Reliance, Inc. (RS) Earnings Call Transcript & Summary

All right. Hi, I'm Karla Lewis. I'm the Chief Financial Officer at Reliance Steel & Aluminum Co. Jim Hoffman, our Chief Executive Officer and President, is also here. So we thank all of you for joining us here this afternoon, and we'd like to tell you a little bit about Reliance Steel & Aluminum. And at the outset, we'd like to highlight our safe harbor statement. The information that we're going to share with you today will be webcast live on the Investors portion of our website at investor.rsac.com and is subject to Regulation FD. I also need to point out that we will release our fourth quarter and full year 2019 results next week. So today, we will be referencing more dated amounts that have been previously disclosed. And we're going to kick things off with our corporate video that showcases Reliance, focusing on our culture, operations and processing capabilities. Please enjoy. [Presentation]

As you just saw, Reliance has a long history of being service-oriented, high quality, diverse and industry-leading, and we're very excited to share our story with you today. Reliance is a leading diversified metal solutions provider in North America. The company was founded in 1939 as a small mom-and-pop job shop in Los Angeles. We celebrated our 80th year in business in 2019. And from our humble beginnings, we've grown to over 300 locations in 40 states and 13 countries outside the U.S. Reliance provides value-added metals processing services and distributes a full line of over 100,000 metal products to more than 125,000 customers in a broad range of industries. In 2018, we reached record annual net sales of $11.5 billion and record non-GAAP diluted earnings per share of $8.94, an improvement of 64.3% over 2017. Reliance went public in -- at $14.50 per share or $3.22 on a split-adjusted basis on September 14, 1994. 25 years and 3 stock splits later, we closed at a record high of $121.50 per share on January 17, resulting in a compound annual total return of approximately 16.4% over this 25-year period. Reliance has been profitable in every 1 of its 80 years, except for 1 year back in the 1970s. Our track record proves that our business model is resilient and that we can be profitable and maintain stable operating results throughout economic cycles. Because we cannot control external factors, such as end market demand and global metals pricing, we focus on the areas that we can control, which has produced positive earnings per share every year since our 1994 IPO, even during recessionary times. Two of our most important operating metrics are gross profit margin and inventory management, which we believe directly influence each other. Our working capital needs are often impacted by those external factors that we can't control that I just mentioned: overall end demand and metals pricing. However, our business model enables strong cash flow generation that is countercyclical throughout economic cycles. Even in times of reduced earnings, we can often generate strong cash flow as we reduce our working capital. This is important as our cash flow from operations is the primary source of capital we use to fund our growth activities and our long-standing history of stockholder returns. Our strong cash generation enables us to invest in our growth, both organically and through acquisitions. Over the last 5 years, we've made CapEx investments totaling $919 million. Our capital budget for 2019 was a record $260 million, of which over 50% was allocated to growth activities. We believe these investments present opportunities to deliver strong ROI and are typically related to new equipment and new facility construction or expansion based on where we are seeing the most attractive growth opportunities. We've also invested $673 million in acquisitions over the last 5 years. Having completed 67 acquisitions since our 1994 IPO, M&A has been, and remains, a core element of our growth and diversification strategy. While our acquisitions to date have remained close to our metal -- our core metal service center business, we have begun to invest in more downstream fabricators and machine shops in recent years where we do not see significant customer conflicts. We're also interested in exploring opportunities in adjacent industries with a key interest in 3D printing and other related businesses. Our strong cash generation also supports our long-standing commitment to stockholder returns. We paid regular quarterly cash dividends for 60 consecutive years, and we've increased our dividend 26 times since our 1994 IPO. We've also repurchased $915 million worth of our common stock over the last 5 years as part of our opportunistic stock repurchase strategy. Our strong financial profile enables us to execute on all of our capital allocation priorities, whether it be investing for organic growth, acquisitions, paying out dividends or repurchasing shares of our common stock. And I'd like to turn it over to Jim now to take over.

Thank you, Karla. Right now, I'd like to talk a little bit about what sets Reliance apart from other metal service centers. First of all, we are highly diversified in terms of our products, customers and geography. This diversification was deliberate in order to lessen our -- the impact of cyclicality in our earnings and cash flows. Early on, Reliance's focus on specialty service centers that provided the highest levels of customer service in local markets resulted us in maintaining a decentralized operating structure with the decision-making and resources close to our customers who value local relationships. Our emphasis on providing when-needed inventory management, value-added processing and small-order sizes to our customers supports our model of focusing on higher-margin business as opposed to a large-volume business. Our decentralized structure places the right processing equipment in the right place, and we operate our own delivery fleets, which we think gives us a competitive advantage. The founders of Reliance believe strongly in maintaining an entrepreneurial environment which we continue to foster. Our managers in the field have significant authority to run their business on a day-to-day basis and are compensated in a manner to drive consistent, strong execution, in line with our overall objectives. Our managers in the field are responsible for pricing discipline, inventory management and expense control. We have made significant investments in new, state-of-the-art equipment for our operations and they have learned to sell the value they provide to the customers to provide a fair return on those investments. We also have minimum contractual sales. We do not speculate, hedge or buy large quantities of import material. We conduct our business predominantly on a spot basis on both the buy and the sell side, meaning we buy what we need, when we need it. The buy-and-sell decisions are made at the local level where our managers in the field have real-time visibility into our customers' needs. This helps us as efficiently manage working capital and mitigate the impact of volatile metals pricing on our financial results. And finally, through our focus on organic growth, we continued to make significant investments in our business primarily through advanced, state-of-the-art, value-added processing equipment to better service our customers and increase our gross profit margins, resulting in higher earnings levels. Our net sales are well-balanced across North America, which helps lessen the impact of cyclical market conditions in any one region. Our international expansion strategy is largely a reflection of our global customers' request for us to open facilities in other parts of the world, so it's a customer demand-driven. Currently, international sales represents approximately 8% of our total net sales. Our product diversification is very important to us and is key to reducing the volatility of our financial results. No one product dominates our mix. We try to balance sales across the major metals commodities with an emphasis on specialty products. Carbon steel currently represents about 52% of our sales dollars, and we also have a substantial presence in aluminum, stainless and other alloys. Our product diversification leads customers and end users industrial diversification and is a large factor in our consistent performance. At Reliance, customer service and quality are the cornerstones of our success. We operate in a decentralized structure, putting the decision-making and resources close to our customers to enable quick turnaround, high-quality service that save our customers significant time, labor and expense. Our customers value our local relationships with our service centers with more than 97% of our net sales to repeat customers. Our average order size is small at approximately $2,000 per order. Quick turnaround deliveries are difficult, but over 40% of our total orders are delivered within 24 hours of our customers placing the order. Our customers know they can rely on Reliance, and they continue to ask us to do more in different services for them. We remain committed to investing in innovation, machinery and technology so we can keep doing more for our customers. In 2018, we performed value-added processing on 49% of our orders, which is up significantly from our more historic levels of about 40%. We believe our performance-based compensation structure contribute to our strong, consistent and growing financial results. In particular, we think they also approximately -- they motivate our people to support our consistent and growing gross profit margins and increased earnings. This slide shows our historic gross profit margin range of 25% to 27%. Our current estimated sustainable range is 27% to 29%. We believe the significant factor in this is the strength of our people and the talent that we have throughout our organization. People who like to work in an entrepreneurial environment are typically very competitive. To use this competitiveness in a positive way, we hold 2 meetings a year, where we bring all of the leadership together from all of our subsidiary companies which we like to refer to as the FOC, or Family of Companies. We bring them together to discuss best practices and other relevant topics. As a part of the meeting, we rank the FOC key performance indicators and discuss ways to improve the rankings. With an abundant talent and resources we have throughout our company, these meetings provide excellent opportunities for our leaders to network and learn from one another. They build strong relationships over time and push this down throughout their organization, sending different groups of their teams to meet with others to learn from one another. Our persistent focus on maximizing gross profit margins through providing the highest level of customer service differentiates us from other metal companies. This chart illustrates Reliance's gross profit margin, in green, consistently exceeding other service center groups in yellow. We are also showing the mills, the producers, in red, as we are often grouped with metals producers from an investment standpoint because there are not very many publicly traded metal service centers to compare us to. However, as you can see from this slide, our gross profit margin is both much higher and more consistent than other service centers and these mill groups. We have begun to compare ourselves to the industrial distribution peer group, in blue, as many characteristics of our business are similar. We believe our model of diversification, small order sizes, growing value-added processing and focusing on providing value and service to our customers is key to our stronger gross profit margins and that all of these factors have combined to make our earnings more resilient to fluctuations in metal pricing and therefore should support a higher valuation multiple than any other metals group. We believe Reliance, RS, should trade more in line with industrial distributor group. Now I'd like to talk about something that's near and dear to our hearts. I'd like to conclude today talking about safety and making it personal. Moving steels safely is not an easy task. We take the health and safety of our employees, customers, suppliers and communities very serious. Our executive team supports a company-wide safety program that requires adherence through policies, standard practices and goals at each of our facilities. We have a team of safety professionals that monitor compliance with regulatory requirements and safety best practices. This team also conducts regular safety assessments and training to continuously improve our safety practices within the operations and for our drivers who travel on public roads. Since safety is one of the most important priorities, we remain strongly committed to reducing the rate of injuries. As a result of our consistent focus on safety, we saw a 6% year-over-year improvement in our incident rate in 2018, and our fleet accident rate has averaged approximately 0.75 over the last 3 years, significantly better than the national benchmark of 1.50. However, we will not stop until these rates go to 0. That is why we implemented a company-wide, peer-to-peer smart safety program back in 2017 with a focus on one family, one culture of SMART Safety. And in 2020, we want all of our 15,000-plus employees to make it personal. When it comes to safety, Reliance has only one uncompromising culture. I'd like to thank you for joining us today. Thanks for listening to our story. We're quite proud of it. Like Karla said, our earnings are coming out next week, so we can't answer a lot of the questions you may have, but we'll answer any questions that you would like to ask. Okay. Thank you very much for your time. We even have a retired Board member joining us today. So Doug, thank you for joining us.