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

I think we're ready to get started with our next presenter, Reliance Steel. Reliance is the largest metal service center in North America, over 300 locations in 40 states in the U.S. and 13 countries outside of the U.S. I'm going to take the liberty of saying, well-known for being low capital-intensive, high margin, consistent free cash flow generator. Cash has been used to consolidate, still a fragmented service center industry, which we just heard about. Also pay consistent dividends and buy back shares. I think presenting today, we have both the CFO and the CEO. I'm going to turn it over to the CFO, Karla Lewis.

All right. Good morning, everyone, and thank you for joining us today. At the outset, we would 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. 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]

We hope you enjoyed our video. And if you would like to reference it again, the video is posted on the home page of our newly designed company website, and we're very excited to share our story with you today. Reliance is a leading diversified metal solutions provider in North America. We celebrated our 80th year in business in 2019 and have grown to over 300 locations in 40 states and 13 countries outside of the U.S. In 2019, we achieved annual net sales of $11 billion, which drove record earnings of $10.34 per diluted share, an improvement of 18.2% year-over-year. Reliance went public 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 on January 17, resulting in a compound annual total return of approximately 16.4% over this 24 -- 25-year period. Reliance has been profitable in every 1 of its 80 years, except for 1 year back in the 1970s. Jim? Yes, can you come up?

I'm sorry, Karla is not feeling well. I'm going to have to jump in here. We're on Slide 6. How do you turn them -- you got it? I apologize. I'm not sure if you've read this slide. Now Reliance has been profitable in every 1 of its 80 years, except for the one -- a year back in the '70s. Because we cannot control external factors, such as end-market demand and global metal pricing, we focus on areas that we can control, which has produced positive earnings per share every year since 1994 IPO, even during recessionary periods. In 2019, we achieved a record annual gross profit margin of 30.3% and reduced our inventory by $211.8 million, which helped us generate cash provided by operating activities of $1.3 billion and an all-time high for Reliance. Our business model enables strong cash flow generation that is countercyclical throughout economic cycles. Over the last 5 years, we made CapEx investment totaling $971 million. We believe this investment presents opportunities to deliver strong ROI. We've also invested $642 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 the growth and diversification strategy we have. We've paid regular quarterly cash dividends for 60 consecutive years, and we've increased our dividend 27x since our 1994 IPO. With our most recent increase of 13.6% for the first quarter of 2020, an annual dividend -- our annual dividend is now $2.50 per share. 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 in organic growth, acquisitions, paying out dividends or repurchasing shares of our common stock. So what sets Reliance apart from other metal service centers? First of all, we are highly diversified in terms of our products, customers and geography. Reliance consists of specialty service centers that provide the highest level of customer service in a local market for decentralized operating structure, where the decision-making and resources are kept close to our customer. 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 large-volume businesses. Our decentralized structure places the right processing equipment in the right place, and we operate our own delivery fleet, which gives us a competitive advantage. Our managers in the field are responsible for their own pricing discipline, inventory management and expense control. We also have minimal 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. And finally, through our focus on organic growth, we continue to make significant investment in our business to better service our customers and increase our gross profit margin, resulting in higher earning levels. We serve a diverse end market with this pie chart, and reflecting on our best estimate of -- breakdown of specific end markets, our products are ultimately used in a very difficult track. We estimate that general manufacturing, nonresidential construction and transportation, each represent 1/3 of our revenue dollars. We provide this diversification -- we believe this diversification has been instrumental in our ability to produce industry-leading operating results on a consistent basis through all market cycles. Many of our industries in which our customers participate are cyclical in nature. Aerospace and automotive continued to be our top-performing markets. Nonresidential construction steadily improved throughout 2019 and has continued to gain traction so far in 2020. Demand in the heavy industry market has remained fairly steady, and energy, that being oil and gas, remains under pressure. Our net sales are well balanced across North America, with 9% of our sales in international markets. In addition to end markets, we produced diversification, very important to us and key reducing volatility in financial results. No 1 product dominates our mix. We try to balance our sales and control what we can control. Okay. At Reliance, customer service and quality are the cornerstones of our success. More than 96% of our net sales are through repeat customers. Our average order size is small, approximately $2,090 per order. Over 40% of our total orders are delivered within 24 hours of the customer placing the order. Because our customers continue to ask us to do more and different services for them, we continue to invest in innovative machinery and technology, so we can meet their growing needs. In 2019, we performed value-added processing on 51% of our orders, which is up significantly from our more historical levels of about 40%. This slide shows our historical gross profit range of 25% to 27%, our prior estimated sustainable range of 27% to 29% and our current estimated sustainable range of 28% to 30%, which we introduced last week. We believe the increased level of value-added processing services that we now provide, along with the strength of our people and talent in the field, we have a significant factor behind this increase. We believe our performance-based compensation structure motivates our people and supports our consistent, growing gross profits and increased earnings. This chart illustrates Reliance's gross profit margin in green, consistently exceeding the metal service center's group in yellow. We are also showing the mills in red, as we're often grouped with metals producers from an investment standpoint because group -- because there's not that many publicly traded metal service centers to compare us to. However, as you can see from this slide, our gross profit margin is much higher and more consistent in both service centers and the mill group. We have begun to compare ourselves to the industrial distributor 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 a key to our stronger gross profit margins. All of these factors combined makes our earnings more resilient to fluctuations in metal pricing and, therefore, should support higher valuation multiples than our metals group. We believe RS should trade more in line with the industrial distribution group. Our strong cash flow generation and access to capital provides us with the flexibility to allocate capital across capital expenditures, acquisitions, dividends and share repurchases. As discussed earlier, we are focused on organic growth and acquisition activity to drive our earnings higher, and we believe that these activities represent the best long-term use of our capital. We are also committed to returning capital to our shareholders primarily through regular quarterly dividends, opportunistic repurchases of our shares. We build our CapEx budget from the ground up each year, including a record spend of $242 million in 2019 and even higher in 2020 with a budget of $250 million. This slide highlights the steady increase in percentage of orders with processing perform, which is attributable to our investments in value-added processing equipment. These investments have also increased our gross profit margin in recent years, and we have entered a new higher range, reaching an all-time annual high of 30.3% in 2019. Our acquisition criteria has been consistent over the years, and it remains unchanged. We remain disciplined and opportunistic in our approach. We evaluate each opportunity on its own merit, considering how it will fit with Reliance family of companies and what growth opportunities we can provide. For potential targets, we require a transaction be immediately accretive to earnings and the cash flow must be positive. We look for well-run companies with strong management teams already in place. We are extremely proud of our financial and operational performance in 2019. Our managers in the field did an excellent job at managing price fluctuations, growing our value-added services to our customers, controlling expenses and managing working capital, all of which resulted in record annual gross profit dollars of $3.3 billion, record annual EBITDA of $1.2 billion, record annual pretax income of $929 million, record annual diluted earnings per share of $10.34 and record cash flow from operations of $1.3 billion. I'd like to conclude today's presentation on safety and making it personal. Moving metal is not an easy task. We take the health and safety of our employees, customers, suppliers, communities very seriously. Our executive team supports a company-wide safety program, and we have a team of safety professionals that monitors compliance with regular requirements and encourages safety's best practices across organization. When it comes to safety, Reliance has 1 uncompromising culture. In summary, we believe Reliance is a strong investment, given our diversified products, customers, end markets and geography; decentralized operating structure; the ability to expand the sustained industry-leading gross profit margin; consistent profitability achieved throughout all economic cycles; strong balance sheet and countercyclical cash flow generation, which helps us fuel our growth and long-standing history of stockholder return; and strong set of company-wide core values, including our most important core value of safety. Thank you for your time and attention today. And now I open the floor up for your questions.

Great. Thank you very much. Do we have any questions from the floor? Okay. We've got a couple from the app, which I'll hit off first. So you touched on sustainability. Are there customers asking for lower-carbon products where possible? And are they prepared to pay a premium for low-carbon products?

I'm not sure if I understand the -- 52% of what we sell is carbon products. And believe it or not, doing $11 billion at $2,000 at a time is quite a task, and it's based on what our customers ask us to do. They continue to ask us to do more and more, that's why we spend the money. And when we spend the money, we require a return on that investment. And that investment comes from our customers. And we've learned over a period of time that they're willing to pay for it. So that's our...

Okay. Obviously, a long history of M&A activity plus other shareholder returns. Can you give us a sense as to what opportunities you're seeing now, whether it's a geographic, product mix opportunities, customer opportunities?

Yes, that's a great question. We get that asked a lot. Our acquisition strategy hasn't changed at all. We don't have a goal to buy 5 companies a year. In fact, we only bought one last year, and we look at a tremendous amount of them. There's a target-rich environment, if you will. But we have a very strict policy but -- a very, very strict criteria to get in. We don't buy fixer-uppers. It's not important for us to look at our top line and say, "Oh, gosh, we should probably buy another $1 billion company." We just look at the value that we can provide, what they're bringing to the company. For instance, a company we just closed on last day of 2019, great company, very profitable. Really, really fine people with a great reputation, and it just fits our model very well. With 67 acquisitions since 1994, they have to fit the family, if you will. And you're basically looking at 1/3 of the executive management group. So we don't have this team of people who can go out and fix things. So we make sure we buy really well-run companies, and we've got a few, we call it the secret sauce, that we can implement and try to make the company better, so.