Reliance - Earnings Call - Q3 2016
October 20, 2016
Transcript
Speaker 0
Greetings, and welcome to the Reliance Steel and Aluminum Company Second Quarter twenty sixteen Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brenda Miyamoto, Investor Relations.
Thank you. You may begin. Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss our third quarter twenty sixteen financial results. I'm joined by Greg Mullins, our President and CEO Carla Lewis, our Senior Executive Vice President and CFO Jim Hoffman, our Executive Vice President and COO and Bill Gales, our Executive Vice President of Operations.
A recording of this call will be posted on the Investors section of our website at investor.rsac.com. The press release and the information on this call may contain certain forward looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors, which may not be under the company's control, which may cause the actual results, performance or achievement of the company to be materially different from the results, performance or other expectations implied by these forward looking statements. These factors include, but are not limited to, those factors disclosed in the company's annual report on Form 10 ks for the year ended December 3135, under the caption Risk Factors and other reports filed with the Securities and Exchange Commission. The press release and the information on this call speak only as of today's date, and the company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Greg Mullins, President and CEO of Reliance.
Speaker 1
Good morning, everyone, and thank you for joining us today. I continue to be very pleased with our operational performance. After six consecutive quarters of increases in our non GAAP FIFO gross profit margin, our margin in the third quarter declined slightly to 30% from 31.1% in the second quarter of twenty sixteen. However, we believe the 30% level is still outstanding and came in above our expectations. As we communicated to you during our last call, our second quarter FIFO gross profit margin of 31.1% included incremental margin achieved because of multiple mill price increases that were announced during the second quarter that allowed us to increase our selling prices before receiving the higher cost metal in our inventory.
While we maintained the higher selling prices during the third quarter, our inventory costs also increased, offsetting the incremental margin gains. The pricing discipline of our managers in the field, along with diligent inventory management and our significant investments in innovative, value added processing equipment, contributed to our ability to achieve a 30% non GAAP FIFO gross profit margin and a weakening pricing and demand environment. As a result of the multiple price increases announced by the mills throughout the second quarter, mainly for carbon steel products, our third quarter average selling price was up 4.4% over the prior quarter, above the high end of our guidance range of up 1% to 3%. However, the positive metals pricing environment began to lose momentum as the third quarter progressed, and prices have continued to decline thus far into the fourth quarter. The trade cases filed by The U.
S. Producers, coupled with production capacity discipline by the same mills, continue to be supportive of domestic pricing. However, overall softer demand experienced in the third quarter, along with normal seasonal factors heading into the fourth quarter, have contributed to current pricing pressure, most notably for carbon steel products. Bear in mind, our average selling price for the first nine months of twenty sixteen was down 9.5% from the same period in 2015, which has a significant impact on our earning levels. As far as demand goes, while it has been lighter so far in quarter four and overall not as strong as we had originally anticipated heading into 2016, we believe customer demand levels are generally healthy and inventory positions are leaned.
Our tons sold for the third quarter declined by 4.9% from the second quarter twenty sixteen, which was above our expectation of down 1% to 3%, consistent with MSCI industry average decline of 4.9%. Overall, demand for metal products weakened in
Speaker 2
the third quarter more than
Speaker 1
we had anticipated, which we believe was due to decreased metal pricing as well as general economic and political uncertainty. We believe our exposure to a broad array of products and end markets helps mitigate declines in any one market. The automotive and aerospace markets continue to be strong for us, while other markets are not performing as well. Our diversification strategy, together with our decentralized operating structure, investments in value added processing equipment and focus on customer service have once again contributed to our ability to increase Reliance's market share. For the first nine months of twenty sixteen, we outperformed the industry with our same store tons sold down only 2.7% compared to the first nine months of twenty fifteen versus the MSCI industry average shipments, which were down 6.8% in the same period.
Our gross profit margin continues to benefit from our focus on inventory management with our 2016 inventory churn rate of 4.6x nearing our company wide target of 4.7x. We believe an efficient inventory position benefits our gross profit margin by allowing us to focus on higher margin business. Our successful reduction of $433,000,000 of inventory in 2015 and further reduction of $95,500,000 through the first nine months of '16 has generated significant cash, which we have used to invest in value added processing equipment and to acquire higher margin companies, both of which enhance our gross profit margins. We believe one of our strengths at Reliance is to focus on the areas of our business that we can control and to quickly react to changes that are outside of our control. As we have communicated on prior calls, our energy business has declined significantly as a result of the downturn in oil prices and drilling activity that began near the end of twenty fourteen.
Although we have consistently reacted to the declines in this market, we made the decision during the third quarter of twenty sixteen to close a few of our facilities and take asset write downs on certain of our businesses servicing the energy market as our long term outlook deteriorated from our view a year ago. As a result, we recorded a $67,300,000 pretax impairment and restructuring charge in the third quarter. We do not take these actions lightly due to the impact to our employees and customers, but we believe they are necessary to enhance our overall operating efficiencies and long term profitability. Turning to M and A. We're very proud of our track record of completing the acquisitions of 62 quality companies since our 1994 IPO.
Three of those were completed this year: Tubular Steel, Test Manufacturing and Alaska Steel Company. Our most recent acquisition, which closed effective August 1, was Alaska Steel, a full line metal distributor that broadened our geographical reach with our first entry into the Alaskan market. Alaska Steel provides steel, aluminum, stainless and specialty metals and related processing services to a variety of customers in diverse industries throughout Alaska, including infrastructure, energy and mining. Since joining the Reliance family, all three of these acquisitions have been performing in line with our expectations from both an operational and profitability perspective, and our pipeline for potential future opportunities remains strong. We focus on companies that are well run and fit our diversification strategy, often providing specialized products and high levels of value added processing services.
As we look to the future, we expect to stick to our tried and true growth strategy focused on both acquisitions and organic capital investments. These capital investments are made possible by our strong cash flow generation. I'll let Carla dive into the specifics shortly. But as I think about our capital allocation priorities, we expect to continue to return excess cash to our stockholders through the payment of quarterly dividends. We most recently increased our regular quarterly dividend by 6.3% effective for the third quarter of twenty sixteen, marking the twenty third increase since our 1994 IPO.
We have consistently paid regular quarterly cash dividends for fifty seven consecutive years. Before I conclude, I would like to extend my welcome to our two new members of the Reliance Board of Directors. Karen Colonias and Douglas Stottler both joined the Board as independent directors at the October, increasing the size of the Board from nine to 11. Most of these directors are already highly engaged, and we look forward to benefiting from their extensive Board and management experience. In summary, despite the ups and downs we have experienced in this year's pricing environment, I commend our managers for their phenomenal ability to execute throughout all cycles.
I am pleased with our financial performance for the third quarter, which was characterized by ongoing pricing discipline as well as effective expense and inventory management. For the balance of the year and into 2017, we will continue to stay the course with a focus on growth through organic investments and acquisitions as well as a continued strong operational execution. I will now hand the call over to Jim to comment further on our operations and market conditions. Jim?
Speaker 3
Thanks, Greg, and good morning, everyone. I'll begin by commenting on both pricing and demand for our carbon steel and alloy products as well as our outlook on certain key end markets we sell those products into. Bill will then address our aluminum and stainless steel products and related end markets. Demand for automotive remains strong at current production rates. We service this market mainly through our coal processing operations in The U.
S. And Mexico. We continue to increase our volume process for the automotive industry at strong rates mainly because of the increased demand for aluminum used in automotive. We began processing aluminum in the automotive industry in 2015, and since then, we continue to increase both our processing volume and capital investments in this area. In 2016, we have added equipment in our existing locations to support increased aluminum processing and we'll be opening a new facility in Kentucky in mid-twenty seventeen to support both aluminum and steel processing in that region.
As announced on our last call, our new facility in Mexico commenced operations in July to support increased automotive activity in that area. We anticipate we'll have this facility running at close to capacity by early twenty seventeen. As Greg discussed, we remain committed to our focus on growth in our businesses that serve the automotive market and are very well positioned from a capital perspective to continue pursuing organic investments. With our processing volumes increasing at a rapid rate, we'll continue to add incremental capacity as we see best fit to drive improved profitability. Third quarter demand in heavy industry, which includes railcar, truck trailer, shipbuilding, barge manufacturing, tank manufacturers and wind and transmission towers was down compared to the second quarter twenty sixteen levels.
Heavy industry includes sales to agricultural equipment OEMs, which has been a weaker area of that market. That said, due to our exposure to mostly small and midsized agriculture equipment versus the larger equipment, we've been able to mitigate some of the negative sales impact. In addition, we are hopeful that demand trends in the road construction equipment market may improve in 2017 due to the five year infrastructure bill that was passed in December of twenty fifteen. Demand in nonresidential construction market has been characterized by steady upward growth with improvements in our tons shipped. We anticipate the slow but steady growth in demand will continue to improve in 2017, though volume is still far below peak levels.
As such, we are continuing to invest in processing equipment for the business we sell into this market to ensure we are providing the highest possible level of service to our customers. Increased volume will be absorbed into our existing cost structure as this end market improves over time. Demand for energy, which is mainly oil and natural gas, remains weak during the third quarter due to continued low levels of drilling activity. That said, there has been some encouraging signs of new activity taking place that leads us to believe we are at or near the bottom of this downturn. For our managers in the field, our quoting activity improved during the quarter, and since May, rig counts were up about 30%.
When drilling rigs start back up again, we'll be well positioned to support this activity. That said, due to the changes in global markets as well as advancements in technology that have made drilling for oil and natural gas far more efficient than in the past with potentially less steel required, we have further reduced our long term outlook for this recovery and our businesses servicing the energy industry. As a result, we recorded a pretax impairment and restructuring charge in the third quarter, mainly in connection with the closing of a few facilities and asset write downs related to certain of our businesses servicing the energy end market. Pricing for carbon steel products was generally higher in the third quarter due to multiple mill price increases announced during second quarter that allowed us to raise our selling price. However, carbon steel prices began trending downward during the third quarter, and we see that trend continuing into the fourth quarter.
I echo Greg's comments that the multiple carbon steel trade cases filed in The U. S. And production capacity discipline by our domestic producers have been generally supportive of domestic pricing. However, the overall softening in demand in the third quarter and normal seasonal factors impacting demand in the fourth quarter are pressuring prices. Lastly, for our alloy products, the majority of which are sold into our energy end markets, these prices have continued to decline, though at a slower rate than demand.
I will now hand the call over to Bill to comment further on our nonferrous markets. Bill?
Speaker 4
Thanks, Jim. Good morning, everyone. Today, I'll be reviewing pricing and demand for our aluminum and stainless steel products. I'll also touch upon some of the key industry trends in the markets we sell these products into. Before that, I would like to congratulate our managers in the field for managing through this difficult pricing environment.
Keep up the good work. I'll begin with aerospace, which continues to be a strong end market for Reliance. There have been negative reports of slowing demand in this market, but we expect that most of these changes will impact the aluminum producers more than they will impact our business. We consider build rates, lead times and backlog to be key indicators of health for the aerospace market. Looking ahead to the fourth quarter, we've been seeing some downward adjustments on build rates, primarily in the twin aisle wide body jet business.
We expect these adjustments to remain somewhat steady through the remainder of the year. Lead times have shortened significantly since January when we saw lead times of about eleven to seventeen weeks with very tight supply. Today, we're experiencing lead times of about seven to nine weeks and supply is much more available. However, the backlog for orders of commercial planes remains very healthy. In addition, in 2017, we will begin supporting the five year $350,000,000 Joint Strike Fighter program that will add to our already strong aerospace presence.
Based on these trends, our outlook in the aerospace market remains positive. The majority of these products that we sell to the aerospace market are heat treated aluminum products, especially plate as well as specialty stainless steel and titanium products. As stated, mill lead times for heat treated aluminum plate have shortened since the second quarter, which has put some pressure on pricing. As a result, we expect to see some pressure on margins for both aerospace and general engineering aluminum plate for the remainder of the year. Common alloy aluminum pricing has remained stable and volume has increased modestly.
Most of our common alloy aluminum products are sold to sheet metal fabricators that support a variety of end markets. Pricing on common alloy sheet follows ingot and we expect some modest improvement as the Midwest spot price trends up slightly. Turning to stainless steel products. Demand for our stainless steel flat products, which are primarily sold into the kitchen equipment, appliance and construction end markets, remained strong. Stainless steel pricing improved somewhat on solid demand.
Pricing for stainless steel products is heavily impacted by nickel prices, which have been improving modestly on a sequential quarter basis. We expect to continue to see some improvement in nickel pricing in the fourth quarter. Thank you for your time and attention today. With that, I'll now turn the call over to Carla to review our third quarter financial results. Carla?
Speaker 5
Thanks, Bill, and good morning, everyone. Our sales in the third quarter of twenty sixteen were $2,200,000,000 down 4.4% from the third quarter of twenty fifteen with our tons sold down 2.7% and our average selling price per ton sold down 1.8%. On a same store basis, which excludes the sales of the three companies we acquired in 2016, our tons sold were down 4%, and our average selling price was down 2.3% year over year. Compared to the second quarter of twenty sixteen, our sales were down $18,700,000 or 0.8%, with a 4.9 decline in our tons sold, mostly offset by a 4.4% increase in our average selling price per ton sold. Although metals pricing began to decline in the third quarter of twenty sixteen, our average selling price was higher because of the price increases that occurred in the second quarter and held through most of the third quarter.
Our non GAAP FIFO gross profit margin was 30% in the third quarter of twenty sixteen compared to 31.1% in the second quarter of twenty sixteen and '26 point '5 percent in the third quarter of twenty fifteen. Since the fourth quarter of twenty fourteen, we increased our FIFO gross profit margin in each successful quarter for the second quarter of twenty sixteen, A sequential decrease of 1.1% in our non GAAP FIFO gross profit margin in the third quarter was expected. In the second quarter of twenty sixteen, we were able to expand our gross profit margin as multiple mill price increases were announced, allowing us to push through the higher price to our customers in advance of receiving the higher cost metal in our inventory. During the third quarter of 'sixteen, as we received the higher cost metal in our inventory, prices leveled off and then began to decline somewhat, eliminating the margin expansion achieved in the prior quarter. That said, we are very pleased with our gross profit margin and overall operational performance.
Metal pricing has a significant impact on our sales and earnings levels. And although metal prices improved in the second quarter of twenty sixteen, our average selling price for the first nine months of twenty sixteen was still 9.5% or $153 per ton below our average selling price for the first nine months of twenty fifteen. This reduced our sales by about $680,000,000 also reducing our gross profit dollars, most of which would have fallen to our operating and pretax income amounts. However, because of our three forty basis point increase in our gross profit margin to 30.2% in the first nine months of twenty sixteen, we earned approximately $220,000,000 more gross profit dollars than we would have earned in our nine month 2015 gross profit margin of 26.8%. In other words, compared to the first nine months of twenty fifteen, we generated more gross profit dollars in the 2016 period on $680,000,000 less sales, demonstrating the positive impact of our higher gross profit margin.
We currently anticipate the declining metal price trends that began in the third quarter to continue through the fourth quarter, with our inventory costs at the end of twenty sixteen expected to be lower than at the end of twenty fifteen. Until this time, we had anticipated that our inventory costs at the end of 'sixteen would be generally the same as at the end of 'fifteen, resulting in no LIFO inventory valuation adjustment for 2016. Because of our updated outlook, however, we now estimate a pretax inventory valuation adjustment of $15,000,000 of income for the 2016 year was $11,300,000 included in cost of sales in the third quarter of twenty sixteen compared to a pretax LIFO credit or income of $35,000,000 in the third quarter of twenty fifteen. We did not record a LIFO inventory valuation adjustment in the first half of twenty sixteen. As a percent of sales, our SG and A expenses were 20.8% compared to 18.8% in the third quarter of twenty fifteen and twenty point seven percent in the second quarter of twenty sixteen.
On a year over year basis, the slight increase as a percent of sales was primarily due to lower metal prices and tons shipped. However, when excluding the non GAAP charges, our SG and A expense declined by $7,300,000 or 1.6% in the third quarter of twenty sixteen from the prior quarter. Our operating income margin during the third quarters of both twenty sixteen and 2015 were impacted by impairment and restructuring charges, mainly related to our businesses servicing the energy end market in pretax amounts of $67,300,000 in 2016 and $55,500,000 in 2015. Excluding the restructuring and impairment charges, our non GAAP operating income margin was 7.3% in the third quarter of twenty sixteen, up from 6.9% in the third quarter of twenty fifteen, mainly because of our higher gross profit margins. Our effective income tax rate for the third quarter of twenty sixteen was 28.2% compared to 32.1% in the third quarter of twenty fifteen and thirty two point seven percent in the second quarter of twenty sixteen.
Our projected annual effective income tax rate for 2016 is 27.5%, down from 31.1% in 2015. Net income attributable to Reliance for the third quarter of twenty sixteen was $49,500,000 or $0.68 per diluted share. Our non GAAP diluted earnings per share were $1.25 in the third quarter of twenty sixteen compared to $1.16 in the third quarter of twenty fifteen and $1.36 in the second quarter of twenty sixteen. Please refer to our earnings release issued earlier today for a reconciliation of our non GAAP adjustments. And now turning to our balance sheet and cash flow.
Because of our effective working capital management and strong gross profit margins, we generated $182,400,000 of cash from operations during the third quarter of twenty sixteen and three hundred and eighty seven point six million dollars during the first nine months of twenty sixteen. Our 2016 year to date inventory turn rate at September 30 was 4.6x or two point six months on hand based on tons. This is just below our company wide inventory turn goal of 4.7 turns. As previously announced, on September 30, we entered into a new five year $2,100,000,000 credit agreement comprised of a $1,500,000,000 unsecured revolving credit facility and a $600,000,000 unsecured term loan. The terms of the new credit agreement are substantially the same as our prior credit agreement, including pricing.
We intend to use borrowings on our revolving credit facility to retire $350,000,000 of 6.2% senior unsecured notes when they mature on November 1536, which is expected to create pro form a interest expense savings of approximately $15,000,000 per year on a go forward basis. At September 3036, our total debt outstanding was $2,100,000,000 and our net debt to total capital ratio was 32.2. As a result of our new credit agreement, we have ample liquidity to continue funding our growth and stockholder return activities with $1,100,000,000 available on our $1,500,000,000 revolving credit facility. We used our strong cash from operations to both grow the company and return value to our stockholders. In addition to funding the three acquisitions we've completed so far in 2016 for a total of $349,000,000 we used our cash from operations and borrowings on our credit facility to fund $110,600,000 of capital expenditures, primarily on purchases of new equipment to increase our value added processing capabilities and to pay quarterly cash dividends totaling $89,500,000 to our valued stockholders.
Now turning to our outlook. We continue to believe The U. S. Economy is generally healthy, and we anticipate a continued slow recovery. However, given the increased uncertainty in the market at this time, along with fewer shipping days in the fourth quarter due to holiday related customer closures, we are cautious in regard to both business activity levels and metals pricing in the fourth quarter.
We estimate tons sold to be down 5% to 7% in the fourth quarter of twenty sixteen compared to the third quarter. We also expect that metals pricing for most of the products we sell will continue to experience downward pressure in the fourth quarter, and therefore, we expect our average selling price will be down 1% to 3% from the third quarter of twenty sixteen. As a result, we currently expect non GAAP earnings per diluted share to be in the range of $0.65 to $0.75 for the fourth quarter of twenty sixteen. In closing, despite a quarter that was characterized by softer than anticipated demand in metals pricing, we continue to be very pleased with our overall financial performance. Our managers in the field have once again exceeded our expectations.
That concludes our prepared remarks. Thank you for your attention. And at this time, we would like to open the call up to questions. Operator?
Speaker 0
Thank you. We will now be conducting a question and answer session. Session. Our first question comes from
Speaker 5
the line of Jorge Periste with Deutsche Bank.
Speaker 2
Well, thank you for taking on head on, I guess, the issue about the aerospace destock. But I'd like to dive a little bit more deeply into that. And could you just clarify why you believe the impact will be harder on the manufacturers than
Speaker 6
the service centers? That's my first question.
Speaker 1
Go ahead, Bill. Yes. A lot of
Speaker 4
the business, particularly on the larger planes, is mill direct. Things like wing skins, fuselage skins, wing plate. So it will we'll see a bigger impact at the mill level versus our model where we're supplying cut to size just in time. Some markets over, particularly in Asia, it's more of a full plate market and the mills will it's more where it's more mill direct business.
Speaker 2
Okay. That makes sense. And if you could just talk about if you're seeing an inflection on the horizon in steel prices perhaps. I just hopped off a call with Steel Dynamics. They seem to be hopeful that things are kind of bottoming.
And just seeing if you're seeing any kind of mounting evidence that buyers may be starting to anticipate maybe a fourth quarter inflection coming.
Speaker 1
As far as we can see, with scrap potentially going up, it has gone down a little bit. And there's been a reflection of that on price discounting on the carbon steel side with the exception of the $30 a ton increase on plate that Nucor announced just recently, which remains to be seen if that's going to hold or not. We hope it does, but it's still kind of out there. As far as pricing is concerned, we're just going to have to wait and see. It appears that imports are not as strong as they were last year.
However, they're still in the marketplace. So with demand going down last quarter compared to the second quarter, 4.9% for us in tons, and we're anticipating 5% to 7% down in the fourth quarter. Demand is softer than we would like it to be, softer than we thought it would be. And pricing generally follows demand levels. So we'd
Speaker 6
love
Speaker 1
to see a price increase, in particular, on flat rolled products. We think it would be appropriate to kind of stop the bleeding, if you will. But we're not the mill. So we're just hopeful that their discipline will work out over the long haul. But nonetheless, we can control what we can control.
And the bottom line is Reliance is doing just fine, and we'll continue to do But there's things that are out of our control and demand is one of them and pricing from the mill level is the other one. So we'll just wait and see, and we'll do exactly what we've been doing in the past. We're going to control our inventories. We're going turn them as best we possibly can. We're going to manage those gross profit margins as best we possibly can.
I think our people in the field have done a marvelous job in doing that. So we're just going to keep our business model in place and continue to do the best job we possibly can in plotting and tackling. And I think we've proven that through many years.
Speaker 0
Our next question comes from the line
Speaker 5
of Aldo Mazzucchero with Macquarie.
Speaker 2
Hi, good morning.
Speaker 1
Good morning, Aldo.
Speaker 2
Was wondering on the Bakken question whether you can say whether the declines you're seeing are resulting of are resulting from anything like higher prices or people shifting manufacturing offshore in response to this U. S. Pricing is so much higher than the world at large. Can you comment on that and whether you're seeing any kind of regional pattern to where the weakness seems to be showing up in the fourth quarter?
Speaker 1
Aldo, this is Greg. How are doing?
Speaker 2
Good. Good. Hey,
Speaker 1
listen, we're not seeing any manufacturing, okay, moving overseas. None of that would impact our fourth quarter. We're just seeing some uncertainty in the marketplace with our customer base. They've seen declining prices. They don't know if it's hit bottom or not.
So they're buying for need, okay, only, which kind of does well for us because we can deliver next day on just about everything. So it's just I think our management team believes that there is just uncertainty. It's economic uncertainty. It's political uncertainty. People are just buying absolutely what they need and no more.
So but we also believe that the inventory levels at our customer base, okay, as well as our peers, okay, are in pretty damn good shape. So 4.6x turns for us, we're it hasn't hit our goal, but it's oneten, 1% below our goals. So I would not model in that there's any material change with respect to manufacturing going offshore. I don't believe that's taking place. I haven't heard anything from the field or from our VPs about that.
So it's just as vague as that word is uncertainty, that really is the word.
Speaker 3
And Aldo, this is Jim. On the positive side, the energy market has been it's been
Speaker 1
just dead for seems like ever, but
Speaker 3
it's been a couple of years. And we're actually seeing some positive signs. Better quotes coming
Speaker 2
in, getting orders that haven't been there for
Speaker 3
a while, positive talk for 2017 about dollars that will be spent in completion of rigs. And so we're optimistic about that.
Speaker 2
Great. Okay. Thanks. I'll hand it off, and I'll stay on for maybe another one later. Thanks.
Speaker 0
Our next question comes from the line of Phil Gibbs with KeyBanc.
Speaker 7
Greg, I had a question just on the daily demand momentum through the third quarter and then what you're seeing here early in the fourth quarter. How would you characterize that intra quarter trend last quarter and then what you're seeing in October?
Speaker 2
Well, Phil,
Speaker 1
was softer in the third quarter than, frankly, any of us thought. We recognized the fact the fourth of July holidays and all that, but we thought we'd see some recovery. Normally, we do in August. And frankly, that did not happen. September normally recovers a little bit more on average daily sales basis than August does.
That didn't materialize. So it was we guided, I think, 1% to three percent down in tons sold compared to second quarter. It ended up close to 5%. That was disappointing. Did not have not so far seen a recovery.
So which is why our guide $0.65 to $0.75 may be somewhat disappointing to some people, but it's realistic as far as we're concerned, given the fact that we're projecting about a 7% decline in our tons sold in the fourth quarter compared to the third quarter, which was down 9% compared to the second quarter. So we the one thing about Reliance that you'll always know, okay, is we tell it like it is, and we don't sugarcoat anything.
Speaker 5
Yes. And we've read a lot of the headlines this morning by folks out there about the disappointing Q4, which certainly the EPS numbers are. But I think to Greg's point, being down five to 7%, fourth quarter is historically down 5% to 7% or even 5% to 10% in volume. Last year, in 2015, our fourth quarter tons were down 7% compared to the third quarter. We had
Speaker 0
not fallen as much in
Speaker 5
the third quarter, but so to us, the demand trend being down the way it is, is not really out of the ordinary. We wish it was stronger. Our average selling price Q4 last year to Q3 was down 4.5%. We're guiding down 1% to 3% last year. And we've tried, I think, the years, and I think, Phil, you get it, but we really try to make people understand how important the shipping day is in the service center business.
And we have less shipping days in the fourth quarter that even if demand stays relatively steady, we're going to ship fewer tons because our customers are closed. And we expect to still operate very strong in the fourth quarter, still hitting our gross profit margins, turning our inventory, doing all the things that we do well. But just given the market trends that are out there, our earnings are going to be down a bit. And our fourth quarter earnings per share always fall off significantly from last year from the third quarter to the fourth quarter. And this year, although seem as disappointing, is really not that much different than prior year trends.
Speaker 7
I appreciate that. And Carla, did you I may have missed it, but did you give any color on what you anticipate the fourth quarter gross profit margins are going to do? It implied that they're going be down a little bit with pricing?
Speaker 5
Yes. So our expectation, we talked a little bit in the second quarter when we hit the 31.1% gross profit margin that there was some impact in there from the rising prices that we didn't think would be sustainable. We saw kind of our first quarter gross profit margin levels that were 29.4 or something that could be sustainable in the current environment. The environment has gotten a little worse, but we did come in above that in Q3. And so I think from Q4, just given the market fundamentals, we expect there may be a little lessening of the gross profit margin in the fourth quarter from the third quarter, but not too significantly.
Speaker 7
Okay. And I just have one operational question, and I'll jump off. I appreciate this. Jim, the alloy shipments were up in the third quarter versus the second quarter. That's something that we were expecting.
Was that based on some of the comments that you're making on the energy side in terms of finally starting to see a little bit of pull through in the oil patch?
Speaker 3
That was a those are
Speaker 2
projects, a of really big orders up in Canada that we decided to get involved with to help with our inventory there. So nothing concrete. I wish I could tell you yes, but
Speaker 5
And that's kind of the normal seasonality in the Canadian market, Yes.
Speaker 2
They have to the ground has to freeze up there and get where they need to get.
Speaker 0
Our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch. Please proceed with your question.
Speaker 8
Hey, good morning, guys.
Speaker 4
Good morning. So
Speaker 8
clearly, fourth quarter, we do, it seems like, often forget the sequential declines are consistent, as you point out. But I think it's still the third quarter that surprised us. So sorry for harping on it again. But I was wondering if you wouldn't mind going into a little bit more color on what you're seeing in terms of your auto customer reminding us how much exposure you have there. I know it's relatively small.
And also, we're seeing some slowness there. Is that something you're hearing? And then on your aerospace forecast and the way you're thinking about that market, are you factoring in downside risk to Boeing's price?
Speaker 1
Well, to address the automotive, Timna, we're doing very well in automotive. We've invested more this year. We actually brought on another line, I think, in, what, the end of the second quarter. So we have not seen any slowdown with except for the fact that July, there's some maintenance shutdowns at some of the automakers and but that's normal. So we're doing well in auto, and we foresee that to continue.
I mean anything in the $17,000,000 build rate is extremely strong. So we're not complaining about our investments or the profitability of the companies that we have that are servicing the automotive business.
Speaker 3
We also brought our new plant in Mexico, came online in July, doing quite well.
Speaker 1
Yes, that's a good point, Jim. I forgot about that. We opened up a facility in Monterrey, Mexico, servicing the automotive industry, and that plant opened up July 1. We moved some business that we were doing about 80 miles away in Ramos down to that plant. We expect that plant to be doing very well sometime in the first half of twenty seventeen.
Speaker 5
And remember, even in auto, even if build rates were to level off, we have been and through our investments and our position to process aluminum, we've been picking up a lot of new business, additional tolling business because we can process the aluminum.
Speaker 0
Okay. That's fair.
Speaker 8
All right. And I wanted to ask a question I think I've asked before, but it's still a kind
Speaker 0
of hot topic, I think,
Speaker 8
with the prevalence of a lot of the mini mills continuing to invest in fabricating and making a focus fabricating a lot more of their own metal. Are you seeing them impinge on any of your potential acquisitions or potential are they starting to compete with you a little bit more?
Speaker 3
Are there
Speaker 8
still plenty of options for you to enter into more fabricating options as you discussed further M and A opportunities?
Speaker 1
No, they haven't infringed on in our space really. I mean, Nucor just recently bought the tubing mill independents. And that's probably a good thing for the industry.
Speaker 3
Hopefully, it's a good
Speaker 1
thing for Nucor. Obviously, we wish them well. But as far as them getting into the service center industry, any of the mills, we haven't seen it. We don't anticipate to see it. It's not getting in the way of our M and A outlook.
So as far as we're concerned, it's a non
Speaker 5
event. Our
Speaker 0
next question is a follow-up question from Aldo Mazoferro with Macquarie.
Speaker 2
Carla, I just had a quick question on the balance sheet. The credit line and the term loan that you put in place the September 30, I think that's not on the balance sheet at the date of September 30, correct?
Speaker 5
Yeah. So we did close it at September 30. So we we we did refinancing them. So, yeah, it's just a switch. So you would see the switch from really, you're not going see anything on the balance sheet because it's all in long term debt.
It's just a little more allocated to the term loan now instead of the revolving credit facility, but it shows up on the same line in the balance sheet.
Speaker 2
Could you briefly tell us what the strategy was behind refinancing there?
Speaker 5
So we have the $350,000,000 worth of senior notes that mature in November. And so we looked at the market to either refinance or to pay down that $350,000,000, through a new bond issue or on the bank line. The bank market does have a lot of capacity now. The rates, on the bank line are certainly more attractive and more accretive to our earnings per share than, a new bond issue would have been. So really, it was that driving higher earnings, and having the availability, within the bank market that allowed us to do it.
We also our revolving credit line and our existing term loan would have been maturing. It would become current at the beginning of next year in April. So we would have been out in the bank market at that time anyway so that it didn't become current. So the timing worked out and but again, the main driver was just for more attractive pricing to drive higher earnings per share.
Speaker 2
At this time, you expecting any sizable acquisition transactions to happen in the industry over the next twelve months? I mean, that would move the needle?
Speaker 5
Yes, mean, I think the acquisition pipeline continues to be pretty active. But what we're seeing are a lot of smaller acquisitions, some that make sense that are attractive to us, a lot that are a little outside our wheelhouse that we're not that interested in or they don't meet the financial criteria that we look for. So we are still looking at a lot
Speaker 6
of
Speaker 5
transactions. We haven't been seeing a lot of the larger transactions. But some of these smaller transactions are extremely strong performers. It's on a smaller base, but they drive very high returns. And so those continue to be attractive to us.
But to the extent we see any larger opportunities, we will look at that. There could be various reasons, market reasons that some of the larger companies might see this as catalyst of a reason that they need to sell, but we haven't seen or hearing anything about that currently. Our
Speaker 0
next question comes from the line of John Tumazos Tumazos Very with Independent Research. Please proceed with your question.
Speaker 6
Thank you very much for a very informative call. In terms of the impairment charges and volume declines generally, would you characterize it as many small customers and end markets being a little bit weak collectively or that there's more specific issues like energy in Texas being weak or Boeing squeezing the aerospace supply chain or something that's more specific to a region or end market in particular?
Speaker 1
It would be more associated with the oil and gas in the southern region of the country.
Speaker 5
The charge.
Speaker 4
We
Speaker 1
companies that we have, several companies that we're basically closing are and they their main focus has been the oil and natural gas, and it's just dried up tremendously for them and has been for a while, and we don't see turning around with these particular companies anytime soon. So some of that business, we're actually going to transfer to other energy related businesses that we have basically in the Houston, Louisiana area. So we're not going to lose the entire amount of business. We're just going to reduce our exposure to that, cut our expenses back as best we possibly can. But everything, John, related to those that write down and whatnot is energy related.
Speaker 5
And it's all small locations. And like Greg said, they're kind of getting we can still support those markets. And so I think that the impairment is not what's driving our guide of demand being down 5% to 7% in the fourth quarter. That's more normal seasonality. And just in general, as Greg said, demand being weaker because of the uncertainty out there, but that's really pretty much across all markets.
It's not specific to any.
Speaker 6
If I could follow-up by asking a question on shapes, And I'm just looking at Nucor's financials because they came out this morning, too. In the September versus the March six months earlier, Nucor's prices were $195 higher for sheet, but they were $5 lower for large structurals and only $28 higher for fabricated steel. And it would appear as though they paid more money in sheet and place, played and made less money in big beams and fabricated products. Are you seeing that certain shapes are more profitable and other end markets are weaker, construction or whatnot?
Speaker 1
No. As far as we're concerned, well, there was a drop on structurals of $60 a ton last month. Okay? So that was a correction that probably need to be made because there was a lot of discounting being had from suppliers to customers like ourselves that were below the book prices. So the book prices were in jeopardy.
So I think their $60 a ton drop, okay, was appropriate. As far as profitability is concerned at Reliance, all of our basically, all of our products, we've been driving gross profit margins like unbelievable the last in particular, the last couple
Speaker 8
of
Speaker 1
years, okay? So our margins, basically, on all the products that we have are a little bit better than they were a year ago and two years ago. So there hasn't been any major change in our at least in our business, okay, other than the fact that we've put a lot more emphasis on processing and providing our customers with a more finished product and charging them for it. So I hope that answers your question.
Speaker 6
Thank you very much.
Speaker 2
Thank you.
Speaker 0
Mr. Mollis, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
Speaker 1
Thank you very much. Thanks again for your support and for participating in today's call. We would like to remind everyone that in mid November, we will be in New York City presenting at Barclays Industrial Distribution Forum and will be there again in early December participating in the Cohen and Company Energy and Natural Resources Conference. We hope to see many of you there, and we hope you have a great day. Thanks for joining us.
Speaker 0
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.