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Article by DailyStocks_admin    (10-22-08 04:24 AM)

The Daily Magic Formula Stock for 10/22/2008 is Reliance Steel & Aluminum Co. According to the Magic Formula Investing Web Site, the ebit yield is 24% and the EBIT ROIC is 25-50%.

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BUSINESS OVERVIEW

We are one of the largest metals service center companies in North America. Our network of 28 divisions, 27 operating subsidiaries and two majority-owned joint venture companies operates more than 180 locations in 37 states, Belgium, Canada, China, South Korea and the United Kingdom. Through this network, we provide metals processing services and distribute a full line of more than 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, titanium, stainless steel and specialty steel products, to more than 125,000 customers in a broad range of industries. Many of our metals service centers process and distribute only specialty metals. In addition to being diversified by products and customers, we are geographically diversified. We deliver products from facilities located across the United States and Canada, and have a growing international presence to support the globalization of our customers.
Our primary business strategy is to enhance our operating results through strategic acquisitions, expansion of our existing operations and improved operating performance at our locations. We believe that our geographic, customer and product diversification also makes us less vulnerable to regional or industry specific economic volatility. Following the economic recession in 2001, 2002 and 2003, our industry experienced a broad-based significant and unprecedented upturn in 2004. Due to several industry dynamics, including the consolidation of carbon steel mills, increased global demand for metal products, and shortages of raw materials, the pricing environment for most products that we sell has been favorable since then. In 2007, we achieved our highest ever levels of net sales of $7.26 billion and net income of $408.0 million.
Industry Overview
Metals service centers acquire products from primary metals producers and then process carbon steel, aluminum, stainless steel and other metals to meet customer specifications, using techniques such as blanking, leveling (or cutting-to-length), sawing, shape cutting, shearing and slitting. These processing services save our customers time, labor, and expense and reduce their overall manufacturing costs. Specialized equipment used to process the metals requires high-volume production to be cost effective. Many manufacturers are not able or willing to invest in the necessary technology, equipment, and inventory to process the metals for their own manufacturing operations. Accordingly, industry dynamics have created a niche in the market. Metals service centers purchase, process, and deliver metals to end-users in a more efficient and cost-effective manner than the end-user could achieve by dealing directly with the primary producer or with an intermediate steel processor. Service centers comprise the largest single customer group for North American mills, buying and reselling about 35% of all the carbon, alloy, stainless and specialty steels, aluminum, copper, brass and bronze, and superalloys produced in the U.S. and Canada each year ( Purchasing magazine, May 2007).
In May 2007, the magazine Purchasing also reported that the North American (U.S. and Canada) metals distribution industry was estimated to have generated record revenues of about $126.5 billion in 2006 (the latest year for which such information is available), up from $115.0 billion in 2005, with the increase being primarily due to increased prices for nonferrous metals.
The metals service center industry is highly fragmented and intensely competitive within localized areas or regions. Many of our competitors operate single stand-alone service centers. According to Purchasing , the number of intermediate steel processors and metal center facilities in North America has decreased from approximately 7,000 locations in 1980 to approximately 3,500 locations operated by more than 1,300 companies in 2003. This consolidation trend creates opportunities for us to expand by making acquisitions.
Metals service centers are generally less susceptible to market cycles than producers of the metals, because service centers are usually able to pass on all or a portion of increases in metal costs to their customers. In recent years, consolidation at the carbon steel mill level has led to capacity rationalization that has reduced pricing volatility somewhat and elevated the pricing levels for these products. Stainless steel prices have been very volatile over the last few years mainly because of nickel shortages caused by strikes and fires at certain nickel mines. In addition, increased global demand for metal products has led to increased costs due to the shortage of raw materials used in these products. During 2007, imports of metal products to the U.S. were below recent levels; because metal prices in Europe and Asia were typically higher than in the U.S, metals were diverted to these markets rather than the U.S. The weak U.S. dollar and strong demand in other parts of the world also contributed to this. We believe that service centers, like Reliance, with the most rapid inventory turnover are generally the least vulnerable to changing metals prices.
Customers purchase from service centers to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size, and quality control. Many customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills or because those customers require intermittent deliveries over long or irregular periods. Metals service centers respond to a niche market created because of the focus of the capital goods and related industries on just-in-time inventory management and materials management outsourcing, and because integrated mills have reduced in-house direct sales efforts to small sporadic purchasers to enhance their production efficiency.
History of Reliance
Reliance Steel & Aluminum Co. was organized as a California corporation on February 3, 1939, and commenced business in Los Angeles, California fabricating steel reinforcing bar. Within ten years, we had become a full-line distributor of steel and aluminum, operating a single metals service center in Los Angeles. In the early 1950’s, we automated our materials handling operations and began to provide processing services to meet our customers’ requirements. In the 1960’s, we began to acquire other companies to establish additional service centers, expanding into other geographic areas.
In the mid-1970’s, we began to establish specialty metals centers stocked with inventories of selected metals such as aluminum, stainless steel, brass, and copper, and equipped with automated materials handling and precision cutting equipment. We have continued to expand our network, with a focus on servicing our customers as opposed to merely distributing metal. In 2003, we acquired a company that processes metal for a fee without taking ownership of the metal. In the past two years we have expanded our geographic and product base significantly through our acquisitions.

We serve our customers primarily by providing quick delivery, metals processing and inventory management services. We purchase a variety of metals from primary producers and sell these products in small quantities based on our customers’ needs. We performed metals processing services, or first-stage processing, on approximately 40% of our sales orders in 2007 before distributing the product to manufacturers and other end-users. For almost half of our 2007 orders, we delivered the metal to our customer within 24 hours from receipt of an order, if the order did not require extensive or customized processing. These services save time, labor, and expense for our customers and reduce their overall manufacturing costs. During 2007, we handled approximately 21,400 transactions per business day, with an average price of approximately $1,350 per transaction. Our net sales were $7.26 billion for the 2007 year. We believe that our focus on small orders with quick turnaround differentiates us from many of the other large metals service center companies and allows us to generate higher profits than those companies.
Historically, we have expanded both through acquisitions and internal growth. Since our initial public offering in September 1994, we have successfully purchased more than 40 businesses. In 2006, we significantly increased the size of our company through acquisitions, primarily as a result of the Earle M. Jorgensen Company and Yarde Metals, Inc. acquisitions. In 2007 we continued our growth with five acquisitions, including further penetration in Canada and an entry into the United Kingdom. From 1984 to September 1994, we acquired 20 businesses. Our internal growth activities in 2006 and 2007 have been at historically high levels for us and have included the opening of new facilities, adding to our processing capabilities and relocating existing operations to larger, more efficient facilities. We continue to evaluate acquisition opportunities and expect to continue to grow our business through acquisitions and internal growth initiatives, particularly those that will diversify our products, customer base and geographic locations.

Acquisitions
Effective October 1, 2007, we acquired all of the outstanding capital stock of Metalweb plc (“Metalweb”), a metals service center company headquartered in Birmingham, England. Metalweb, established in 2001, specializes in the processing and distribution of primarily aluminum products for non-structural aerospace components and general engineering parts and has three additional service centers located in London, Manchester and Oxford, England. Metalweb’s net sales for the three months ended December 31, 2007 were approximately $12 million. Metalweb has been re-registered as Metalweb Limited.
On July 1, 2007, we acquired all of the outstanding capital stock of Clayton Metals, Inc. (“Clayton Metals”), headquartered in Wood Dale, Illinois. Clayton Metals, founded in 1976, specializes primarily in the processing and distribution of aluminum, stainless steel and red metal flat-rolled products, custom extrusions and aluminum circles through its metals service center locations in Wood Dale, Illinois; Cerritos, California; High Point, North Carolina; and Parsippany, New Jersey. Clayton Metals’ net sales for the six months ended December 31, 2007 were approximately $54 million.
As of February 1, 2007, we acquired the net assets and business of the Encore Group of metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore Coils, and Team Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in 2004 in connection with the buyout by management and a private equity fund of certain former Corus CIC and Corus America businesses. Encore specializes in the processing and distribution of alloy and carbon bar and tube, as well as stainless steel sheet, plate and bar and carbon steel flat-rolled products, through its facilities located mainly in Western Canada. The net sales of the Encore Group for the eleven months ended December 31, 2007 were approximately $208 million. As discussed below in “Recent Developments”, on January 1, 2008 we sold certain assets and the business of the Encore Coils division.
On January 2, 2007, we purchased all of the outstanding capital stock of Crest Steel Corporation (“Crest”), a metals service center company headquartered in Carson, California with facilities in Riverside, California and Phoenix, Arizona. Crest was founded in 1963 and specializes in the processing and distribution of carbon steel products including flat-rolled, plate, bars and structurals. Crest’s net sales for the year ended December 31, 2007 were approximately $126 million.
Also on January 2, 2007, our wholly-owned subsidiary, Siskin Steel & Supply Company, Inc. (“Siskin”), purchased the outstanding capital stock of Industrial Metals and Surplus, Inc. (“Industrial Metals”), a metals service center company headquartered in Atlanta, Georgia and a related company, Athens Steel, Inc. (“Athens Steel”), located in Athens, Georgia. Industrial Metals was founded in 1978 and specializes in the processing and distribution of carbon steel structurals, flat-rolled and ornamental iron products. Siskin’s Georgia Steel Supply Company division located in Atlanta will be combined with the Industrial Metals operations. Net sales for Industrial Metals (including Athens Steel) for the year ended December 31, 2007 were approximately $115 million. Industrial Metals and Athens Steel now operate as divisions of Siskin.
On August 1, 2006, we acquired Yarde Metals, Inc. (“Yarde Metals”), a metals service center company headquartered in Southington, Connecticut. We paid $100 million in cash for all of the outstanding common stock of Yarde Metals and assumed approximately $101 million of its net debt. Yarde Metals was founded in 1976 and specializes in the processing and distribution of stainless steel and aluminum plate, rod and bar products. Yarde Metals has additional metals service centers in Pelham, New Hampshire; East Hanover, New Jersey; Hauppauge, New York; High Point, North Carolina; Streetsboro, Ohio; and Limerick, Pennsylvania and a sales office in Ft. Lauderdale, Florida. Yarde Metals’ net sales for the year ended December 31, 2007 were approximately $477 million.
On April 3, 2006, we completed the acquisition of Earle M. Jorgensen Company (“EMJ”), which was our first acquisition of a public company. EMJ, headquartered in Lynwood, California, is one of the largest distributors of metal products in North America with 40 service and processing centers selling primarily specialty bar and tube products. The transaction was valued at approximately $984 million, including the assumption of EMJ’s net debt. We paid $6.50 in cash and issued .1784 of a share of Reliance common stock for each share of EMJ common stock outstanding. This is currently the only acquisition to date where we have used our stock as consideration. EMJ’s net sales for the year ended December 31, 2007 were approximately $2.04 billion.
Recent Developments
As of January 1, 2008, we sold certain assets and the business of the Encore Coils division of Encore Group Limited, that we acquired on February 1, 2007. The Encore Coils division processed and distributed carbon steel flat-rolled products through four facilities located in Western Canada. The Encore Coils business did not fit well for us because we did not have any similar facilities nearby that could help support this relatively small business. We were attracted to Encore Group because of its specialty bar and tube business, as well as its stainless products and exposure to the energy industry. We have retained the Encore Metals and Team Tube divisions that participate in these markets. In addition, one remaining facility of Encore Coils now operates as a toll processing facility.

In December 2007 we announced that our subsidiary Valex Corp. opened a facility in the People’s Republic of China. Valex China Co. Ltd. is 100% owned by the Hong Kong joint venture company Valex Holdings Ltd. Valex Corp. owns 88% of Valex Holdings Ltd. The facility is located in the Nanhui district of Shanghai and will produce ultra high purity tubes, fittings, and valves for the semiconductor, LCD and solar industries.
Other Developments
In 2007, our focus on organic growth continued and included the opening of new facilities, building or expanding existing facilities and adding processing equipment with total capital expenditures of $124.1 million. Phoenix Metals Company completed the construction of a new facility for its Charlotte, North Carolina operation and is adding processing equipment to better support its customers in that area. Phoenix Metals Company also leased warehouse space in Russellville, Arkansas to expand into the stainless steel market in that area. Precision Strip has added processing equipment in its Tipp City and Perrysburg, Ohio locations and increased its fleet of trucks and trailers in 2007 to support the growth in the business. Earle M. Jorgensen Company relocated its Portland, Oregon operation to a new, larger more efficient facility in early 2007. Also in 2007 PDM Steel Service Centers, Inc. purchased land in Las Vegas, Nevada to build a new larger facility to open in 2008 and expanded its Spanish Fork, Utah facility. Liebovich Bros, Inc. moved its existing operation near Green Bay, Wisconsin from a leased facility to a newly built larger and more efficient facility in Kaukauna, Wisconsin. Yarde Metals, Inc. expanded its network geographically by leasing space in Baltimore, Maryland to store depot inventory. The current environment supports strong organic growth and we expect to continue to expand our business in 2008 by continuing to build and expand facilities and add processing equipment with a record capital expenditures budget for 2008 of $210 million.
Due to the increased size and growth activities of our company, late in 2006 we recapitalized the Company by issuing $600 million of debt securities and increasing the availability of our credit facility to $1.1 billion to provide for our future growth. We also repurchased approximately $250 million of outstanding 9.75% senior secured notes of EMJ to lower our cost of capital.
We formed RSAC Management Corp., a California corporation, in 1999 to operate as a holding company for our subsidiaries and to provide administrative and management services to our metals service centers. Our executive officers maintain a control environment that is focused on integrity and ethical behavior, establish general policies and operating guidelines and monitor adherence to proper financial controls, while our division managers and subsidiary officers have virtual autonomy with respect to day-to-day operations. This balanced, yet entrepreneurial, management style has enabled us to improve the productivity and profitability both of acquired businesses and of our own expanded operations. Division managers and other management personnel are eligible for incentive compensation based, in part, on the profitability of their particular division or subsidiary and, in part, on the Company’s overall profitability.
We seek to increase our profitability by expanding our existing operations and acquiring businesses that diversify or enhance our customer base, product range, processing services and geographic coverage. We have developed and maintained an excellent reputation in the industry for our integrity and the quality and timeliness of our service to customers.
Customers
Our customers purchase from us and other metals service centers to obtain value-added metals processing, readily available inventory, reliable and timely delivery, flexible minimum order size and quality control. Many of our customers deal exclusively with service centers because the quantities of metal products that they purchase are smaller than the minimum orders specified by mills, because those customers require intermittent deliveries over long or irregular periods, or because those customers require specialized processing services. We believe that metals service centers have also enjoyed an increasing share of total metal shipments due to the focus of the capital goods and other manufacturing industries on just-in-time inventory management and materials management outsourcing, and because metal producers have reduced in-house direct sales efforts to small sporadic purchasers in order to enhance their production efficiency. The recent consolidation of carbon steel mills has further reduced the number of potential sources of metal available to customers purchasing small quantities of metal.
We have more than 125,000 metals service center customers in various industries. In 2007, no single customer accounted for more than 1.0% of our sales, and more than approximately 85% of our orders were from repeat customers. Our customers are manufacturers and end-users in the general manufacturing, non-residential construction, transportation (rail, truck trailer and shipbuilding), aerospace, energy, electronics and semiconductor fabrication and related industries. In 2003, many of our suppliers also became our customers as a result of our purchase of Precision Strip, which typically sells processing services, but not metal, to larger customers, such as mills and original equipment manufacturers (OEM’s), and in larger annual volumes than we have experienced historically. Precision Strip has also indirectly increased our participation in the auto and appliance end markets with the auto exposure primarily relating to the transplants, or “New Domestic” companies. Our metals service centers wrote and delivered over 5,375,000 orders during 2007 at an average price of approximately $1,350 per order. Most of our metals service center customers are located within a 200-mile radius of the metals service center serving them. The proximity of our centers to our customers helps us provide just-in-time delivery to our customers. With our fleet of approximately 1,460 trucks (some of which are leased), we are able to service many smaller customers. Moreover, our computerized order entry system and flexible production scheduling enable us to meet customer requirements for short lead times and just-in-time delivery. We believe that our long-term relationships with many of our customers significantly contribute to the success of our business. Providing prompt and efficient services and quality products at reasonable prices are important factors in maintaining these relationships.
In 2006 and 2007, we increased our international presence significantly through the acquisitions of the Canadian service centers of EMJ and Encore Group and Metalweb in the United Kingdom and our subsidiary Valex Corp. opened a facility in China. Approximately 6% of our 2007 net sales or $458.2 million were to international customers (based on the shipping destination), with approximately 72% of these sales or $331.5 million to Canadian customers. Approximately 81% of our Canadian sales or $268.8 million were made by our EMJ Canada and Encore Canada locations.
Customer demand may change from time to time based on, among other things, general economic conditions and industry capacity. Many of the industries in which our customers compete are cyclical in nature. Because we sell to a wide variety of customers in several industries, we believe that the effect of such changes on us is significantly reduced. In 2007, demand in most markets that we serve was at reasonably strong levels from a historical basis, but generally below that of 2006. Aerospace, energy and non-residential construction were the strongest of these markets in 2007. We anticipate that demand in the non-residential construction market, which we believe represents approximately one-third of our sales dollars, may slow somewhat in 2008 from 2007 levels. We have very limited exposure to the domestic auto and residential construction markets that were the weakest areas of the U.S. economy in 2007.
Since 2004, pricing for carbon steel products has been at elevated levels compared to historical pricing levels, primarily due to raw material shortages for the mills which has increased their costs, and due to consolidation at the mill level resulting in a more controlled level of domestic capacity and pricing discipline. In addition, during 2007 import levels into the U.S. were very low because the metal was re-routed to Europe and Asia where prices were higher than in the U.S., because of strong demand in those geographic areas and because of the weak U.S. dollar. During 2007, carbon steel prices remained fairly steady trending downward slightly until November and then remained flat through the end of the year. In December, price increases were announced for 2008. Prices for stainless steel products continued to increase from unprecedented levels throughout the first half of 2007 driven by record increases in the nickel surcharges due to shortages of nickel. However, in the months of August, September and October 2007 stainless steel prices dropped sharply (approximately 35% decrease in total during that period), driven by decreases in the nickel surcharge before leveling off somewhat during the fourth quarter of 2007. This sharp decline in stainless steel prices created a challenging environment for pricing of stainless steel products during the second half of 2007 and caused many customers to delay purchases or to purchase limited quantities while prices were declining. This negatively impacted our gross profit margins on sales of stainless steel products. In 2007, pricing of aluminum products, excluding specialty aerospace products, was relatively steady with downward trends in the third quarter. The prices of aerospace-related aluminum products also began to decrease in 2007 from the record levels in late 2006 and early 2007 primarily due to increased metal availability.
California was our largest market for many years, but we have expanded our geographic coverage in recent years and the Midwest region of the United States has become our largest market. Although our sales dollars in each of these regions have increased, the percent of total sales in each region has changed due to our growth. California represented 16% of our 2007 sales, which was a significant decrease from 45% of our 1997 sales. The Midwest region, which we entered in 1999 and is now our largest market, represented 25% of our 2007 sales. Our 2007 acquisitions and organic growth continued our geographic diversification, especially in Canada through Encore Group and in the United Kingdom through Metalweb.

Suppliers
We purchase our inventory from the major metals mills, both domestic and foreign, and have multiple suppliers for all of our product lines. Our major suppliers of domestic carbon steel products include California Steel Industries, Inc., Gerdau Ameristeel Corporation (including Chaparral Steel Company), IPSCO, Inc., Mittal Steel, Nucor Corporation, Evraz Oregon Steel Mills, Steel Dynamics, Inc. and United States Steel Corporation. Allegheny Technologies Incorporated, AK Steel, and North American Stainless supply stainless steel products. We are a recognized distributor for various major aluminum companies, including Alcoa Inc., Alcan Aluminum Limited, Aleris International, Inc. and Kaiser Aluminum Corp.
During 2001 through 2003, many domestic steel mills entered bankruptcy proceedings and certain of those mills temporarily closed a portion of their production capacity. Most of the bankrupt mill facilities were acquired by existing mills. Since then mill consolidation has continued at a rapid pace, resulting in significant market share controlled by a limited number of suppliers. This has improved capacity and pricing discipline at the mills. Steel producers have experienced significant increases in their raw material costs due to shortages caused by increased global demand. These factors have provided a more stable pricing environment since 2004 with prices at relatively high levels. Costs for aluminum and stainless steel products have also been at relatively high levels compared to historical levels in recent years because of the increased global demand and raw material shortages for those products. In addition recent strength in certain end markets such as aerospace and energy have limited the availability of certain products, allowing the producers to increase their prices for these products.
Because of our total volume of purchases and our long-term relationships with our suppliers, we believe that we are generally able to purchase inventory at the best prices offered by the suppliers, given the order size. We believe that we are not dependent on any one of our suppliers for metals. In recent years, when the supply of certain metals was tight, we believe that these relationships provided an advantage to us in our ability to source product and have it available for our customers. Our size and strong relationships with our suppliers is now more important because mill consolidation has somewhat reduced the number of suppliers. Because of the favorable market conditions experienced in the U.S. in recent years new capacity is being built in the U.S. that could make pricing more volatile in future years from current levels. In 2006, China became a net exporter of metals which caused concern about the impact on the U.S. and other markets. We have not seen a significant disruption in the U.S. market because of this; however, continued and increased imports of Chinese and other metals into the U.S. market could negatively impact pricing.
Backlog
Because of the just-in-time delivery and the short lead-time nature of our business, we do not believe the information on backlog of orders is material to an understanding of our metals service center business.
Products and Processing Services
We provide a wide variety of processing services to meet each customer’s specifications and deliver products to fabricators, manufacturers and other end users. We maintain a wide variety of products in inventory. Our product mix has changed mainly as a result of our acquisitions. Flat-rolled carbon steel products are generally the most volatile and competitive products in terms of pricing and accounted for only 9% of our 2007 sales. For orders other than those requiring extensive or specialized We do not depend on any particular customer group or industry because we process a variety of metals. Because of this diversity of product type and material, we believe that we are less exposed to fluctuations or other weaknesses in the financial or economic stability of particular customers or industries. We also are less dependent on particular suppliers.
For sheet and coil products, we purchase coiled metal from primary producers in the form of a continuous sheet, typically 36 to 60 inches wide, between .015 and .25 inches thick, and rolled into 3- to 20-ton coils. The size and weight of these coils require specialized equipment to move and process the coils into smaller sizes and various products. Many of the other products that we carry also require specialized equipment. Few of our customers have the capability to process the metal into the desired products.
After receiving an order, we enter it into our computerized order entry system, select appropriate inventory and schedule the processing to meet the specified delivery date. In 2007, we delivered almost half of our orders within 24 hours. We attempt to maximize the yield from the various metals that we process by combining customer orders to use each product that we purchase to the fullest extent practicable.
Few metals service centers offer the full scope of processing services and metals that we provide. In 2007, we performed processing services for approximately 40% of our sales orders. Our primary processing services are described below:
• Bar turning involves machining a metal bar into a smaller diameter.

• Bending is the forming of metals into various angles.

• Blanking is the cutting of metals into close-tolerance square or rectangular shapes.

• Deburring is the process used to smooth the sharp, jagged edges of a cut piece of metal.

• Electropolishing is the process used on stainless steel tubing and fittings to simultaneously smooth, brighten, clean and passivate the interior surfaces of these components. Electropolishing is an electrochemical removal process that selectively removes a thin layer of metal, including surface flaws and imbedded impurities. Electropolishing is a required surface treatment for all ultra high-purity components used in the gas distribution systems of semiconductor manufacturers worldwide and many sterile water distribution systems of pharmaceutical and biotechnology companies.

• Fabricating includes performing second- and/or third-stage processing per customer specifications, typically to provide a part, casing or kit which is used in the customer’s end product.

• Forming involves bending and forming plate or sheet products into customer-specified shapes and sizes with press brakes.

• Grinding or blanchard grinding involves grinding the top and/or bottom of carbon or alloy steel plate or bars into close tolerance.

• Leveling (cutting-to-length) involves cutting metal along the width of a coil into specified lengths of sheets or plates.

• Machining refers to performing multiple processes to a piece of metal to produce a customer-specified component part.

• Oscillate slitting involves slitting the metal into specified widths and then oscillating the slit coil when it is wound. The oscillated coil winds the strip metal similar to the way fishing line is wound on a reel rather than standard ribbon winding. An oscillate coil can typically hold five to six times more metal than a standard coil, which allows customers to achieve longer production run times by reducing the number of equipment shut-downs to change coils.

• Pipe threading refers to the cutting of threads around the circumference of the pipe.

• Polishing changes the texture of the surface of the metal to specific finishes in accordance with customer specifications.

• Precision plate sawing involves sawing plate (primarily aluminum plate products) into square or rectangular shapes to tolerances as close as 0.003 of an inch.

• Punching is the cutting of holes into carbon steel beams or plates by pressing or welding per customer specifications.

• Routing produces various sizes and shapes of aluminum plate according to customer-supplied drawings through the use of CNC controlled machinery.

• Sawing involves cutting metal into customer-specified lengths, shapes or sizes.

• Shape cutting, or burning, can produce various shapes according to customer-supplied drawings through the use of CNC controlled machinery. This procedure can include the use of oxy-fuel, plasma, high-definition plasma, laser burning or water jet cutting for carbon, aluminum and stainless steel sheet and plate.

• Shearing is the cutting of metal into small, precise square or rectangular pieces.

• Skin milling grinds the top and/or bottom of a large aluminum plate into close tolerance.

• Slitting involves cutting metal to specified widths along the length of the coil.

• Tee splitting involves splitting metal beams. Tee straightening is the process of straightening split beams.

• Twin milling grinds one or all six sides of a small square or rectangular piece of aluminum plate into close tolerance.

• Welding is the joining of one or more pieces of metal.

• Wheelabrating, shotblasting and bead-blasting involve pressure blasting metal grid onto carbon steel products to remove rust and scale from the surface.
We generally process specific metals to non-standard sizes only at the request of customers pursuant to purchase orders. We do not maintain a significant inventory of finished products, but we carry a wide range of metals to meet the short lead time and just-in-time delivery requirements of our customers. Our metals service centers maintain inventory and equipment selected to meet the needs of that facility’s customers.


CEO BACKGROUND

Thomas W. Gimbel was appointed a director of Reliance in January 1999. Mr. Gimbel has been retired since 2006 and currently serves as Trustee of the Florence Neilan Trust, Reliance’s largest shareholder. Between 1984 and 2006, Mr. Gimbel was the President of Advanced Systems Group, an independent computer consulting firm servicing database requirements for diverse businesses of various sizes. From 1975 to 1984, Mr. Gimbel was employed by Dun & Bradstreet. Mr. Gimbel serves as a member of our Nominating and Governance Committee. The Board of Directors has determined that Mr. Gimbel is an independent director.

David H. Hannah was appointed a director of Reliance in 1992 and became the Chairman in October 2007 and the Chief Executive Officer of Reliance in January 1999. Mr. Hannah served as President of Reliance from November 1995 to January 2002. Prior to that, he was Executive Vice President and Chief Financial Officer from 1992 to 1995, Vice President and Chief Financial Officer from 1990 to 1992 and Vice President and Division Manager of the Los Angeles Reliance Steel Company division of Reliance from 1989 to 1990. Mr. Hannah has served as an officer of the Company since 1981. For eight years before joining Reliance in 1981, Mr. Hannah, a certified public accountant, was employed by Ernst & Whinney (a predecessor to Ernst & Young LLP, our independent registered public accounting firm through 2007) in various professional staff positions.

Mark V. Kaminski was appointed a director of Reliance in November 2004. Mr. Kaminski was chief executive officer and a director of Commonwealth Industries Inc. (now Aleris International, Inc.) from 1991 to June 2004, when he retired. Mr. Kaminski had served in other capacities with Commonwealth Industries Inc. since 1987. Aleris is a supplier of metals to Reliance, but the purchases in any year do not exceed five percent of either the gross revenues or the total consolidated assets of Reliance or of Aleris. Mr. Kaminski is also a director of the Matthew Kelly Foundation, Cincinnati, Ohio, a non-profit organization. Mr. Kaminski serves as a member and Chairman of our Nominating and Governance Committee and as a member of our Compensation and Stock Option Committee and our Audit Committee. The Board of Directors has determined that Mr. Kaminski is an independent director.

Gregg J. Mollins was appointed a director of Reliance in September 1997 and became President of Reliance in January 2002. Mr. Mollins has served as Chief Operating Officer since May 1994. Mr. Mollins was Executive Vice President from November 1995 to January 2002, was Vice President and Chief Operating Officer from 1994 to 1995 and was Vice President from 1992 to 1994. Prior to that time he had been with Reliance for six years as Division Manager of the Santa Clara division. For ten years before joining Reliance in 1986, Mr. Mollins was employed by certain of our competitors in various sales and sales management positions.

Andrew G. Sharkey, III was appointed a director of Reliance in July 2007. Mr. Sharkey has served as president and chief executive officer of the American Iron and Steel Institute since 1993 and from 1978 to 1993 was president, executive vice president and director of education for the Steel Service Center Institute (currently the Metal Service Center Institute). Mr. Sharkey serves as a member of our Nominating and Governance Committee and our Compensation and Stock Option Committee. The Board of Directors has determined that Mr. Sharkey is an independent director.

Douglas M. Hayes became a director of Reliance in September 1997. Mr. Hayes retired from Donaldson, Lufkin & Jenrette Securities Corporation (“DLJ”), where he was Managing Director of Investment Banking from 1986 to May 1997, after which he established his own investment firm, Hayes Capital Corporation, located in Los Angeles, California. DLJ was an underwriter in our 1997 public equity offering and was also the underwriter in our initial public offering in 1994. Mr. Hayes serves as a member of our Audit Committee and our Compensation and Stock Option Committee. Mr. Hayes served on our Nominating and Governance Committee through February 2005. Mr. Hayes is also a director of Circor International, Inc., a public company, the securities of which are traded on the New York Stock Exchange, and for which Mr. Hayes serves as chairman of the nominating and governance committee and as a member of the audit committee and the compensation committee. The Board of Directors has determined that Mr. Hayes is an independent director, and Mr. Hayes serves as our Lead Director for non-management director meetings.

Franklin R. Johnson was appointed a director of Reliance in February 2002. Mr. Johnson is a certified public accountant, having been the managing partner of the entertainment practice of Price Waterhouse until he retired in June 1997. Mr. Johnson was the chief financial officer of Rysher Entertainment, a producer and distributor of films and television shows from June 1997 to June 1999 and, since July 1999, he has served as a business consultant, a litigation consultant and an expert witness, none of which services has been provided to Reliance. Mr. Johnson serves as a member and the Chairman of our Audit Committee and as a member of our Nominating and Governance Committee. Mr. Johnson also serves as a director of Special Value Continuation Fund, a registered investment fund for institutional investors organized by Tennenbaum Capital Partners, for which Mr. Johnson is chairman of its audit committee. The Board of Directors has determined that Mr. Johnson is an independent director and that he qualifies as the financial expert of the Audit Committee.

Richard J. Slater became a director of Reliance as of January 1, 2006. Mr. Slater is chairman of ORBIS LLC, an investment and corporate advisory firm, and serves on the board of directors of Bluebeam, a privately-held, early stage software development company. From May 1980 until his retirement in October 2006, Mr. Slater served in various executive positions with Jacobs Engineering Group, including Executive Vice President of Worldwide Operations (1998 through 2002) and advisor to the chairman and CEO (2003 through 2006). He is currently a director of KBR, Inc., a member of their nomination and governance committee and chairman of its health, safety and environmental committee. He is also a Trustee of the Board of Claremont Graduate University, chairman of their business and finance committee, and member of their audit and investment committees. The Board of Directors has determined that Mr. Slater is an independent director.

Leslie A. Waite has been a director of Reliance since 1977. Mr. Waite is an investment advisor and, since April 2003, has been Managing Director and Senior Portfolio Manager of Lombardia Capital Partners LLC (formerly Valenzuela Capital Partners LLC). Prior to that, he had been the president and chief portfolio manager of Waite & Associates since its formation in 1977. Mr. Waite is a member of our Audit Committee and serves as a member and Chairman of our Compensation and Stock Option Committee. The Board of Directors has determined that Mr. Waite is an independent director.

Karla R. Lewis became Executive Vice President of Reliance in January 2002 and continues as our Chief Financial Officer. Mrs. Lewis was also appointed an Assistant Secretary in 2007. Mrs. Lewis had been Senior Vice President and Chief Financial Officer of Reliance since February 2000. Mrs. Lewis served as Vice President and Chief Financial Officer of Reliance from 1999 to 2000 and was Vice President and Controller from 1995 to 1999. Mrs. Lewis served as Corporate Controller from 1992 to 1995. For four years prior to joining Reliance, Mrs. Lewis, a certified public accountant, was employed by Ernst & Young (our independent registered public accounting firm for 2007) in various professional staff positions.

James P. MacBeth became Senior Vice President, Carbon Steel Operations in January 2002, having been promoted from Vice President, Carbon Steel Operations, a position which he had held since July 1998. Prior to that time, Mr. MacBeth served as Division Manager of our Los Angeles Reliance Steel Company division from September 1995 to June 1998. From December 1991 to September 1995, Mr. MacBeth was Vice President and Division Manager of Feralloy Reliance Company, L.P., a joint venture owned 50% by Reliance. Prior to December 1991, Mr. MacBeth held various sales and management positions since joining Reliance in 1969.

William K. Sales, Jr. became Senior Vice President, Non-Ferrous Operations in January 2002, having joined Reliance as Vice President, Non-Ferrous Operations in September 1997. From 1981 to 1997, Mr. Sales served in various sales and management positions with Kaiser Aluminum & Chemical Corp., a producer of aluminum products and a supplier of Reliance.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
2007 was another year of record results for us, with higher revenues, profits and cash flows than our Company has ever experienced. Our 2007 acquisitions along with the 2006 acquisitions of EMJ and Yarde Metals contributed significantly to our financial results. We completed five acquisitions during 2007 that were important in further expanding and diversifying our product, customer and geographic base, both domestically and internationally. We significantly increased our exposure in Canada through an acquisition that services the Western Canada energy market. We also made our first entry into the United Kingdom through an acquisition that provided us the opportunity to expand our European presence. Near the end of 2007 we opened a facility in China to service a sector of the semiconductor industry. These activities better position us to meet the needs of our customers that are expanding their businesses globally.
We spent $124.1 million on capital expenditures in 2007, with a significant portion of that amount relating to growth initiatives, including the expansion and relocation of existing facilities, enhancing and adding processing capabilities, penetrating new geographic markets and expanding product offerings at existing locations. We continue to focus on growing our Company with accretive acquisitions and internal growth activities that enhance our product, geographic and customer diversity. We believe this diversification makes our financial results less cyclical than others in our industry.
We generated record cash flow from operations of $639.0 million in 2007 due to the increased size of the company, strong profit levels and effective working capital management. During 2007 we used our cash flow from operations to fund our $124.1 million of capital expenditures, $270.0 million of acquisitions and $82.2 million of stock repurchases and were able to repay a portion of our outstanding debt. This resulted in a net debt-to-total capital ratio of 32.4% and $185 million outstanding on our $1.1 billion credit facility at December 31, 2007. This strong financial position provides us with ready and adequate access to capital to continue our growth activities.
Demand for most products that we sell was healthy during 2007, although not at the strong levels that we experienced in 2006, especially for products that we sell to the non-residential construction and aerospace markets. Pricing was somewhat volatile for most products that we sell during 2007. Overall, prices for metal products have been at relatively high levels since 2004. In 2007, domestic prices for metals were supported by a historically low level of imported metals into the U.S. The strong global demand and pricing for metal products caused metals to be re-routed to these stronger foreign markets in 2007. Stainless steel products experienced the most pricing volatility in 2007. In 2006 stainless steel prices reached unprecedented levels that rose even further in the first half of 2007 with these increases mainly due to global shortages of nickel. In the third quarter of 2007 this trend reversed suddenly with significant price reductions that caused our gross profit margins on sales of these products to deteriorate. Prices for stainless steel products have been more stable since then, but could experience further significant fluctuations in the future. Also in 2007, there were significant competitive pressures in our industry, especially in the first half of the year, due to inventory destocking that pressured our selling prices and gross profit margins.
We believe the steps that we took during the difficult years of 2001 through 2003 positioned us to take full advantage of the improved economic conditions we have experienced since 2004. However, as evidenced by our performance during the difficult years, we take the necessary actions to allow us to operate efficiently and profitably even in less favorable economies. We believe this is because of our focus on cost controls and inventory turnover and our product, customer and geographic diversification. Our product and geographic diversification should continue to benefit us in 2008. We believe that demand levels may decline somewhat in 2008 due to general fears about the economy. We are optimistic about pricing, with increases already in effect for many carbon steel products in early 2008. Significant declines in demand or pricing for our products could reduce our gross profit margins. Also, if we cannot obtain a sufficient supply of metals for our customers in 2008, or if domestic availability of our products increases significantly in 2008, this could negatively impact our 2008 financial results, especially as compared to our 2007 results.
Customer demand can have a significant impact on our results of operations. When volume increases our revenue dollars increase, which contributes to increased gross profit dollars. Variable costs may also increase with volume including increases in our warehouse, delivery, selling, general and administrative expenses. Conversely, when volume declines, we typically produce fewer revenue dollars which can reduce our gross profit dollars. We can reduce certain variable expenses when volumes decline, but we cannot easily reduce our fixed costs.

Pricing for our products can have a more significant impact on our results of operations than customer demand levels. As pricing increases, so do our revenue dollars. Our pricing usually increases when the cost of our materials increases. If prices increase and we maintain the same gross profit percentage, we generate higher levels of gross profit and pre-tax income dollars for the same operational efforts. Conversely, if pricing declines, we will typically generate lower levels of gross profit and pre-tax income dollars. Because changes in pricing do not require us to adjust our expense structure, the impact on our results of operations from changes in pricing is much greater than the effect of volume changes.
Also, when volume or pricing increases, our working capital requirements typically increase, which may require us to increase our outstanding debt. This could increase our interest expense. When our customer demand falls, we can typically generate stronger levels of cash flow from operations as our working capital needs decrease.
Acquisitions
Effective October 1, 2007, we acquired all of the outstanding capital stock of Metalweb plc (“Metalweb”), a metals service center company headquartered in Birmingham, England. Metalweb, established in 2001, specializes in the processing and distribution of primarily aluminum products for non-structural aerospace components and general engineering parts and has three additional service centers located in London, Manchester and Oxford, England. Metalweb’s net sales for the three months ended December 31, 2007 were approximately $12 million. Metalweb has been re-registered as Metalweb Limited.
On July 1, 2007, we acquired all of the outstanding capital stock of Clayton Metals, Inc. (“Clayton Metals”), headquartered in Wood Dale, Illinois. Clayton Metals, founded in 1976, specializes primarily in the processing and distribution of aluminum, stainless steel and red metal flat-rolled products, custom extrusions and aluminum circles through its metals service center locations in Wood Dale, Illinois; Cerritos, California; High Point, North Carolina; and Parsippany, New Jersey. Clayton Metals’ net sales for the six months ended December 31, 2007 were approximately $54 million.
As of February 1, 2007, we acquired the net assets and business of the Encore Group of metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore Coils, and Team Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in 2004 in connection with the buyout by management and a private equity fund of certain former Corus CIC and Corus America businesses. Encore specializes in the processing and distribution of alloy and carbon bar and tube, as well as stainless steel sheet, plate and bar and carbon steel flat-rolled products, through its facilities located mainly in Western Canada. The net sales of the Encore Group for the eleven months ended December 31, 2007 were approximately $208 million. As discussed below in “Recent Developments”, on January 1, 2008 we sold certain assets and the business of the Encore Coils division.
On January 2, 2007, we purchased all of the outstanding capital stock of Crest Steel Corporation (“Crest”), a metals service center company headquartered in Carson, California with facilities in Riverside, California and Phoenix, Arizona. Crest was founded in 1963 and specializes in the processing and distribution of carbon steel products including flat-rolled, plate, bars and structurals. Crest’s net sales for the year ended December 31, 2007 were approximately $126 million.
Also on January 2, 2007, our wholly-owned subsidiary, Siskin Steel & Supply Company, Inc. (“Siskin”), purchased the outstanding capital stock of Industrial Metals and Surplus, Inc. (“Industrial Metals”), a metals service center company headquartered in Atlanta, Georgia and a related company, Athens Steel, Inc. (“Athens Steel”), located in Athens, Georgia. Industrial Metals was founded in 1978 and specializes in the processing and distribution of carbon steel structurals, flat-rolled and ornamental iron products. Siskin’s Georgia Steel Supply Company division located in Atlanta will be combined with the Industrial Metals operations. Net sales for Industrial Metals (including Athens Steel) for the year ended December 31, 2007 were approximately $115 million. Industrial Metals and Athens Steel now operate as divisions of Siskin.
On August 1, 2006, we acquired Yarde Metals, Inc. (“Yarde Metals”), a metals service center company headquartered in Southington, Connecticut. We paid $100 million in cash for all of the outstanding common stock of Yarde Metals and assumed approximately $101 million of its net debt. Yarde Metals was founded in 1976 and specializes in the processing and distribution of stainless steel and aluminum plate, rod and bar products. Yarde Metals has additional metals service centers in Pelham, New Hampshire; East Hanover, New Jersey; Hauppauge, New York; High Point, North Carolina; Streetsboro, Ohio; and Limerick, Pennsylvania and a sales office in Ft. Lauderdale, Florida. Yarde Metals’ net sales for the year ended December 31, 2007 were approximately $477 million.
On April 3, 2006 we completed the acquisition of Earle M. Jorgensen Company (“EMJ”) which was our first acquisition of a public company. EMJ, headquartered in Lynwood, California, is one of the largest distributors of metal products in North America with 40 service and processing centers selling primarily specialty bar and tube products. The transaction was valued at approximately $984 million, including the assumption of EMJ’s net debt. We paid $6.50 in cash and issued .1784 of a share of Reliance common stock for each share of EMJ common stock outstanding. This is currently the only acquisition where we have used our stock as consideration. EMJ’s net sales for the year ended December 31, 2007 were approximately $2.04 billion.

Recent Developments
On January 1, 2008, we sold certain assets and business of the Encore Coils division of Encore Group Limited, that we acquired on February 1, 2007. The Encore Coils division processed and distributed carbon steel flat-rolled products through four facilities located in Western Canada. The Encore Coils business did not fit well for us because we did not have any similar facilities nearby that could help support this relatively small business. We were attracted to Encore Group because of its specialty bar and tube business, as well as its stainless products and exposure to the energy industry. We have retained the Encore Metals and Team Tube divisions that participate in these markets. In addition, one remaining facility of Encore Coils now operates as a toll processing facility.
In December 2007 we announced that our subsidiary Valex Corp. opened a facility in the People’s Republic of China. Valex China Co. Ltd. is 100% owned by the Hong Kong joint venture company Valex Holdings Ltd. Valex Corp. owns 88% of Valex Holdings Ltd. The facility is located in the Nanhui district of Shanghai and will produce ultra high purity tubes, fittings, and valves for the semiconductor, LCD and solar industries.
Other Developments
In 2007, our focus on organic growth continued and included the opening of new facilities, building or expanding existing facilities and adding processing equipment with total capital expenditures of $124.1 million. Phoenix Metals Company completed the construction of a new facility for its Charlotte, North Carolina operation and is adding processing equipment to better support its customers in that area. Phoenix Metals Company also leased warehouse space in Russellville, Arkansas to expand into the stainless steel market in that area. Precision Strip has added processing equipment in its Tipp City and Perrysburg, Ohio locations and increased its fleet of trucks and trailers in 2007 to support the growth in the business. Earle M. Jorgensen Company relocated its Portland, Oregon operation to a new, larger more efficient facility in early 2007. Also in 2007 PDM Steel Service Centers, Inc. purchased land in Las Vegas, Nevada to build a new larger facility to open in 2008 and expanded its Spanish Fork, Utah facility. Liebovich Bros, Inc. moved its existing operation near Green Bay, Wisconsin from a leased facility to a newly built larger and more efficient facility in Kaukauna, Wisconsin. Yarde Metals, Inc. expanded its network geographically by leasing space in Baltimore, Maryland to store depot inventory. The current competitive environment supports strong organic growth and we expect to continue to expand our business in 2008 by continuing to build and expand facilities and add processing equipment with a record capital expenditures budget for 2008 of $210 million.
Due to the increased size and growth activities of our company, late in 2006 we recapitalized the Company by issuing $600 million of debt securities and increasing the availability of our credit facility to $1.1 billion to provide for our future growth. We also repurchased approximately $250 million of outstanding 9.75% senior secured notes of EMJ to lower our cost of capital.
Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net Sales . Our 2007 annual consolidated sales of $7.26 billion were our highest ever, up 26.3% from 2006, with a 17.3% increase in tons sold and an 8.5% increase in our average selling price per ton sold (our tons sold and average selling price per ton sold amounts exclude the sales of Precision Strip because of the “toll processing” nature of its business). Our 2007 acquisitions along with our 2006 acquisitions of EMJ on April 3, 2006 and Yarde Metals on August 1, 2006, contributed significantly to the increase in our 2007 sales levels.
Same-store sales, which exclude the sales of our 2006 and 2007 acquisitions, were $4.1 billion in 2007, up 2.1% from 2006, with a 1.8% decrease in our tons sold and a 5.7% increase in our average selling price per ton sold. Demand from most markets was relatively strong in 2007, but down somewhat from our 2006 levels. In 2006, we experienced significant strength in sales of our products to the non-residential construction and aerospace industries. Although we experienced various degrees of pricing volatility in all the metal products that we sell, with the most significant volatility in stainless steel products, overall 2007 pricing levels were above 2006 levels. Historically low levels of imported metal products into the U.S. in 2007 contributed to the strength of domestic prices. Import levels were low due to foreign mills re-routing their products to Europe and Asia where prices were higher due to the weak U.S. dollar and strong global demand. Our 2007 average price on a consolidated basis increased somewhat due to a shift in our product mix from our 2006 and 2007 acquisitions.
Gross Profit . Our total gross profit of $1.84 billion, up 21.6% from 2006, increased mainly because of our higher net sales level in 2007. Our gross profit as a percentage of sales was 25.3% in 2007, down from 26.3% in 2006. The decline in our gross profit margin in 2007 was mainly due to significant competitive pressures during the year, especially in the first half, resulting from excess inventories throughout the industry. A significant amount of this destocking by our competitors was in stainless steel products. Stainless steel costs were increasing significantly in the first half of 2007 and we can typically increase our gross profit margins in these environments; however, the destocking caused us to reduce our selling prices to compete, thereby reducing our gross profit margins. In the 2007 third quarter, stainless steel costs experienced sudden and significant declines. This adversely impacted our margins because we had to reduce our stainless steel selling prices more rapidly than our inventory costs on hand were reduced. In the fourth quarter of 2007, costs of most products were stable with third quarter levels, allowing us to realize some improvement in our gross profit margins from third quarter levels. Also, our 2007 LIFO expense was lower in 2007 than in 2006. We recorded LIFO expense, which is included in our cost of sales, of $43.8 million during 2007, compared to $94.1 million in 2006. Our 2007 LIFO expense resulted mainly from the further increases in the cost of stainless steel products at year end 2007 compared to the beginning of the year, although at a much lower rate than in 2006.
Expenses . Warehouse, delivery, selling, general and administrative expenses (“S,G&A expenses”) for 2007 increased $212.8 million, or 25.9% from 2006 mainly due to our 2006 and 2007 acquisitions and general cost increases. The expenses as a percent of sales in 2007 were 14.3%, the same as in the 2006 period. We continue to focus on cost control and take appropriate cost reduction measures when needed.
Depreciation expense increased $12.3 million in 2007 mainly because of our 2006 and 2007 acquisitions and because of depreciation of our 2007 capital expenditures. Amortization expense increased $5.1 million, or 74.4%, because of the amortization of our intangibles from our 2006 and 2007 acquisitions.
Operating Profit . Operating profit, calculated as gross profit less S,G&A expenses and depreciation expense, was $735.5 million in 2007, resulting in an operating profit margin of 10.1%, compared to 2006 operating profit of $634.2 million and an operating profit margin of 11.0%. The increased profit is mainly due to higher gross profit dollars resulting from increased sales levels, however, our operating profit margins deteriorated because of our lower gross profit margins in 2007.
Other Income and Expense . Interest expense was $78.7 million in 2007 compared to $61.7 million in 2006. The increase was mainly due to increased borrowings to fund our 2007 acquisitions.
Income Tax Rate . Our 2007 effective income tax rate was 37.7% compared to 37.9% for 2006. The 2007 rate is slightly lower than the 2006 rate due to increased international exposure through our 2007 acquisitions and various tax credits that were available to us in 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Pending Acquisition of PNA Group Holding Corporation
On June 16, 2008 we entered into an agreement with PNA Group Holding Corporation, a Delaware corporation (“PNA”) and its stockholders, Platinum Equity Capital Partners, L.P. and certain of its affiliates, to acquire the outstanding capital stock of PNA. The estimated purchase price of the acquisition is based on a price of $315.0 million, subject to adjustment, for all of the outstanding shares of PNA and the repayment or refinancing by Reliance of PNA’s outstanding debt of up to $750.0 million. The acquisition is subject to obtaining applicable regulatory approvals and certain other conditions precedent to closing.
PNA Group Holding’s operating subsidiaries include Delta Steel, LP, Feralloy Corporation, Infra-Metals Co., Metals Supply Company, Ltd., Precision Flamecutting and Steel, LP and Sugar Steel Corporation. Through these operating subsidiaries, PNA Group Holding processes and distributes principally carbon steel plate, bar, structural and flat-rolled products. PNA Group Holding has 23 steel service centers throughout the United States and participates in five joint ventures operating seven service centers in the United States and Mexico. PNA Group Holding’s revenues were about $1.63 billion for the twelve months ended December 31, 2007 and about $474 million for the quarter ended March 31, 2008.
On July 17, 2008, we announced a proposed equity offering to issue 6.75 million shares of its common stock in a firm commitment public offering, plus up to 1.0 million additional shares that may be issued upon exercise of the underwriters’ over-allotment option. If this offering is completed, we expect to use the net proceeds from this offering, together with funds drawn under our existing revolving credit facility and borrowings under a proposed $250.0 million unsecured senior term loan facility, to fund the purchase of PNA as well as the related repayment or refinancing of PNA’s outstanding indebtedness. Also, in connection with the proposed repayment or refinancing of the PNA indebtedness, on July 1, 2008, we tendered for the $250.0 million aggregate principal amount 10 3 / 4 % Senior Notes due 2016 (“Fixed Rate Notes”) issued by PNA Group, Inc., a subsidiary of PNA Intermediate Holding Corporation, and the $170.0 million aggregate principal amount Senior Floating Rate Toggle Notes due 2013 (“Floating Rate Notes”) issued by PNA Intermediate Holding Corporation, a subsidiary of PNA. The tender offers are subject to the closing of the acquisition of PNA. As of July 15, 2008, all of the Fixed Rate Notes and Floating Rate Notes were validly tendered and not withdrawn pursuant to the tender offer therefore. If we acquire PNA in accordance with our agreement, we may retire both the Fixed Rate Notes and the Floating Rate Notes and expect to pay related tender offer and consent solicitation premium payments of approximately $54.8 million, together with the aggregate principal amount of $420.0 million plus accrued and unpaid interest. These additional tender offer and consent solicitation premium payments result in a total transaction value for the acquisition of PNA of approximately $1.12 billion, inclusive of all other estimated direct acquisition costs. There is no assurance that these transactions will successfully close.
2008 Acquisition
Acquisition of Dynamic Metals International LLC
Effective April 1, 2008, through our subsidiary Service Steel Aerospace Corp., we acquired the business of Dynamic Metals International LLC (“Dynamic”) based in Bristol, Connecticut. Dynamic was founded in 1999 and is a specialty metal distributor. Dynamic currently operates as a subsidiary of Service Steel Aerospace Corp. headquartered in Tacoma, Washington, our wholly-owned subsidiary. This strategic acquisition expands Reliance’s existing Service Steel Aerospace specialty product offerings in the Northeastern area of the U.S. The all cash purchase price was funded with borrowings on our revolving credit facility. Dynamic’s net sales for the three months ended June 30, 2008 were approximately $2.8 million.
2007 Acquisitions
Acquisition of Metalweb plc
Effective October 1, 2007, we acquired all of the outstanding capital stock of Metalweb plc (“Metalweb”), a metals service center company headquartered in Birmingham, England. Metalweb, established in 2001, specializes in the processing and distribution of primarily aluminum products for non-structural aerospace components and general engineering parts and has three additional service centers located in London, Manchester and Oxford, England. Metalweb’s net sales for the three months ended December 31, 2007 were approximately $12 million. Metalweb has been re-registered as Metalweb Limited.
Acquisition of Clayton Metals, Inc.
On July 1, 2007, we acquired all of the outstanding capital stock of Clayton Metals, Inc. (“Clayton Metals”), headquartered in Wood Dale, Illinois. Clayton Metals, founded in 1976, specializes primarily in the processing and distribution of aluminum, stainless steel and red metal flat-rolled products, custom extrusions and aluminum circles through its metals service center locations in Wood Dale, Illinois; Cerritos, California; High Point, North Carolina; and Parsippany, New Jersey. Clayton Metals’ net sales for the six months ended December 31, 2007 were approximately $54 million.
Acquisition of Encore Group
As of February 1, 2007, we acquired the net assets and business of the Encore Group of metals service center companies (Encore Metals, Encore Metals (USA), Inc., Encore Coils, and Team Tube in Canada) headquartered in Edmonton, Alberta, Canada. Encore was organized in 2004 in connection with the buyout by management and a private equity fund of certain former Corus CIC and Corus America businesses. Encore specializes in the processing and distribution of alloy and carbon steel bar and tube, as well as stainless steel sheet, plate and bar, through its currently 13 facilities located mainly in Western Canada. The net sales of the Encore Group for the eleven months ended December 31, 2007 were approximately $208 million. Effective January 1, 2008, we sold certain assets and the business of the Encore Coils division for total proceeds of approximately $16.1 million. The net sales of Encore Coils during the year ended December 31, 2007 were approximately $37 million. We retained one of the Encore Coils operations that is now performing toll processing services. Costs related to the sale and the resulting loss from the sale were not material.
Acquisition of Crest Steel Corporation
On January 2, 2007, we purchased all of the outstanding capital stock of Crest Steel Corporation (“Crest”), a metals service center company headquartered in Carson, California with facilities in Riverside, California and Phoenix, Arizona. Crest was founded in 1963 and specializes in the processing and distribution of carbon steel products including flat-rolled, plate, bars and structurals. Crest’s net sales for the year ended December 31, 2007 were approximately $126 million.

Acquisition of Industrial Metals and Surplus, Inc.
Also on January 2, 2007, our wholly-owned subsidiary, Siskin Steel & Supply Company, Inc. (“Siskin”), purchased the outstanding capital stock of Industrial Metals and Surplus, Inc. (“Industrial Metals”), a metals service center company headquartered in Atlanta, Georgia and a related company, Athens Steel, Inc. (“Athens Steel”), located in Athens, Georgia. Industrial Metals was founded in 1978 and specializes in the processing and distribution of carbon steel structurals, flat-rolled and ornamental iron products. We expect to combine Siskin’s Georgia Steel Supply Company division located in Atlanta with the Industrial Metals operations. Net sales for Industrial Metals (including Athens Steel) for the year ended December 31, 2007 were approximately $115 million. Industrial Metals and Athens Steel now operate as divisions of Siskin.
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
In the three months ended June 30, 2008, our consolidated net sales increased 10.5% to a record $2.10 billion compared to $1.90 billion for the three months ended June 30, 2007. This includes a 2.2% decrease in tons sold and a 13.2% increase in our average selling price per ton sold. Same-store sales, which exclude the sales of our 2008 and 2007 acquisitions, were $1.93 billion in the 2008 second quarter, up 9.2% from the 2007 second quarter, with a 0.7% decrease in our tons sold and a 10.2% increase in our average selling price per ton sold. (Tons sold and average selling price per ton sold amounts exclude the sales of Precision Strip because of the “toll processing” nature of its business.)
The increase in our average selling price per ton sold is due mainly to the significant increases in carbon steel prices that were effective in the 2008 second quarter. Also, further price increases have been announced for the 2008 third quarter. Although demand has continued at what we consider to be at reasonable levels in the 2008 second quarter, demand levels have somewhat declined from the 2007 second quarter levels.
Total gross profit increased 18.0% to $586.9 million for the 2008 second quarter compared to $497.5 million in the 2007 second quarter. Our gross profit as a percentage of sales in the 2008 first quarter was 28.0% compared to 26.2% in the 2007 second quarter. The improvement in our 2008 gross profit margins is mainly due to the carbon steel price increases effective in the 2008 second quarter. Typically, when our suppliers announce price increases, we pass these increases through to our customers at that time, before we receive the higher cost metal into our inventory. This results in a temporary improvement in our gross profit margins. Because the significant and rapid carbon steel mill price increases in the 2008 second quarter were, for the most part, accepted by our customers, we were able to significantly increase our gross profit margins. As mill pricing levels off in the future, we expect our gross profit margin to compress somewhat as our costs in inventory will have “caught up” with our selling prices.
In the 2008 second quarter our LIFO reserve adjustment resulted in expense of $40.0 million (before tax), or $0.34 earnings per diluted share (after tax). In the 2007 second quarter our LIFO reserve adjustment resulted in expense of $13.75 million (before tax), or $0.11 earnings per diluted share (after tax). The expense (or income) from our LIFO reserve adjustments is included in cost of sales. We have revised our estimate of our 2008 year-end LIFO reserve increase to $115.0 million from $70.0 million in the 2008 first quarter based upon the carbon steel price increases announced through September 2008. We also anticipate some further increases in aluminum prices in 2008 due to recent (July 2008) aluminum price increases at the London Metal Exchange.
Our 2008 second quarter warehouse, delivery, selling, general and administrative (S,G&A) expenses increased $33.0 million, or 12.5%, from the 2007 second quarter and were 14.2% as a percentage of sales, up from 14.0% in the 2007 second quarter. The higher expenses were mainly due to increased costs for energy and fuel, and higher incentive pay due to our improved operating performance.
Depreciation expense for the 2008 second quarter was $18.4 million compared to $16.5 million in the 2007 second quarter. The increase was mostly due to the additional depreciation expense from our 2007 acquisitions along with depreciation on new assets placed in service throughout the second half of 2007 and so far in 2008. Amortization expense increased $0.3 million in the 2008 second quarter primarily due to the additional amortization expense from our 2007 acquisitions.

Our 2008 second quarter operating income was $267.9 million, resulting in an operating income margin of 12.8%, compared to $213.7 million, or an 11.3% operating income margin in the same period of 2007. Our operating income improved because of our higher gross profit margins achieved in the 2008 second quarter.
Interest expense for the 2008 second quarter decreased $3.5 million, or 17.6%, mainly due to lower borrowing rates and lower outstanding balances.
Net income for the 2008 second quarter increased $33.8 million, or 27.5%, also due to our higher gross profit margins achieved in the 2008 second quarter somewhat offset by higher operating expenses. Our effective tax rate in the 2008 second quarter of 37.7% was relatively consistent with our 2007 second quarter rate of 37.5%.

CONF CALL

David H. Hannah - Chairman of the Board and Chief Executive Officer

Thank you. Good morning and thank you all for taking the time to listen to our conference call for the second quarter and six months ended, June 30th of 2008. Gregg Mollins, our President and Chief Operating Officer and Karla Lewis, our Executive VP and CFO are also here with me today.

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 31st, 2007 and other reports on file with the Securities and Exchange Commission. A transcript of this conference call, including Regulation G reconciliation will be posted on our web site at www.rsac.com/investorinformation.

Okay, for the 2008 second quarter, our net income was a record $156.6 million, that's up 27.5% compared with net income of $122.8 million for the 2007 second quarter, and it's up 45.8% from $107.4 million for the 2008 first quarter. Earnings per diluted share were also a record at $2.12 compared to $1.59 for the 2007 second quarter and $1.46 for the 2008 first quarter.

2008 second quarter sales were a record $2.1 billion, an increase of 10.5% compared with 2007 second quarter sales of $1.9 billion, and up 9.8% from our 2008 first quarter.

For the first six months ended June 30, 2008, net income amounted to a record $264 million, up 12.6% compared with net income of $234.5 million for the same period in 2007. Earnings per diluted share were a record $3.58 compared with earnings of $3.06 per diluted share for the six months ended June 30, 2007.

Sales for the 2008 year-to-date period were a record $4.0 billion, an increase of 7.1% compared with 2007 six-month sales of $3.74 billion. For the 2008 second quarter, our volume decreased 2.2% and average prices increased 13.2% compared to the 2007 second quarter. Our volume was down about 1.1% and average pricing was up 11.2% compared to the 2008 first quarter. For the 2008 second quarter, carbon steel products were 51% of our revenue dollars, aluminum was 17%, stainless was 16%, alloy 9%, toll processing 2% and the remaining 5% was miscellaneous including titanium, copper and brass.

The second quarter turned out to be quite a bit better than we had originally anticipated, which resulted in our updated guidance on June 24th. The main reason for the increased earnings was the higher carbon steel prices, which resulted in higher gross profit margins as we quickly passed through the increases to our customers. While we expected carbon steel pricing to continue upwards during the second quarter, the increases were larger than we had anticipated.

Additionally, these higher-than-expected prices led us to adjust our LIFO expense estimate for the year from $70 million at the end of the first quarter to $115 million currently, resulting in a pre-tax LIFO expense of $40 million or $0.34 per diluted share in the second quarter.

Our gross profit margin as reported on a LIFO basis, increased to 28% in the 2008 second quarter from 25.8% in the 2008 first quarter. On a FIFO basis, our gross profit margins were 29.9%, up from 26.7% in the 2008 first quarter. Once again, our managers and our sales personnel did an outstanding job managing our margins. Demand in the second quarter was about even with the first quarter as evidenced by our tons sold decrease of only about 1%, which was in line with our expectations.

We continue to manage our working capital well with receivables in good shape and inventory still representing between 2.6 and 2.7 months on hand. Our net debt to total capital was 32% at the end of the quarter.

Now looking at the third quarter, we expect pricing to be slightly above second quarter levels. While we do not expect any unusual changes in demand, we do expect the normal seasonal softness compared to the 2008 second quarter, and we recognize there is still a good deal of uncertainty surrounding the overall economic activity. We therefore are anticipating our volume to decrease slightly and our gross profit margins to be a bit lower because the rate of carbon steel price increases will be below that of the 2008, second quarter.

As a result, we currently estimate earnings per diluted share for the 2008 third quarter to be in a range of $1.80 to $1.90. Now this guidance does not include the impact of the acquisition of PNA or any of the related financing activities. We expect the PNA acquisition and the related financing activities to close in early August and to be accretive to our third quarter earnings.

During the quarter, we are very excited to announce that we have reached an agreement to acquire PNA Group Holding Corporation, a leading steel service center group. PNA is an outstanding company that fits well with the Reliance family and our strategic goals for product, geographic and customer diversification. We have known and respected the management teams at the PNA operations for many years and we are looking forward to the opportunities that this combination present.

The transaction is valued at approximately $1.1 billion, comprised of about $315 million for PNA’s equity plus up to $750 million of debt. PNA processes and distributes primarily carbon steel plate, bar, structural and flat-rolled products. 2007 and first quarter 2008 revenues for PNA were about $1.6 billion and $474 million, respectively. PNA has 23 steel service centers throughout the United States, as well as five joint ventures that operate a total of seven service centers in the U.S. and Mexico. The major markets served by PNA include infrastructure, non-residential construction, machinery and equipment manufacturing, oil and gas, telecom and utility.

We plan to finance the transaction, including the repayment of PNA's existing debt through a combination of borrowings under our existing credit facility and by raising approximately $750 million through new bank debts and the proceeds from an equity financing that we announced this morning. All of the outstanding PNA notes were validly tendered and we expect them to be retired subject to the closing of the PNA acquisition.

On April 16th of 2008, our Board of Directors declared a regular quarterly cash dividend of $0.10 per share of common stock. The 2008 second quarter dividend was paid, June 23rd, to shareholders of record, June 2. The Company has paid regular quarterly dividend for 47 consecutive years. Once again, we are proud of our performance, and our leadership position in the industry, and believe that our proven ability is robust internally and by successful accretive acquisition on a consistent basis and through varying market conditions will result in continued strong operating results going forward.

I'll now turn the floor over to Gregg for some additional comments on our operations and market conditions. Thank you. Gregg?

Gregg J. Mollins - President and Chief Operating Officer

Thank you, Dave. Good morning. We are very pleased with our record sales and profits in the second quarter. Once again, our managers did an outstanding job passing through historically high price increases to our customers and expanding our margins. We improved our gross profit margins to 28% in the quarter, up from 25.8% in the first quarter. This is by no means an easy task. With our focus on outstanding customer service, our breadth of inventory, along with the disciplined approach to managing our gross profit, we were able to accomplish this improvement in margin.

Our inventory turn was consistent with the first quarter. As always, we will keep a close eye on our inventory and make concerted efforts to improve our turns. From a demand standpoint, our same-store tons sold in the first half of 2008 compared to the first half of 2007, fell 1%.

The MSCI reported member volumes down 3.8% for the first half of 2008 versus 2007. This supports our belief that you can increase margins and market share simultaneously through outstanding customer service. We still see strength in many of the key markets and industries we supported. These include aerospace, energy, electronics, wind towers, barge and shipbuilding, railcar, agricultural equipment, non-residential construction, infrastructure and heavy equipment. The three industries that continue to struggle are domestic auto, residential construction, and appliance. Fortunately, we do very little business in these industries.

The most significant change in the quarter and the year thus far has been the increase in our cost of goods. It looks like carbon steel prices will continue to increase in the third quarter, with price increases already announced for August and September. Skyrocketing raw material costs, the weak dollar, low imports, low service and inventories, and high energy and freight rates are all impacting the price of steel. Carbon plate, as an example, was at $820 a ton in January and will be just shy of $1,500 a ton in August, an increase of almost 80%. Every time we believe the price is in peak, they go up again. The important thing is passing these increases through to our customers, which we have done.

As for aluminum, Midwest spot ingot is up $0.36 a pound versus January and roughly $1.5 [ph] a pound. Demand for commercial grade aluminum is relatively flat at reasonable levels. Aerospace for us, in spite of the delays of the 787, is still quite strong. Stainless demand is off from a year ago and nickel surcharges are trending down. Our inventory is in good shape in expectation of further reductions in surcharges and/or base price.

To summarize, demand in most of the major industries we support is still pretty good. Pricing, particularly in carbon steel, is at record levels with signs of further increases. We will continue to focus our attention on superior customer service, managing our gross profit margins, and turning our inventory. We look forward to another good year at Reliance.

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

Karla R. Lewis - Executive Vice President and Chief Financial Officer

Thanks, Gregg. Good morning. Our 2008, second quarter consolidated sales were a record at $2.1 billion as were our 2008 six month consolidated sales of $4 billion. Our 2008 six month sales included 1.5% decrease in tons sold and a 9% increase in our average selling price per ton sold compared to the first half of 2007. And please note that our tons sold and average selling price amount excludes the sales of Precision Strip because of the toll processing nature of the business.

For the 2008 six month period, same-store sales, which exclude the sale of our 2007 and 2008 acquisitions were $3.7 billion, up 4.9% from the 2007’s first half, with a 1% decrease in our tons sold and a 6.3% increase in our average selling price per tons sold. As the numbers indicate, we believe the demand is still at reasonable levels for the markets that we sell to. Our average selling price increased mainly because of the significant price increases the carbon steel products experienced in the 2008 second quarter.

Our 2008 second quarter gross profit was a record $586.9 million, up 18% from the 2007 second quarter. For the six month period, our gross profit margin was 27.0% in 2008, up from 25.9% in 2007. The improvement in our 2008 gross profit margin is mainly due to the carbon steel price increases, effective mostly in the 2008 second quarter. Typically, when our suppliers announce price increases, we push these increases through to our customers at that time, before we receive the higher cost of metal [ph] into our inventory. This results in a temporary improvement in our gross profit margins. Because the significant and rapid carbon steel mill price increases in the 2008 second quarter were, for the most part, accepted by our customers, we were able to significantly increase our gross profit margins.

As the mill pricing level is off in the future, we expect our gross profit margin spread to compress somewhat, as our cost and inventory will have caught up with our selling prices. Our 2007 second quarter LIFO expense was $40 million or $0.34 per diluted share compared to $13.75 million or $0.11 per diluted share in the 2007 second quarter. In the 2008 six months period, we reported LIFO expense of $57.5 million or $0.49 earnings per diluted share, up from our 2007 six months LIFO expense of $32.5 million or $0.26 earnings per diluted share.

The 2008 LIFO expense is due to our increased costs for carbon steel products in 2008 as compared to 2007 levels. We have increased our full-year LIFO expense estimate to $115 million [ph], based upon the carbon steel price increases announced through August, along with additional increases now expected for certain carbon steel products announced just last week, and after our revised second quarter guidance was issued. We also anticipate further increases in aluminum prices in 2008, due to recent LME aluminum price increases. And our LIFO expense is included in our cost of sales.

Our warehouse delivery, selling, general, and administrative expenses have increased 11.4% in the first half of 2008 compared to 2007, due to the expenses of our 2007 and 2008 acquisitions, increased cost for energy and fuel, and higher incentives paid, due to our improved operating performance. As a percent of sales, our 2008 second quarter expenses were 14.2% compared to 14.0% in the 2007 second quarter, and 14.5% in the 2008 first half compared to 13.9% in the 2007 first half.

Our 2008 six month depreciation and amortization expense increased $5.1 million over 2007, and includes the depreciation from our 2007 and 2008 acquisitions and from our capital expenditures made since June of 2007.

Operating income for the 2008 second quarter was $267.9 million or 12.8% compared to $213.7 million or 11.3% in 2007's second quarter. Our operating income improved because of our higher gross profit margins achieved in 2008. Interest expense for the 2008 six months, decreased $7 million or 17.5% due to both lower interest rates in 2008 and lower average borrowings during 2008 as compared to 2007.

Our effective income tax rate for the 2008 period was 37.7% compared to 37.5% in the 2007 period, and our annual 2007 rate was 37.6%. Our working capital needs increased significantly in the 2008 second quarter because of the significant increases in carbon steel prices. Net of acquisitions, our accounts receivable balance increased $257.2 million, and our inventory levels increased $205 million at June 30th, 2008, from our year-end 2007 amounts.

Our accounts receivable day sales outstanding rate was approximately 40 days for the 2008 first half, consistent with our 2007 rate. Although we have not seen a deterioration in our customers' payment pattern, as might be expected because of their increased working capital needs and general economic uncertainty, many of our customers are requesting increased credit limits and payment term, and we continue to closely monitor our customer exposure.

Our inventory turn rate was 4.5 times for the 2008 first half compared to 4.4 turns for 2007. And our high earnings levels offset by our increased working capital needs provided cash flow from operation of $21.2 million in the 2008 second quarter and $128.4 million in the 2008 first half. Our outstanding debt at June 30th, 2008 was $1.16 billion, which included $292 million borrowed on our $1.1 billion revolving line of credit, and our net debt to total capital ratio was 32.0% at June 30th, 2008, down from our year-end 2007 rate of 32.4%.

In 2008 first half, we used our borrowings and cash flow to fund our increased working capital needs. Capital expenditures were approximately $88.3 million, and acquisition for approximately $13.3 million, and stock repurchases of approximately $114.8 million. In the 2008 first quarter and the 2007 third quarter, we repurchased shares of our common stock, resulting in approximately 4% fewer shares outstanding in the 2008 first half compared to 2007 first half. Book value per share was $30.93 per share at June 30th, 2008, up from $28.12 per share at December 31st, 2007.

And we expect to fund approximately $1.1 billion purchase of PNA Group Holding Corporation with the proceeds from our proposed equity financing of approximately $250 million from a new term loan. We'll fund the remaining balance with borrowings under our existing credit facility. The $1.1 billion transaction value with the purchase of PNA includes the repayment or refinancing of up to $750 million of their outstanding debt at the closing. This includes their secured credit facility, as well as $250 million of 10.75% outstanding fixed rate notes, and $170 million of outstanding floating rate notes.

We initiated tender offers and consent solicitations for both of these series of notes, and 100% of the notes were tendered as of the expiration of our consent period on July 15th. The settlement date for the tendered notes is August 4th, 2008. Although we paid a premium for the tender of the fixed rate notes, we expect to save approximately $13 million compared to the make-whole premium amount, and expect to realize savings by lower borrowing costs immediately for the $420 million of PNA notes that have been tendered.

Earlier today, we filed with the SEC, Form 8-K that includes certain financial statements of the PNA, and pro forma financial information reflecting the PNA acquisition and related financing activities for the respective periods included in the filing. We also filed a Form S-3 Registration Statement related to the proposed equity financing.

Thank you. And we'll now open the discussion for questions.

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