total capital is calculated as total debt (net of cash) divided by shareholders’ equity plus total debt (net of cash).

This conference call may contain forward-looking statements relating to future financial results. Actual results may differ materially as a result of factors over which Reliance Steel & Aluminum Co. 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, 2007 and other reports on file with the Securities and Exchange Commission.

2008 Two months ended September 30: PNA companies LIFO expense $ 24,000 Tax rate 37.7% Net LIFO expense $ 14,952 Weighted average shares outstanding – diluted

73,775,991 Per share effect $.20

2008 Three months ended September 30: Earnings per diluted share $2.07 Earnings per diluted share – legacy Reliance

1.95

Earnings per diluted share – PNA companies $.12

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Q U E S T I O N A N D A N S W E R

Operator

Thank you very much, ladies and gentlemen. The floor is now open for questions. (OPERATOR INSTRUCTIONS). We'll take the first question from Brett Levy. Your line is live.

Brett Levy - Jeffries - Analyst

Hey, guys. Pro forma for PNA. Can you guys talk about where you guys sit right now in terms of distribution, both on a revenue basis, and talk a little bit about where you are in inventory right now, aluminum, stainless, carbon and then within carbon, the percentages that you have that are exposed to sheet and other products.


I think with respect to where we are in the industry, I think was the first part of your question. Does that mean, what percent of the total industry are we looking at?


No. What, exactly what portion of revenue comes from aluminum, stainless and carbon. Then also talk about your inventory positions in all of the above with a special focus in carbon where, I think you have very little in the way of sheet product.


Right, right. Our carbon steel for the third quarter, and now, keep in mind, this has two months only of the PNA business, which is a little more carbon. But our carbon sales in the first -- I mean in the third quarter were 60% of our revenue dollars, aluminum was 14%. Stainless steel was 12%. Alloys were 8%. And then total processing was 2% and the other 4% was miscellaneous, and that includes some titanium and some copper and brass. In terms of how much of that is carbon sheet, Karla's got that.


That's 12% for sheet with about 6% of that hot rolled and then the rest in cold rolled and galvanized.


And then in terms of going -- how do you look going into the fourth quarter -- do you feel like your inventories are heavier than that or lighter than that, as you position yourself?


I think our inventories are pretty much in proportion to where they should be. We've been talking, however, about reducing inventories and we fully expect that inventories will be reduced materially during the fourth quarter. That's a normal seasonal thing for us. We usually reduce inventories in the fourth quarter but this year, with the tail off somewhat of business that we saw in September, we expect that to continue through the fourth quarter, and we therefore expect inventories to come down even more than what we would bring them down normally.

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Overall, I think today, we have about 2.8 months of inventory on hand. Somewhere in there, 2.7, 2.8. You know, we're not uncomfortable. We just want it lower.


We have initiatives out there right now in the field with our people to reduce their inventories even quicker and by larger amounts than we have in a typical fourth quarter. Just because of some uncertainty that we have out there. We certainly, with all of the products, prices falling, in the last -- basically the last 60 to 75 days, we're going to take a very cautious approach to our inventories, so we expect our operators in the field to get their inventories down.


Whatever you guys are going through, all of your competitors have to be going through worse. Can you talk about whether or not you have opportunities to buy people at pennies on the dollar, or you're seeing small guys go out of business, or on the other side of that, are they getting so desperate that they're making the pricing environment ridiculous?


You know, there's a lot of that conjecturing going on and speculation, and I think that's just what it is, Brett. It is just a bunch of people sitting around thinking about what could go wrong, and we don't see customers blowing up -- or competitors going out of business. Most of the people in the service center industry have pretty strong balance sheets because the market, in general, has been pretty strong since 2004. You know, the earlier part of this year was very strong. Not necessarily because of demand but because pricing has been so strong for all of us. And I think people are in pretty good shape. We don't see the opportunity to buy companies for pennies on a dollar. You know, usually what happens and as I said before, we've seen this kind of cycle in the past. Maybe the reasons were different but we've seen down cycles in the past. And usually what happens is people just don't sell their businesses. You know, the speculation that they have to sell is just that, I think. It is just unfounded speculation.


Got it. All right. Thanks very much, guys.


Thank you.

Operator

Thank you. We'll take the next question from Timna Tanners. Your line is live.

Timna Tanners - UBS - Analyst

Hi, good morning.


Good morning.

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Wanted to ask some questions about how you manage in a downturn to reduce your fixed costs, if you could talk to us about that and what your people in the field are doing, given the uncertainty about where prices are. I think it’s really telling – on the Steel Dynamics call we heard that it is really hard to call where the price is right now. Can you qualitatively describe how you're managing those two elements.


Timna, before Gregg gives you a little detail, managing through pricing cycles is what we do. You know, we Reliance and we the industry. We don't have the same concerns and the same challenges of the mills that present themselves. So, we have, I think, much more variable costs. And about 55% of our operating costs are personnel related. So, that's usually the first place we look and Gregg can talk some more about that. But it is not an environment that we're -- that we haven't seen before. Maybe the cause might be different. But the actions are the same. We manage our business on a day-to-day basis, really the same way through all market conditions. Now, certainly, when prices are going down, you want to skinny up a little bit more than normal on inventory, but we don't speculate on inventories when prices are going up. We don't try to outsmart the market and buy heavy when prices are rising because sure as heck, it turns around and they go down and things happen like last year in the third quarter when nickel came crashing down and those of us that had stainless steel inventories didn't like that too much. So, our message to our management teams in the field is consistent through all market conditions. Maximize your profits and turn your inventories and collect your receivables. That's day in, day out, what they hear from us. And when we do get into environments where things are a little bit different, then we can attack some of our overhead expenses. Gregg?


Yes, Timna, we have initiatives out there and have for about the last six weeks, on reducing our head count in the field. Some of the companies, the recent companies that we acquired with the PNA group, very honestly had never had a layoff in their entire existence within their companies. And they have taken action and responded to that as Dave said, about 55% of our expenses are related to people, head count in the field. And although we certainly don't enjoy laying people off, it is part of the business that we're in. And we do what we have to do. In 2000 through 2003, we eliminated about 24% of our work force which is why we were profitable in all of those quarters throughout that very dismal period of time in our industry. So, yes, what are we doing? We're doing what we need to do and that is, we're taking some people out in the field, reducing our head counts and our expenses. And we're watching every dime that we spend.


It is not an across the board edict where we come up with some percent and expect people that, in all of our businesses to take X percent of the head count out. It is really done by specific business. There are certain of our businesses that are doing well and expanding. And there's really no need for them to reduce their head count. Certain other businesses may be -- the markets they're exposed to have gone down a little more.


That's really helpful. The only other question I had is, a lot of investors seem to be pretty concerned about the stainless and aluminum side in particular. Can you talk to us about how you're managing the conditions in those markets in particular?


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Yes. It is very simple, actually. We're taking our inventories down as fast as we possibly can, and we're trying to do it more on the buy side than the sell side. So, we're cutting back our purchases rather dramatically. The prices in stainless and aluminum, I mean stainless surcharges have dropped incredibly. In June, they were at about $1.67 a pound. And in December, they're going to be somewhere around, in the 70s per pound. That's like a $0.90 a pound, $1 a pound decrease. So, what do you do in a market like that? You make sure you have very, very little inventory. You buy -- availability is not an issue. Ok. You can get aluminum and stainless out of depots very, very quickly. And that's exactly what we're doing. So, in that particular case, the company with the least amount of inventory wins.


And on the heat treat aluminum side, it is a different story out there. That's a stronger market despite what some people might think about aerospace, aerospace has been pretty good for us this year.


Aerospace with Reliance you have to understand is that about 50% of what we sell goes into defense and military in the aerospace market. So, even though Boeing is going through their strike and the issues on the commercial side, the defense and military side is very strong as well as regional jet manufacturing. So, that's why that business is very strong with us.


Ok. Thanks again, very much. Appreciate it.


Thanks.

Operator

Thank you. We'll take the next question from Mark Parr. Your line is live.

Mark Parr - Keybanc - Analyst

Thanks very much.


Hey, Mark.


Good morning. Welcome to the new reality.


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We've been here before. Maybe not with the stock price. That's a fun, new thing to look at. But the economic challenges are none that we're rookies at.


I think it is a little less painful today thanks to the numbers you put up. Congrats on that.


We got a long way to go.


I hear you. One of the things I was curious about, and I've asked this question before. The relative outperformance you guys seem to be experiencing on the volume side, to the extent that there might in fact be a disconnect, actual volumes are somewhat weaker. Do you have a way of tracking how much traction you're getting with internal or organic growth initiatives or market share momentum? Do you see that process accelerating over the next six months, or how do you view your ability to counteract just a general macro miasma that we're in.


Mark, we do expect that our internal growth would pick up during times like this. I think that the concentration and the type of customer base we have, I think helps us. And this year, even earlier in the year, I think it has helped us. As maybe customers have been limited in their abilities to purchase the quantities and materials they wanted by their credit lines. Again, they weren't experiencing problems, maybe more frustration that they couldn't buy as much at one time, so they had to buy smaller quantities more often. That actually, we think, we're pretty good at next day delivery, more than half of our business comes from people calling us today and wanting their processed metal delivered tomorrow. So, when times tighten up like this, we do expect that we should be able to outperform. How that lays out in the whole scheme of things, we don't really know, and it is probably not significant very honestly in the whole realm of what happens out there.


We obviously, if we, for instance, open a new facility, we know what those numbers are because we track each location. But typically, we had already put a salesperson there and we were selling into there from another facility, so it is kind of hard and like Dave said, it hasn't been material enough that we've tried to drill down and quantify it.


Hey, Mark, I think more importantly, what most people don't realize about our Company is really the base, the fundamental industrial base that we service. I think they underestimate our involvement in energy with oil tools, wind towers, ok? That's a very important business to us. And we do extremely well. Aerospace, as I mentioned a minute ago, defense military, regional jets, that's a very good business for us. Agricultural equipment, through Deere, and Cat and others, we do a lot of business, not necessarily direct but certainly through subcontractors of theirs. Industrial construction, refineries, utilities, stadiums, that's supposed to be up 30% in 2009. And we have a great deal of involvement in that. Infrastructure through bridges and mining and barge and ship building. All of those industries that we support are all doing reasonably well. And I think people get caught up with automotive, with appliance, with residential construction. And they lose sight about the highly industrial portion of the business that Reliance is very much involved in, and by design. We look at companies that we acquire, Dave and I and Karla, we look at

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the industries that they support and those industries that I just described, they're very, very important to us. And I think they served us well in the past and certainly our regional -- our geographical footprint bodes well for that.


Because we sell a lot to the job shops and people like that, if there are shifts within some of those industrial or other markets, typically the people we're selling to also shift to those, and so that helps us stay in the strong market.


The job shops are pretty versatile. We've seen that, here in southern California, really, with some of the residential issues that have happened, maybe there's a slowdown for new gas stations next to these new communities, but the job shops that we're selling, now they're working on school projects. So, we've seen a tremendous amount of activity for schools and hospitals here in southern California. And maybe less from the private projects standpoint but more in the public project standpoint. So, the customers are very versatile and many times we don't have the visibility we wish we did so we can answer your questions better. But we just ship the fabricator or the job shop. We don't really know what project they're working on. We don't know if it is for a gas station or a school or a hospital or some industrial refinery or something.


Ok. That's really helpful. I had just one other question. Could you give us some color on how you feel your customers' inventory positions are? You're doing a lot to reduce your inventories but how does your customer -- what's the -- kind of the field test about your customers' inventory base right now?


Mark, I can tell you this right now. Our customers are living hand to mouth. Okay, which as Dave pointed out a minute ago, really serves our Company well. The typical order that a customer might place, let's say it was $1400, now they're placing it on Monday, Wednesday, Friday, and it is $600 a piece. They're just being very, very cautious. They're seeing steel prices go down. They're seeing aluminum prices go down. Stainless prices go down. And they're looking at possibly, although we haven't heard any negatives about customers with their credit situations, which is kind of unusual. You would expect that we would, but it has been very quiet on that side of the business. But I talk to our guys all the time. I was talking to one of our fellows in the Southeast yesterday morning. And he said our quoting activity was poor in September. But it has picked up in October. But the situation is that the quantities are so small. So, they're doing just exactly what we're doing. They're buying as little as they possibly can, and with us, we can process material and deliver it the next day. There's many companies that are out there that lead times are three to five days. So, that falls pretty nicely into our lap.


Okay. Terrific. Hey, Gregg, guys, thanks for all of the color and good luck on the fourth quarter.


Thanks, Mark.

Operator

Thank you very much. We'll take the next question from Tony Rizzuto. Your line is live.

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Tony Rizzuto - Dahlman Rose & Co - Analyst

Thanks very much. Very solid performance in a very challenging environment. Certainly looks like it could get a little more challenging as we move ahead. The question I had is, do you guys normally see, in a leaner environment, in a tougher environment, somewhat along the lines of the question that Mark was asking, do you typically see a lot of your customer base seem to gravitate toward you versus the competition because of that very fact that you can get products even more quickly? So is that in some way maybe camouflaging maybe some of the erosion or maybe has in the past, some of the erosion from more of a macroeconomic standpoint? That's my first question.


Can we answer that one first so we don't forget it?


Sure.


Okay, Tony. I think the answer is no. We don't -- do we think that that helps us or at least helps our chances in the market place? Yes. Is that big enough to mask any erosion that's going on out there? No. I don't think so.


Okay. Then the second question is, if you look at those various markets, you could argue that those markets have been pretty good but we've really seen quite a sharp fall off in a wide range of commodities. Oil has come down, by more than one half since July. And the rest of the commodities sector, Agricultural prices. There are increasing questions about the financial wherewithal of municipalities, state, local governments, the federal government, I assume a lot of the folks that you -- the fabricators, the shops probably supply a lot of these different efforts. Could you kind of go over with us, end market by end market, areas where you're seeing maybe a sharper deceleration or more pronounced changes on the margin versus say three months ago?


First off, Tony, on the fall off in commodities, I'll ramble here for a minute so Gregg can prepare an answer to that question.


Thanks, Dave.


With regard to the fall off in commodities, there's a lot of good stuff going on out there, too. Everybody is dwelling on the negative and there is a million different reasons why things, it is like, if this happens, things go to hell. If this happens. It is one after another of just negative opportunity. And what if that doesn't happen? Or what if only half of those bad things happen?

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Oil was going up and up and up and up. And at one point, that was a bad thing because it was going to fuel inflation and slow everything down and kill projects. Well, now oil has come down. So, that must be a good thing. Maybe if it gets too low, it is not so good for some people. But energy costs are down. Interest rates are down. Other commodity prices are down. So, there's -- the stage is set. If you look at it from a different angle and we're trying to be realistic and see both sides, not just the negative side. But there's a lot of reasons why things shouldn't be as bad as people expect them to be, and some of the changes that are happening out there can really set the stage for things to get better. Maybe not tomorrow. Or maybe not in the fourth quarter but certainly better sooner than you might think.


I appreciate that, Dave. That's helpful.


You know, Tony, probably the biggest influence in the businesses that we're in is that obviously the residential construction industry, when that slows up, it is going have-- eventually, it is going to get into the nonresidential and we're going to see that in going forward, okay. I think it is actually predicted to go down to have negative growth in 2009. Which is no surprise to probably anybody. On the other side of that though, as I mentioned earlier, okay, the industrial construction, that's got pretty good legs. Now, the financing that you just brought up, okay, that's a good point. How that's going to affect us, I don't know. I don't think any of us know. I've asked our guys in the field. There's been, one project that I can think of. It was a stadium in Wisconsin that was put on hold. And we actually had a sizable portion of that job at one of our operations. That will be released and we'll fill that order.


Someday. Yes, exactly. But overall, I think that business conditions where we're focused on is -- it is pretty healthy. I think the customer base that we're doing business with, financially, they're pretty healthy. And maybe only the projects that should be financed get financed going forward. That maybe the viable projects and certainly there's going to be some that don't happen. Maybe they shouldn't have happened in the first place.


You guys I'm sure play with worst-case scenarios. Assuming that there's no further acquisitions made, what kind of revenue declines do you typically forecast in these scenarios. You've mentioned on the call, I think certainly in the release, 2001 or 2003 period, we know that was a very challenging period, very difficult period. Should we think along those lines? Is that sort of a worst case from a revenue standpoint top line?


Tony, I think, keep in mind that we just acquired a company that was about 25% of our size. And that was done August 1. So, even in 2009, we're going to have seven months more of that company than we had this year.


Prices are still high -- if you look at '01 to '03, prices were significantly different then. Even if they continue to go down a little bit right now.

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A smaller margin on a much higher level of pricing environment is to our benefit. So, on a same store basis, things can get a little more difficult, but that's one of the things that we like to point out is, we've got kind of a built in increase in revenue for next year because of the PNA acquisition that we just did in August. And so it would -- we can't come up with a scenario where revenues would be down next year because we're going to have seven more months of PNA in there. It is such a significant company.


Tony, you recall, hot roll was at $240, $260 a ton in 2003. Demand from industrial America was definitely impacted in those three years, more so than we had ever seen before.


A lot worse than now.


It is not even close. This, unless something happens that we're not --


--we can't predict.


We can sit here and run -- I could run 50 different spreadsheets just like you can with different numbers in them, but the reason we're not putting guidance out right now is because we're not really sure what numbers to drop into those from a volume standpoint because we haven't seen the actual drop-off. We don't have the backlog and visibility based on our next day type of business. So, we're not sure what that number would be right now.


And even the estimates that are out in the street now, there is a huge range in the estimates. So, it appears that there might be a little confusion at the analyst level as well. And we just don't know. So, hopefully we can come up with some meaningful information as the quarter progresses and get that out to you and --


What we do know, Tony, is that we know how to operate this business. It is what we do for a living. We're going to do whatever it takes to make sure that we're as profitable as we possibly can be.


We continue to respect the way you guys manage the business and that you continue to do a fabulous job. So, we're certainly very cognizant. Thank you very much.


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Thank you, Tony.

Operator

Thank you very much. We'll take the next question from John Tumazos. Your line is live.

John Tumazos - John Tumazos Very Independent Research - Analyst

Congratulations on all of the progress.


Thanks, John.


As strong as your controls are, some of your customers may be inadvertently, too much inventory here and there, not as tight a ship as yours, even if they run their businesses perfectly, many small businessmen have trouble getting credit today because of the banks losing money on mortgages and not having enough money to finance a normal small business. Are you modifying your credit practices at all to help long-standing customers that you've been with for a long time, or are you moving material on consignment or doing anything like that sort of adapting to the time to keep the system falling?


I think, John, the real change if any that has happened is just that we're kind of doing what Greg and Dave alluded to earlier, where we're selling them more frequently in smaller quantities at a time to make their cash flow a little more even and their inventory receipts. But we're not becoming the bank for them. And we're continuing to monitor them. We're keeping our payment terms consistent.


We're not embracing consignment. That's something that we don't really favor. And the whole speculation -- I think that's another area, John, where there's a lot of reasons why it makes sense to think that small businesses are having a hard time getting credit. But I think it is way overblown. We're not aware of our -- we haven't had customers come to us and say I can't get my bank line renewed or I can't get a bank line. That's just -- we're just not aware of that. I think that that's just -- it is more gas out there to talk about and it is being way overblown. The good companies, not everybody has a credit line that's renewing today. And certainly we wouldn't like to be in the market place renewing our revolver, any time in the last six months or going forward probably in the next six months. But it just doesn't seem to be the size of problem that it is being made out to be.


Thank you.


Thanks, John.

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Operator

Thank you very much. We'll take the next question from Jane Haugh. Your line is live.

Jane Hough - Dwight Asset Management Company - Analyst

Thank you. I would like to talk about capital structure for just a little bit, and I know that initially you planned to sell stock to help pay for the PNA acquisition but it is not going to happen. It looks like the debt balances are much higher now. I wanted to know, number one, can you estimate the free cash flow that it would generate in the fourth quarter from the sale of inventories to pay down that debt? Can you give us any kind of ballpark estimate in terms where your debt EBITDA ratio will come out at year end? And also have you been in talks with any of the rating agencies? I know Moody's has you on negative watch because they're concerned about this very issue that you're not able to raise the incremental equity that could put pressure on your ratings. So, just want to get a sense of where, at the level of your leverage and if you've -- what the rating agencies are saying about this.


Yes, we -- our capital structure, we're currently very comfortable with. We're at 48% debt to cap, which is higher than where we've been earlier this year but really not anything that we're uncomfortable with. We probably think about it a little more today just in light of what is going on within the financial markets. We are not prepared to give you any comments on where we think EBITDA or inventory or cash flow levels will be in the fourth quarter because of the uncertainty that's out there, which is why we're not giving guidance. It all kind of follows each other. So, we're not ready to give you any numbers. We do continue to talk to the rating agencies. They understand, we believe, the fundamentals of our business and they understand that even if the economy does decline somewhat as working capital needs decline, that does throw off more cash flow for us. And we believe that they are, watching and comfortable and that Moody's in particular is going to watch our cash flow and watch us bring our debt levels down to a level probably I think he likes to see us closer to about 40%, debt to cap.

Jane Hough - Dwight Asset Management Company - Analyst

Okay. Thank you very much.

Operator

Thank you very much. Next question is coming from Tim Hayes. Your line is live.

Tim Hayes - Davenport & Company - Analyst

Good morning.


Hey, Tim.


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I had some questions on the aluminum plate market starting with the general engineering 6000 plate. I know those prices are coming down because primary aluminum prices have come down, but are they falling in price more than the drop in primary aluminum or are they declining less than that?


Primary aluminum meaning the Midwest spot?


US Midwest price, benched off of the LME


They're not falling anywhere as near as quickly as the Midwest spot has fallen. Okay. The Midwest spot was -- I guess yesterday was somewhere near $1.02. Okay. And 6061 plate is not falling anywhere near that extent at all.


And the demand conditions for that product remain pretty strong?


Yes. Actually, I wouldn't say strong. I would say reasonable. Okay. Semiconductor business, which uses quite a bit of that, then you have the mold making, okay. That gets into some of the commercial plate markets. Primarily in the Detroit area and what not. So, mold plate is down. Some of the semiconductor equipment manufacturers, their uses is down somewhat. So, it would be activity basically in commercial plate, 61 being the major with that. It is not as robust as it was say the first half of the year or last year. It is not dismal by any means. But prices on 61 plate, they might be down $0.15 compared to three months ago. As opposed to what you've seen the ingot fall from a high of $1.54 to today, $1.02. In very short order. So, don't ever think that any of the plate items fall nearly as quick as the Midwest spot. It just doesn't happen.


Okay. Very good. Thank you.


Yes.

Operator

Thank you. We'll take the next question from Bob Richard. Your line is live.

Bob Richard - Longbow Research - Analyst

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Good morning, and thanks for taking our call. You don't have much tolling business but you inherited a little bit with PNA. Can you give us the state of that business. Is that pretty weak right now I would presume, or can you provide any color on that?


I wouldn't say it is weak. I wouldn't say it is robust either. But we're pretty happy with that. The toll processing business that we have with the Feralloy Company does pretty well. We do it in a number of different places as well. So, Mexico is strong. Our operations up in Oregon steel are doing well. The Midwest operations. You know, we're doing ok. We do a number of different tolling arrangements whether it be slitting, custom link or we're getting involved with pickling and things like that. We've no complaints. Our operations in toll processing at Feralloy, we're very pleased with them.


We do a lot more toll processing with Precision Strip, which is one of our subsidiaries. That's all they do. They don't sell any metal at all. And they're off some. A good portion of their business, about 60% of their business or thereabouts, is auto related. The good thing there, if there is a good thing, is that most of it relates to the new domestics or the transplants as opposed to the Detroit, the big three in Detroit. But they're still down. And their volumes have come down, about what, Karla, 7%, 8%?


Same as the rest of the companies.


Consistent with us. They have had a bigger drop-off in some of their auto related business. They've done an outstanding job replacing that business with other things. So, other toll processing things. So, some related to auto that they didn't have before and some related to other industries. So, overall, it is pretty good. It is not the best, again like Gregg -- this can probably be said for probably all of the phases of our business but for maybe the energy side, which has been very strong. Everything else is okay. It is not the best we've ever seen but it is certainly not the worst. It is okay.


Thanks for that color. Could you comment -- do you think we're on a pricing -- have we hit the pricing trough on aluminum or stainless? Are we closer on either one of those commodities in your opinion? Which one maybe has more room to go down? That would be driven by the inventory levels, right?


On aluminum, as with Midwest spot, somewhere around a little bit higher than a buck a pound on Midwest spot, I would say we're pretty much at bottom there. Most of the smelters at a buck a pound, they're not making any money. So, I would guess they would have discipline enough to say if we're not making any money, it won't go down any further. I think we're pretty much down at the bottom there.

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There is going to be probably -- not probably, there is going to be another discount on the surcharge in stainless. It is going to apply in December. It is going to be sizable. Okay. Somewhere between $0.30 and $0.40 a pound, okay. So, that's going to bring that surcharge level, as I think I mentioned earlier, somewhere between $0.70 and $0.80 a pound, coming off of highs of $1.67 a pound. Is that at bottom? God, I hope it's at bottom. I would say if it's not, it is pretty darn close to being at bottom. So, bottom line for anybody that's listening from the Reliance Company, turn those inventories, baby.


Okay. Thanks very much for that color. Great quarter. Congratulations.


Thank you, Bob.

Operator

Thank you. The next question is coming from Yvonne Varano. Your line is live.

Yvonne Varano - Jefferies - Analyst

Hi. It is Yvonne.


Hi there, Yvonne.


Hi there, Yvonne.


I changed my name. I was wondering if you could just give us a little color on what the customer's sentiment is out there. Obviously hand to mouth type of buying, but is it feeling that things are going to get materially worse or are they panicking? Is there any color you could give us there?


You know, our customers are skittish. Okay. Their mind frame, I don't think is any different than yours or mine or anybody else's.


Different than hers. They're not nearly as negative as she's thinking it could be.


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But you know, the order book, okay, the activity with respect to quoting and business and what not, I had an opportunity to be at a sales meeting a couple of weeks ago and I was asking, what do you guys see out there? They said you know, Gregg, you always say believe what you see on your financial statements, not what you read in the newspaper. They say there's still a lot of steel and aluminum and stainless that are in our customer's operations. But they're just ordering them at the very last minute. Which plays well for us. But the bottom line is that, for the first nine months of the year, we're off just slightly above 2% on our volume, okay, compared to the first nine months of last year. And last year wasn't bad. So, are they cautious? Yes, they're cautious. Are they concerned? I think everybody is concerned. We don't know what's going to happen next with the credit crunch and all of that other stuff. But the fact of the matter is, is that people need to produce. They need to manufacture. Our customer base, as we always say, they're flexible. They're job shops, they're fabricators. They are family owned businesses, they have to support their families. They have to put food on the table. And they're going to go out there and get business whether it is in the industries they've been supporting in the past or new industries that they have to go after today. So, are they cautious? You bet they're cautious. On the other hand, we're selling a lot of steel.


Okay. And on the demand side, can you compare what you're seeing now maybe to the other cycles you've been through, and give us some sort of feel of whether you think we're in the very beginning of this or if we're more toward, the middle.


You know, Yvonne, the toughest period that we've ever been through in our working lives, and I think it is probably the toughest period for the whole industry, was 2001 through 2003.


Right.


And you know, 2003 was probably the toughest part of that. It seemed to get progressively worse. It started really in the second half of 2000 and got progressively worse. And you know, this is -- it just isn't like that. As Gregg, I think mentioned earlier, that back in that time period, we had really very little demand. Demand really just dried up in the industrial side. There was no activity, virtually no activity in the nonresidential construction side. That didn't really come back until late 2005. And it had been down for about four and a half years from our perspective at that point. So, demand was just awful in 2003 and it started getting awful in late 2000. And you can adjust to that. You can manage for that because if you're shipping and processing and shipping less weight, you don't need as many people and you don't need as many trucks, and so you can adjust your overhead better. The complicating thing in that time period was also, Gregg said earlier, was the pricing. I mean we had, we always quote the base hot roll price because that's kind of the reference point out there. But it was $240, $260 a ton back in 2003. And if you're making -- if you look at our gross profit margins during that time period, they were still right around the same gross profit margins that we have today. And the difference though is that you're getting 26 plus or minus percent of $800, $900 a ton now versus the same percent of $260 or $300 a ton back then. That's painful. When you don't get that differential in there.

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So, it is different because pricing levels are at significantly higher levels today than it was in the most difficult period that we've ever seen, and demand, even though it is not as good as it was last year or maybe in 2006, which was pretty darn good, it is still reasonable. And from our perspective, again, we don't have a lot of exposure in selling metal to the troubled areas out there. So, it is not what it was in 2001, 2002, and 2003. I don't think this is the beginning of something that's going to develop into that because the root cause of all of the uncertainty has not been the industrial economy. It's been this credit issue. And the troubles that it's caused and the wealth that it's erased from people in their homes and the ways they've financed their personal lives as well as their businesses. So, it is just a different thing today. And while the causes may be different, I think if -- the actions may not be. People that worked through the prior periods that were difficult successfully, I think will work through this period however long it is successfully also.


Sure. I think we're pretty comfortable that you guys do a great job and we think that pricing is going to be a different scenario than it was in the last downturn that you talked about, and I think the big question, as Karla said earlier, too, is it is the demand and what happens there.


Yes, you can only take so much negative news out there. We get pelted with it from all sides every day. And then you layer on top of all of the negative news in the media what's going on in the stock market and your head starts to spin. And people lose confidence in what's going on out there and they're losing confidence in their decision making and that has an impact on them. But then again, they look at their order books and they're still quoting jobs and we're still shipping metal. So, I think everybody -- they're so uncertain because they're getting slapped around so much by all of this negative news, they just don't know what tomorrow brings. But so far, it has been okay.


We would all be really happy if we didn't have to look at our stock price.


Yes. From a business standpoint, things are okay.


Just touch on imports quickly. Because I know the mills brought down the prices to be in line with imports. But just curious on the offerings on the import side, to get a gauge for what's going on globally. Is there really a lot of steel that's looking to come here now?


Let's put it this way, Yvonne. There's more offerings today than there was, two months ago. But I really have to tell you I feel better about the fact that the mills are kind of stepping up. And recognizing the fact that it is a reality that they could be coming back into the United States and they're lowering their prices today rather than waiting 90 days from now and then lowering them when it is too late because everybody already bought offshore.


Right.

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So, yes, there's more offerings. But it is not a tremendous amount of offerings though. It is nothing like it was a couple of years ago, when we had imports coming in, what were the imports, about 45 million tons that came in. A couple of years ago. And it is not even close. It is not even close. And it is not attractive. So, our message to our people in the field is that if they get offerings and they're even thinking about taking advantage of it, they have to clear it with us first. Because, we just think that the domestic mills are going to be very proactive in making sure that they do not come in any major way. I guess as a round about answer to say that yes, there's more offerings today than there was a couple of months ago but A, they're not very attractive and B, they're not in huge quantities.


Perfect. Thanks very much.


Thank you.

Operator

Thank you. We'll take the next question from Kris Drue.

Michelle Applebaum Michelle Applebaum Research - Analyst

Hey, this is Michelle.


Hey, Michelle.


Hey. Sorry it took me awhile. I have a couple of questions. Number one, with prices coming down, is there a chance you could have a fourth quarter LIFO credit?


No. No. The reason is, I think Karla had in her material what our LIFO assumption is for the year. And we book it pro rata through each quarter.


Okay.


So, we do expect that our actual calculation will turn around in the fourth quarter but we're still going to book some expense because of the way that we believe we're supposed to book it, which is pro rata for the year.

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Okay. Asking you to put a qualitative spin with a quantitative bent, if you were to say on a scale of one to ten, if you could rate your stock price on that scale and rate your current business outlook on that same scale, where would you pick those numbers?


Is ten the best?


Yes.


Stock price is zero. Or minus if that's possible.


Okay.


It is just ridiculous, Michelle.


Incomprehensible is the word today.


To have a PE of three or four, I know -- anyway, I won't go there. So, zero. Business conditions, seven.


Seven? And have you been below seven in the past?


Yes.


Oh, yes. We were 4 in 2003.


So this isn't even close.

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Not even close.


You know, it is -- it is lovely to give us year-to-date same store sales but it is irrelevant. The only thing that's relevant probably is October. Can you give us the October same store sales?


No.


September?


Sorry.


How about September?


Yes. We can actually -- we can give you September, I think.


Okay. Do you know, there have been quarters where I've asked this question, David, and people -- you have answered midway through the first month. So, don't shoot me.


October, we don't know yet. That's the kind of information, Michelle, if we think it is meaningful, whatever it is, at the end of -- after we close out October, then that's the kind of information we would like to get out to the market place.


We'll be talking November 8. September, you're going to give me? I just wanted to ask you, looking at my history, which goes back to before the IPO, I'm looking at historical gross margins and wondering if, you were going over my head a little bit in this last discussion, your worst gross margin for any given year I think has been about 25%. Is there reason to believe it could get worse? Is that what you were trying to explain with the higher price?


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I think, with the LIFO impact, it has been so significant this year, too, that has been huge with respect to our gross margins, and really, the main reason why we dropped down to what, 24.3 or whatever we just reported. So that, and then with PNA in there, their margins will come up and -- but it is going to take a little time for that to work its way through, especially in this environment when you have prices coming down.


But I guess I'm trying to look at like, as opposed to the fourth quarter, first quarter, a full year where you have LIFO and then it abates. Then one more question.


Let us answer your first question. Before we forget what the answer is.


Remember, Michelle, in Dave's comments, he talked about that July and August didn't drop off as much as we expected. They were pretty flat. August and September, same store was down 7%, which is what we were down for the quarter.


Okay, great.


One little interesting fact that kind of surprised us actually is July usually slows down with kind of vacations and things mostly in the Midwest and in the eastern half of the country. We anticipated, July to slow down and then the typical pattern is early August is still a little slow. It builds back up. September is better and October is a little better. But July this year didn't slow down. And it actually ended up on a FIFO basis. So, we've got -- again, we look at this on a FIFO basis. It ended up being the best month of the year out of the first seven months of the year. I don't ever remember July being the best month of the first seven months of any year. And that's on a same store basis. We didn't have PNA in there until -- So that was kind of a surprise. If anybody out there listening heard us speaking in July, when we were out trying to sell stock, we were pretty upbeat because of what we were seeing during the month of July. And then August held really steady with July and then September we were down as Karla said about 7% on the same store -- 7% same store or not, we had PNA --


It was same store, right?


Yes, that was same store.


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Then one last question. In my own experience, this seems from a steel market perspective, much like the Asian crisis in the Fall of 1997. And the way I remember that happening was that when it happened, the steel market here went into complete tailspin. There were offers of all kinds of really attractive low price stuff, and for that first month of October, there was some aggressive discounting imports came in and then what was wild was that users were so worried about the pricing trend that the Country took in fewer imports in the fourth quarter of '97 after the crisis, and then in the first of '98, and the mills here actually had an eight month window before you saw a big surge in imports. Do you get any sense that, this reminds me a lot of that. Where users are so worried about the trend that they're not buying a lot of imports. But the big difference is the mills are actually cutting price here. So, do you think -- I'm just wondering -- I'm starting to suspect we're going to see fewer imports. In November, December, January, than we had seen. Because of this. And that could make a far more stable market. Do you get any sense --


I think you hit the nail right on the head, Michelle. This is Gregg. And I don't think that there is going to be a surge of imports at all. People -- whenever there is uncertainty, okay, most people that are reasonable, have any common sense, take a very cautious approach to their buying patterns. And every time we've ever looked at a company, the three of us, and there were problems in their history, when you look at five year past history of sales and earnings and what not, it is always related that when they had problems, it was inventory related. And I think, with the uncertainty that we have in the market places today, there is not very many people that are foolish enough to go offshore, and with the domestics taking on a more proactive stance and it really, looking at their pricing and lowering their pricing to prevent that from happening, brings a lot more stability to the market. So, I think you're absolutely right. I don't think you're going to see very many imports coming in any time soon. I would take it out to the end of the first quarter. I just don't see it.


And the environment is so much different, Michelle, as you mentioned, that the mills are reacting now and sooner, and in 1997, you just didn't have that discipline.


You mean production cuts.


Yes. We just -- it was kind of a different world then.


Right.


And now we have a whole different group running the mills and their attitude is different.


Their costs are different, too.

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So, we don't -- I think -- I don't think it is going to happen the same way.


One more, please. In prior recessions and we've seen many in the last 30 years, in prior slowdowns, how soon going into a slowdown did you start the announcements of production cuts?


By the mills?


By the domestic and the global mills?


About 12 months after--.


Okay.


It was really slow.


I was going to say never.


That's probably what he wanted to say.


The group of us 50 somethings can say we've never seen this before.


I think that's true.


Okay.

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Different environment.


We'll have to see if Sheldon agrees with that. Guys, one more thing. You're one of my top three picks. You've been consistent. I'm a very happy shareholder. Keep up the good work and keep that list in your pocket.


Thank you.


All right, bye.


Have a good day.

Operator

Thank you very much, ladies and gentlemen. We have one final question. A follow-up from Mark Parr. Your line is live.


Hey, Mark.


I guess I changed my name, too. Hey, the $0.12 accretion from PNA, was that excluding purchase accounting?


That has the estimates of the depreciation and amortization pushed down. We're still finalizing those valuations but that is fully loaded for purchase accounting, interest costs and also on a LIFO basis.


Okay.


There's no -- but there was no inventory purchase accounting.


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Correct.


Okay, no inventory purchase. Okay. So, that should be -- that kind of $0.06 a quarter is kind of the run rate -- $0.06 a month is kind of the run rate you're starting off with on PNA.


Correct.


That's as reported, too. So it has a pretty heavy LIFO component as Karla mentioned.


Terrific. Thanks very much.


All righty, Mark.


Take care.

Operator

Thank you very much. We have no further questions in queue. Do you have any closing comments you would like to finish with?


Just thank you for taking the time to talk to us, and we're going to have some fun over the next quarter and we'll talk to you as soon as we have any meaningful information that we think would help us all understand what type of environment we're really in. And last thing, today it is not nearly as bad as you might think it is. Thank you very much.

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