Reliance Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Reliance Steel and Aluminum Corp. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce you to your host, Kim Orlando with Addo Investor Relations. Thank you, Kim. You may begin.

Speaker 1

Thank you, operator. Good morning, and thanks to all of you for joining our conference to discuss Reliance's Q3 2023 Financial Results. I am joined by Carla Lewis, President and Chief Executive Officer Steve Cook, Executive Vice President and Chief Operating Officer and Arthur Ojemian, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor. Rsac.com.

Speaker 1

Please read the forward looking statement disclosures included in our earnings release issued this morning and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non GAAP reconciliation part of our earnings release. I will now turn the call over to Carla Lewis, President and CEO of Reliance.

Speaker 2

Good morning, everyone, and thank you for joining us today to discuss our Q3 2023 results. Reliance's business model is designed to provide resilient performance throughout economic cycles, including both pricing and end market demand fluctuations present in the metals industry. The unique facets of our business model highlighted by strong pricing and inventory management discipline, A highly diversified product mix that is sold into various end markets and geographies, small order sizes, quick delivery, Value added processing and increasing collaboration across our family of companies collectively support our ability to deliver consistent profitable results and generate cash flow. I'd like to commend the entire Reliance team for successfully executing our strategy during challenging times and delivering another quarter of solid financial performance. Our overall financial performance in the Q3 was in line with our expectations.

Speaker 2

While our tons sold were down slightly more than anticipated. We outperformed broader service center industry trends and delivered year over year growth. As expected, our average selling price declined throughout the quarter across virtually all of our major commodity products, but our pricing discipline and industry leading value added processing capabilities provided us with gross margin stability and lessened the impact of falling prices on our gross profit margin. As a result, we delivered non GAAP earnings per share of $5 in line with our guidance. Our profitability coupled with effective working capital management generated strong operating cash flow of $466,000,000 for the quarter.

Speaker 2

Investing in growth remains our top Capital allocation priority with approximately $125,500,000 of capital expenditures. Our capital expenditure budget for the full year 2023 remains unchanged at a record $520,000,000 with approximately 2 thirds directed towards growth projects to advance our value added processing capabilities, upgrade facilities and expand into new markets. Our total 2023 CapEx Cash outlay is expected to be in the range of $450,000,000 to $475,000,000 While we did not complete any acquisitions during the Q3, the pipeline remains robust. We will pursue opportunities that meet our discipline criteria of well managed companies that would be complementary to our diversification strategy and immediately accretive to earnings. Our acquisition strategy is supported by our strong balance sheet and consistent ability to generate cash throughout industry cycles.

Speaker 2

Along with growth, returning value to our stockholders remains a core element of our capital allocation strategy. During the Q3, we returned $185,100,000 to our stockholders through a combination of dividends and share repurchases and we continue to opportunistically repurchase shares in the Q4. Since 2018, we have invested over $2,300,000,000 in organic growth and acquisitions and returned nearly $3,100,000,000 to our stockholders through dividends and share repurchases, far surpassing our metal service center peers. In summary, we are very pleased with and thankful for the ongoing efforts of our entire Reliance team, all of whom expertly execute Reliance's strategy On a day to day basis, operate safely and produce industry leading results through all operating environments. We will continue to leverage our strong balance sheet and significant liquidity to fund profitable growth and return value to our stockholders.

Speaker 2

We are excited about the many growth activities underway and that we anticipate arising under the Infrastructure Bill, the CHIPS Act and the Inflation Reduction Act as well as on shoring and near shoring activities in the markets we serve. Thank you all for your time today. I'll now turn the call over to Steve, who will review our Q3 demand and pricing trends.

Speaker 3

Thanks, Carla, and good morning, everyone. I'd like to echo Carla's comments by thanking the Reliance team for delivering another quarter of profitable results for the continued focus and effort to ensure the safety of our workforce. I'm pleased to report that the 3rd quarter was our strongest safety quarter in all of 2023. I will now turn to our Q3 demand and pricing trends. Our tons sold were up 1.1% from the Q3 of 2022 and are up 3 point 4% on a year to date basis reflecting solid underlying demand in key markets including non res construction, aerospace as well as contributions from our organic growth activities.

Speaker 3

Our year to date 3.4% increase in tons sold outpaces the 1% increase across the broader Service Center Industry. When compared to the Q2 of 2023, our tons sold decreased 4.3% predominantly due to lower carbon flat rolled shipments as Our average selling price per ton sold of $2,552 was down 2.8% from the Q2 of 2023, but in line with our expected range of down 2% to 4%. I will now turn to a high level overview of the trends we saw within our products and key end markets. Carbon Steel Tubing, Plate and Structural, our 3 largest product groups represented about 1 third of our 3rd quarter sales. All of these products experienced higher shipments compared to the Q3 of 2022 and stable or only slight declines in daily shipments compared to the Q2 of 2023.

Speaker 3

We continue to believe new public infrastructure projects under various federal and state programs in addition to industrial reshoring efforts will continue to support non res construction and infrastructure demand in the medium to long term. Aluminum and stainless products represented 31% of our total 3rd quarter sales with aluminum stainless aerospace products comprising approximately 9%. Although, common alloy aluminum and stainless Shipments and pricing declined slightly in the 3rd quarter. Aerospace product demand and pricing remained strong with shipments up significantly year over year. We primarily service the automotive market through our coal processing operations, which as a reminder are not reflected in our tons sold.

Speaker 3

Our tolling business in the Q3 of 2023 was consistent with the Q2 at approximately 4% of our total sales and improved year over year on We did not experience a material impact resulting from the UAW strike during the Q3. We saw a wide range of products in diverse sectors of the general manufacturing market. Shipments declined both sequentially and year over year due in part to both seasonality and a pullback in carbon pot roll demand as prices declined. Sales for the semiconductor industry declined both sequentially and year over year. However, our long term outlook for this market remains positive due to the Chips Act and active reshoring.

Speaker 3

We continue to make investments to increase Reliance's Please refer to our earnings release for additional commentary on our end markets and product diversification. I will now turn the call over to Arthur to review our financial results and outlook.

Speaker 4

Thanks, Steve, and good morning, everyone. Alliance delivered solid performance across all financial metrics this quarter. Our net sales were in line with our expectations, down 6.6% from the 2nd quarter, mainly due to seasonally lower volumes and lower selling prices. Pricing pressure across our major commodity products, in particular, carbon flat rolled, contributed to lower than anticipated tons sold. Despite pricing declines and various macro headwinds, We produced year over year growth in tons sold and gained market share.

Speaker 4

While the pricing declines for most of our products resulted in temporary pressure on our margins as our costs on hand exceeded replacement costs, we nonetheless maintained a solid gross profit margin of 29.7 percent supported by our value added processing capabilities and generated earnings per Share of $4.99 for the quarter. Higher than anticipated declines in carbon steel Prices contributed to revision of our annual LIFO estimate from $120,000,000 of income $240,000,000 of income. As a result, we recorded LIFO income of $45,000,000 in the 3rd quarter. Year to date, our LIFO income totals $105,000,000 Based on our newly updated estimate, we expect $35,000,000 of LIFO income in the 4th quarter. As of the end of this quarter, LIFO reserve of approximately $639,000,000 on our balance sheet remains available to mitigate the impact of possible further in metal prices and benefit future period operating results.

Speaker 4

Moving on to expenses. Our 3rd quarter same store non GAAP SG and A expenses declined by $25,300,000 or 3.9 percent compared to the 2nd quarter due to reduced compensation costs associated with lower FIFO profitability along with lower variable costs associated with fewer tons sold. On a year over year basis, our same store non GAAP SG and A expenses were down 6 $100,000 or 1 percent due to lower incentive based compensation resulting from lower FIFO profitability, partially offset by higher compensation expenses associated with increased headcount and wage inflation. Our 3rd quarter pretax income and margin of $388,000,000 10.7 percent declined from $510,900,000 13.2 percent in the 2nd quarter as a result of the aforementioned Pricing pressures and their impact on our volumes and gross profit margin. Nevertheless, our EPS of $4.99 for $5 on a non GAAP basis was within our guidance.

Speaker 4

Turning to our balance sheet and cash flow. For the 2023 9 month period, our operating cash flow was $1,150,000,000 compared to $1,310,000,000 in the same 9 month period in 2022 as the impact of lower profitability was partially offset by lower working capital needs in 2023. Our inventory turn rate based on tonne came in at 4.7 times or 2.6 months on hand for the 1st 9 months of 2023, matching our company wide goal of 4.7 times and it compared to 4.3 times in the comparable period in 2022. Our healthy inventory turn rate not only contributed to strong cash flow generation, but also helped soften the impact of declining prices on our gross profit margin. As announced in our earnings release, our Board of Directors approved an amendment to our share repurchase plan, Replenishing our repurchase authorization to $1,500,000,000 Our share repurchases in the month of October were $146,700,000 ranking the total purchases under our July 2022 $1,000,000,000 share repurchase authorization to $705,000,000 I'll now turn to our 4th quarter outlook.

Speaker 4

Overall, we expect that underlying end market demand will remain relatively healthy in the Q4 of 2023. We expect 3.5% to 5.5% growth in our tons sold compared to the Q4 of 2022 were a sequential decline of 4% to 6%, consistent with seasonal trends. Although Reliance believes pricing for many products will be near trough levels in the current cycle at some point in the 4th quarter With certain products leveling off or increasing modestly, we expect our average selling price per ton sold for the 4th quarter to be down 4% to 6% compared to the 3rd quarter. We also anticipate continued modest temporary downward pressure on our gross profit margin from these declining metal pricing trends. Based on these expectations, we anticipate non GAAP earnings per diluted share in the range of $3.70 to $3.90 for the Q4 of 2023.

Speaker 4

In closing, we believe we have an industry leading and a proven business model designed to navigate economic cycles and challenges and a strong Balance sheet that collectively give us the confidence to continue pursuing profitable growth and fueling our strong cash flow and capital return activities. That concludes our comments. Thank you for your attention. We'll now open the call up to questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Thank you.

Operator

Our first question is from Martin Engelhurt with Seaport Research. Please proceed with your question.

Speaker 5

Hello. Good morning, everyone.

Speaker 6

Good morning. Good morning.

Speaker 5

I wanted to first touch on SG and A, and you did comment a bit on it in the prepared remarks, $627,000,000 for the quarter, down from $651,000,000 I believe sequentially. Could you briefly touch on your thoughts around SG and A for Q4? Should we expect another step down sequentially here, but kind of still remaining above that $600,000,000 Mark?

Speaker 4

Yes, Martin, good question. It should be consistent with seasonal patterns. So yes, I mean, With fewer tons sold, there should be a little bit of a downward trend, but we're not necessarily putting out a specific guidance on SG and A though.

Speaker 5

Thank you for that. Looking across the different metals product lines here And your comments more broadly within the guidance on modest gross margin pressure quarter on quarter here. Are there any particular products where you feel here's where you're seeing the majority of the Pricing pressure or margin pressure rather?

Speaker 2

Yes. Hi, Martin, it's Carla. That's going to vary A lot based on each of the different products, the markets we're selling into, the amount of value added Processing that we're doing. So generally at a high overall level, when mills are announcing price Increases, we're typically able to get a temporary margin expansion on those products. But when prices are declining And we're selling off our higher cost inventory that's on hand.

Speaker 2

You can see a little compression. So Most products have been declining really for about the last 7 months. We've seen some consistent pricing pressure. So we've been dealing with that for several months, and I think our team has done a great job of being able to manage through that And maintain a very strong gross profit margin, although not at some of the peak levels we had seen recently. And With the current outlook, although there are price increases on certain products announced, There could be more and on some additional products.

Speaker 2

Overall, we're anticipating downward Pressure at least compared to the average from Q3 into Q4, but we do think a lot of our products will see some leveling off. But overall expect some continued pressure.

Speaker 5

Appreciate all the color. If I could one last quick one. And again, you touched on this a little bit in the prepared remarks and no material impact in the tolling business UAW strike, but is this something like there might be just a bit of a delayed impact Or based on what you're seeing through today, kind of similar And kind of the negligible implications on 4Q?

Speaker 2

Yes, Martin. So in our tolling business, About 60% to 65% of our tolling is automotive related. And then a portion of that Is related to the big three where the strike activity is occurring and we've seen very limited impact so far. However, Each time the scope of the strike expands, we could see more impact. So there is some impact Based on there being more locations on strike, in particular, the Ford plant in Kentucky, We will see a bit more impact we anticipate in Q4, but we're very hopeful that the strike will be resolved soon And everyone will be back at work and we'll be back to normal levels.

Speaker 2

But even if there's a broad expansion, it will not be Material to Reliance as a whole in the 4th quarter.

Speaker 6

Okay. All right.

Speaker 5

I appreciate that. Nice job navigating the down market. Thank you.

Speaker 2

Great. Thanks, Martin.

Operator

Thank you. Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Speaker 7

Hey, good morning.

Speaker 4

Good morning. Good morning, Phil. So

Speaker 7

firstly, I wanted clarification on the buyback. I had read it as You had about $1,500,000,000 on a fresh authorization. And then Arthur, I think you made some comment about almost $150,000,000 In October, is that part of that $1,500,000,000 new buyback authorization or Was that is this new one after that one? I'm trying to understand the comments.

Speaker 4

It's Good question, Phil. No, the $150,000,000 in October goes against the previous authorization. The $1,500,000,000 starts fresh that The clock on that starts now.

Speaker 7

Okay, perfect. And secondly, Leased in my model, I had $425,000,000 of cash CapEx for this year. I think at the midpoint, you said about 465. Did some CapEx get pulled into 2023 from 2024 or are you adding new growth in capability Projects?

Speaker 2

Yes, Phil. So we do an annual budget that we approve many, many projects for our many different companies. And that 2023 budget has remained consistent at $520,000,000 However, timing of some of those projects can slip the cash outlay can slip into a different year. We know some of those 5 $20,000,000 projects will extend and some of the cash will go out into 2024. And with the extended lead times we've experienced for equipment, construction, etcetera, over the last couple of years that has More pronounced than historically, we've tried to give you guys a better idea of the cash outlay.

Speaker 2

So, yes, earlier in the year, I think we maybe said $400,000,000 to $450,000,000 we thought would be the cash outlay this year. We've seen some lead times come in a bit for some of the equipment, some of the projects accelerate a bit. And with that, we upped our cash outlay this year to $4.50 to $4.75 Again, it's timing and We're giving you our best estimate at different points in time on the cash outlay.

Speaker 6

Thank you.

Speaker 2

Yes, you're welcome. Thanks.

Operator

Thank you. Our next question comes from Katja Jenik with BMO Capital Markets. Please proceed with your question.

Speaker 6

Hi. Thank you for taking my questions. First, can you talk about what percent of orders right now includes value added processing?

Speaker 4

Hi, Katya. This is Arthur. We don't normally update that disclosure throughout the year. But I mean last time we provided an update, we said it was a little over 50% and we expect to kind of be in that range, But we don't normally put out quarterly updates on that.

Speaker 6

Okay. And is there expectation Would you continuously investing in value added processing equipment that that could grow over the next few years?

Speaker 2

Hi, Katya. Yes, we certainly do anticipate with the investments we're making That will grow. We've been a little over 50%, I think, for the last couple of years. But With certain acquisitions, including an acquisition we made in late 2021 That's more of a wholesale distribution model that does not perform value added processing. That may be slowed a bit the Incremental growth in orders with value added processing, but we certainly That we will continue to grow.

Speaker 2

We continue to see good opportunity from our customers and even from our suppliers on opportunities to do more and more for them and expand our value added processing capabilities. And we're very happy to Invest in those opportunities to help better support our customers.

Speaker 4

And Katya, the only thing I would add So that is our value added processing capabilities provide tremendous amount of stability to our gross profit margins and Especially at times like this when you have consecutive months of declining prices and when you're providing service, you have orders with value added processing. Those you tend to do much better on those than on the straight distribution orders. Just wanted to highlight that.

Speaker 6

Thank you. And then is it fair to assume that CapEx spending will stay elevated over the next few years given that there is a desire to continuously invest in growth?

Speaker 2

Yes, Katya, we're actually in process on our 2024 CapEx budget now and we'll be giving that number In February on our call. But as I just kind of alluded to, we do see continued opportunity from our customers, especially with a lot of the really positive things in the market right now with the different government And the activity we expect there as some of the suppliers expand capacity, we're able to work with them to get some opportunities there. The reshoring, near shoring is real And that all provides increased opportunity for us. And we're fortunate to have our folks Execute the way that they do that we have the strong cash flow and the balance sheet to be able to support our customers and continue to invest. So we don't have a number yet, but we do anticipate a healthy budget next year because of the opportunity we see.

Speaker 6

Okay. If I may one more. Carla, you mentioned the acquisition pipeline is solid. Can you talk a bit more, is there an increase in willingness of these companies to sell? What are the valuations you're seeing?

Speaker 2

Yes. We've seen a flow. I think it's probably Increased a bit more with the more traditional types of service center companies over the last 9 months or so. There were some opportunities that came to market in peak periods That it appears deals did not get completed. So we're seeing a few of those come back around.

Speaker 2

So we're expecting more reasonable expectations in our view on valuation. Reliance, We were very consistent on how we value companies looking at a normalized pretax Income number for the long term going forward and we value from that. We continue to do that and Do believe that we should be closer in expectations with some of those sellers, but not all sellers were We're expecting to be paid off of the peak. The good companies that we acquire have been in this business For a long time, they understand that there are different cycles we go through and look at and understand our approach To the valuation. So we expect to continue to be able to acquire more good companies and we're excited with what we see out there.

Speaker 6

Perfect. Thank you. Thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Cara Lewis for closing comments.

Speaker 2

Great. Thanks again everyone for joining our call today and thank you to our big Reliance family And before we close out the call, I'd like to remind everyone that we'll be in New York City in Mid November presenting at the Goldman Sachs Metals and Mining Conference and we hope to see many of you there. Thank you again to all of you for your continued support of Reliance.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Reliance’s resilient business model and diversified end-market exposure delivered non-GAAP EPS of $5.00 in Q3 despite economic headwinds and volume pressures.
  • Average selling prices declined 2.8% sequentially, but pricing discipline and industry-leading value-added processing maintained a 29.7% gross profit margin.
  • The company generated $466 million in operating cash flow for the quarter and invested $125.5 million in Q3, maintaining a full-year CapEx cash outlay guidance of $450–475 million focused on growth projects.
  • Strong liquidity supported $185.1 million in Q3 shareholder returns via dividends and share repurchases, and the board replenished the buyback authorization to $1.5 billion.
  • Reliance’s acquisition pipeline remains robust for accretive, complementary deals, and Q4 guidance anticipates 3.5–5.5% year-over-year tonnage growth and non-GAAP EPS of $3.70–3.90 amid infrastructure-driven demand.
A.I. generated. May contain errors.
Earnings Conference Call
Reliance Q3 2023
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