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

Great. Good day, everyone. Thank you so much for joining us. My name is Timna Tanners. I am the BofA Americas metals and mining analyst. With me today, I have Jim Hoffman and Karla Lewis from Reliance. I'm delighted to welcome them to review some of the highlights of the thesis and also go over some of the recent developments. There are slides on the presentation. As you know, you can go through them at your leisure. But we're really going to do this more in a fireside chat Q&A format. So with that, I'm going to launch into the discussion. Reliance, for those of you who are not familiar with them, is a distributor or service center, as we call them here. So it's not the typical steel mill that you may have listened to earlier today. In fact, so that does distinguish them a bit from some of the peers. I did want to ask Reliance to start out with a little bit of discussion about the COVID-19 response and both in your operations but also on what you're seeing from your customers. Jim and Karla?

Yes. Hey, Timna, thank you very much for having us, and thank you for asking that question. I mean it's timely, because that is the most important thing that Reliance is focused on right now, and that's the health and the safety of our employees, our suppliers, our customers and our communities. So thanks for starting out with that, and that really is a great way to start. We are up and operational. The majority of our locations remain operational. We are an essential business. That doesn't mean it comes with no pain, because it is difficult. We've changed a lot of the way we do business as far as social distancing, bringing people back to work, taking temperatures, wearing masks, all kind of different PPE, but we've -- we're doing well. We're -- we spend a lot of time, Karla and I, to do with also a couple of other folks. We used to call it the Crisis Committee. We don't call it that anymore because we think we've moved past the crisis and into trying to figure out where the new norm is. And we're focused now on, again, taking care of our customers. And seeing how this is a health-related situation, we've expanded our employee emergency assistance fund and our Reliance Cares, which are internal charities, if you will, to take care of our people, and we've -- they've taken advantage of that. But we're really lucky. We -- our model is set up and has been set up for a long period of time to execute in good times and bad times. And the acquisitions we've made over the last -- 67 acquisitions we've made since '94, we really concentrate on buying good companies that are profitable, and we've got different levels of why we buy them. But one of the main things is the people. And when you get the right people, you get the people to concentrate on the right things. So this COVID-19 is extremely important to our folks. And I know for a fact that they appreciate what Reliance is doing for them, and we'll continue to do that until we get through this thing. But obviously we've had to make some cuts. We had a good first quarter. But we also told -- talked about the fact we had to reduce our workforce through layoffs and terminations. And that's just what we do. It's part of our model. We rightsize to provide the best value as we possibly can to our shareholders, while making sure that our -- the folks I mentioned earlier are safe and healthy. Safety has always been a major concern of Reliance. But now the health of our people and our suppliers and customers and communities has gone to the front of the class, and we'll continue to do that. Some other things that we've done in response to the COVID-19 pandemic. We're focusing on working capital management and prudent cash preservation. Like I said, our model is a good model, and we've executed excellent for a number of years. Rightsizing our inventory is a major Reliance factor, and we've done that. We will continue to do that. I'm proud of where we are. We have the added advantage that we own so many different companies that we're able to move inventory within the FOC, the family of companies, the FOC is what -- who we like to call it. The mills don't particularly like that, but they understand that's part of the charm that comes along with Reliance, and we've been working with our partners. Most of you know that we are a domestic player. 95% of what we buy is domestic. That has been a part of our model for a long period of time. Our domestic suppliers appreciate that, and they know that we're here for them. And they're here for us during these times, and we'll continue to do so. Unfortunately, we've had to cancel some orders, push back some orders. And we know how difficult that is for our suppliers to handle that, but they're really good at what they do, a lot of really smart people. And they'll -- they're running their businesses in accordance with their demand, and we're doing the same thing. So the inventory is a focus of ours. We've reduced our capital expenditure budget, from $250 million to approximately $190 million. Still a big number, but basically we've looked at the nonessential, if you will, our capital expenditures, and we've pushed those out until we -- it's time to do those. But we kept in a lot of projects that will help our customers. We've done -- been this -- through this before. As Timna introduced us earlier, we're a value adder, is what we are. And we will spend money on value-added equipment so we'll have that equipment in and operational, the best technology available when these markets do turn. We anticipate, as happened in '08, '09, various customers ask us to do more and more internally, which is fine with us, which is really part of our model. So we'll continue to spend money wisely to be there for them when they ask us to do more and in different things. So that has been our focus. I know I hit a lot of topics there. Karla, do you have anything to add to that?

Yes. I would just say a lot of what Jim just talked about in the presentation deck, that's on Page 5. So he hit on a lot of those items. We did on our first quarter earnings call, give information about what we had seen from a demand standpoint. At that time, which was the first 2.5 weeks of April 2020 compared to March of 2020, our tons shipped had declined about 20%. And we've seen that kind of hold throughout the month of April. And one of our -- not included in that are our toll processing tons, where we do not own the metal. We just process it for a fee. And in our tolling operations which represent about 4% of our total revenue, about 60% of the tolling business is auto-related. So there was a very big impact when the auto OEMs shut down in mid-March. So that -- those tons were not included in that 20%. They were actually down more than that in the tolling operations. But we have seen at least one of the auto OEMs that we service start up, and we're hopeful that they'll stay with the announced plans to bring back some of the others. But a big portion of our workforce reduction, the 11% that we had talked about at that time was in our tolling operations. So we're hopeful that we'll be able to bring those folks back fairly soon. Also, Jim talked about some of our working capital management and cash preservation focus. We did come off of a record cash flow of $1.3 billion in 2019. So we're in a good liquidity position, with about $1 billion of liquidity at March 31. If you look at Slide 9, that kind of plays to the working capital management items that were countercyclical cash flows in our business. So as demand falls, we try to rightsize our inventory that Jim talked about, which helps throw off cash. Also if prices are declining, metal prices, that throws off additional cash on top of the lower inventory quantities to support the lower shipment levels. And also our accounts receivable would come down. So our model does give us countercyclical cash flows. So in times when the demand and pricing environment is not as strong, we do typically throw off cash flow. And if you're not that familiar with Reliance, I would also point you to Slide 13, which talks a little bit about how Reliance is different than some other companies in our space with our smaller order size, our next-day delivery type of model. And also Slide 15 talks about our product diversification, which -- in our end market, which also leads to end market diversification, which we think are also very important elements of our model that helps us withstand some of these negative impacts better than some other companies.

Okay. Great. And I do want to touch a little bit more on the COVID-19 situation. I know you talked about the auto exposure, but on Slide 14, you do -- and 15, you kind of give more information about your exposure. So you said 20% down as of mid-April. Can you comment on that, if that's still kind of the right run rate? Because construction seems to be later cycle, and we're seeing evidence that some cancellations are affecting that market. But maybe, as you said, automotive can help offset that trend. So just wondered if you could give us a little bit more color on what you're seeing from customers in these different markets.

I can -- let me hit on a few of them. I would stick with our 20%. That was a -- that was what we saw. We continue to see a lot of different changes week to week on literal health care-related -- or health-related CDC activities that we need to do to keep our folks going. And markets are -- they were in shock, and not a whole lot of visibility going forward. However, I think the 20% is a good number to model in for now. When you -- and Timna, you had mentioned nonres. Nonres is a nice market for us. We had a very nice first quarter. The market got hit. And I can tell you right now that we are happy that it's continuing its slow burnup that I've talked about for years now. Remembering our niche is not skyscrapers, our niche is not office space and big downtown areas. That's direct mill and somebody else's. Our niche happens to be 4-story and below assisted living, facilities, hospitals, a lot of infrastructure-type things like power grids and water treatment plants, those types of things. So we're happy to be in the spot we're in. We had some pushouts, if you will, some jobs that frankly are well-funded and some jobs were actually started that got moved out because of the - people weren't really sure what to do. That's changing a bit. We've had very few cancellations, if you will. We continue to have some pushouts. When I say pushout, instead of continuing to go through the second quarter, maybe second or third, fourth quarter, but yes, relatively okay, relatively okay. So that's a -- we're glad we're in that spot. Now I don't know much about politics, but I know a good way to get reelected is to focus on infrastructure. And perhaps, perhaps there may be a politician out there that wants to get reelected. And if they do that and there's an infrastructure bill, that part of our business will continue to do quite well. So that's been a nice spot for us. Another bright spot, semiconductor, that continues to do well. But then we have the others. We talked about on our call, aerospace is in a really tough situation right now. Very, very difficult to figure out where it's going to be. And we'll -- we just do what Reliance does: keep our inventory in line, listen to our customers, provide extra additional value-added services. And we'll see where that one ends up. Heavy machinery, yes, that kind of -- that's, again there's not a whole lot of transparency to what the market is doing right now. Everything is still confusing -- not everything. Things like that look confusing. Energy's not confusing. Energy is -- has been changed, in my opinion, for a long period of time, forever maybe, with technology. And we did some things in the first quarter and had shuttered through some facilities for good, due to the fact that the pie is much smaller now. Now we intend to be a major player in a smaller pie, and we'll continue to do that because we've got some really good companies that function in that market. But we also had a lot of companies that didn't, and we made the decision to shut those down. So I don't think I missed any markets. Karla, if I did, you can kind of jump in.

I think you got them.

Yes. So anyway, that's what...

That was a helpful overview. I think the cloudy outlook for machinery and for aero is helpful even, because we're all kind of confused. But on construction and infrastructure, I think we'll have to see, but have been hearing it's been holding up better. I was hoping maybe -- and maybe this is better for Karla or for both of you, but on the cost side, you alluded to the ability to have countercyclical cash flows and not buy as much from the mills, work down inventory in times of corrections. But I'm curious about the ability to flex even your workforce, like how does that work? Do those people get furloughed and then come back when demand comes back? Is that well understood? Or just a little more color on how costs can be so flexible.

Yes. So Timna, the -- our SG&A -- and maybe to remind people, so our cost of sales is just material and freight in for our service center business, for the toll processing piece of the business, which is only 4% of revenues, they do have direct labor and overhead in cost of sales. But for the rest of our companies, all of the labor falls through the SG&A expense line item. And about 65% of our SG&A expenses are people-related, so base wages, health care, retirement. But also we're very much a pay-for-performance company, so a lot of incentive and commission-based pay included in that 65%. So there's a bit of a self-regulator based on the profitability levels of the company. So that will reduce expenses included in that 65%, just based upon our profitability levels. And then, when we look at actual shipment activity, that's where we look to see if we should be taking any reductions in our workforce, and so as of our conference call in April, we had identified about 11% of our workforce, that we put on layoff, which I'll explain our term of layoff in a minute, or a reduction in force. So the reduction in force is when a position has been eliminated and we do not expect to bring that person back. So we did have some reductions in force, but the majority of our activity was layoffs, which for us a layoff was putting, having someone no longer working today, but we expect to bring them back in the future so expect it to be short term, and so it's a little different than our strategy in '08 and '09, where we viewed it as a longer-term impact. So at that time it was primarily reductions in force where we separated with the employees. This time we believe, business activity was at good levels, pre-pandemic, and we're looking -- our expectation currently is that this will be short-lived in most markets that we're selling into. So we want to be able to bring those people back quickly. So we just put them on a layoff. They're able to collect unemployment and other aid that's available while they're on layoff. We did, because we want to bring those people back and because this is a health-related issue, we have continued our benefit or health care coverage for those employees for a period of time, which we think keeps them engaged with us so that we can bring those folks back. But we'll continue to monitor that. There are a lot of other variable costs included in our cost structure. If we're shipping less, we're delivering less. So our fuel costs go down. Our packaging supplies go down. So we will see expense reduction in all of those areas. But because of the decentralized nature and the diversity of our products and end markets we serve, we can't give you a specific formula of how to model that.

Okay. That color is helpful to conceptualize. I know you just talked about some of the short-term measures and how you think that this downturn could be more temporary. But I'm also curious about what kind of more permanent changes do you think Reliance could enact or see in its end markets or business operations because of the COVID-19? I mean whether that means greater health measures or whether that means some businesses that just aren't coming back, like you said, in energy or -- the other kind of more structural changes among your end markets or operations that you could see coming out of this situation?

That's a good question. We're learning a lot about what can be done efficiently. So we are up and running, we've got a lot of our people working from home, very efficiently by the way. Technology is a very powerful tool that I, in my opinion, we will use. We'll see how that part changes. Well, it'll be interesting to see how the different roles change. It'll be -- I think it'll be really interesting to see what our customers' needs will be. My guess will be they'll need more value added. Our -- we've always been a -- our model, that you well know, has been a diverse model, whether it's diversity in geography, market, customer and everything. And that's part of why we're able to do well in good times and bad, but we're going to see. We're going to do the best we could possibly do and garner as much earnings per share as we can going into the future. And that means more value added, taking care of our customers, taking care of our suppliers and being as efficient as we possibly can be, using the technology that we've had, that we really didn't realize the power of. So I'm not sure where we're going to come out. I know -- I wouldn't bet on this. I would bet on our model. Our model has proven to be a great guidance -- guideline for us to make the right decisions going forward. I believe the guide -- the value added, like I said earlier will be, don't ask more of us, and we're -- we'll be more than happy to help with that. I think our strong balance sheet will continue to be that way. And there may be less players in the space, although that's really not our concern. We don't focus a whole lot on our -- what our competitors do. They seem to do things differently than we do and that's okay. But I think the supply chain will be different. I believe, and it should, I believe there will be more reshoring, if you will, which is would be good for not only the U.S. manufacturing but North America, which I believe should have happened a long time ago. But it seems like some of the things coming out of Washington are coming to fruition and this COVID-19, I think, maybe has changed some people's opinion on how they're going to perform their business in the supply chain, what it looks like. We've kind of proven that if you're a domestic player, you have -- you can really shorten that supply chain and be a heck of a lot more efficient with your cash. So maybe we're on to something good here. And if in fact I'm correct, and I hope I am, then the manufacturing in Reliance will be much stronger in the future. Those are just my views.

Sure. And then I think we're all done with more working from home as long as the schools reopen. But I'm sorry. Go ahead.

Correct. Yes. And then, Timna, I was just going to say, not just in times like this, but on an ongoing basis at Reliance because we are very decentralized and diverse, we always look at each of our individual operations to see how they're performing and if they're really meeting our criteria for what our expectations are from a performance standpoint. So we will continue to look at that as we have more, or a better view on what the outlook is on a longer-term basis. It could result in us potentially combining or closing some facilities. That's something Reliance has always done. We did it in the first quarter, more not -- it was really not COVID-19-related in the energy. It was based on our outlook in that sector. So as we get more visibility as we move through this, there could be some changes. But at this point, nothing decided.

Okay. Just a few more questions, then. And I'm going to ask you about your secret sauce that makes you so different from your competitors. Because if I keep asking, someday you'll tell me. But the question I'm getting on the line here or through this program is asking, how confident or how can you be confident that the -- that this is a temporary blip and not a bigger issue? And it is a divergent view relative to our economists expecting a recession through the second and third quarter. Is there something that you're seeing from your customers that gives you confidence that things can be more V-shaped in the recovery?

Yes. I mean I've got great confidence in the American economy and good old-fashioned American knowhow. We've been kicked around before and came out, so I'm not sure why this should be any different. We still get to work with some wonderful, innovative companies on our customer side and some really innovative and smart suppliers. And to get an economy up and going again, or to live the kind of lives that we get to live in North America, there's a lot of metal involved. There's a lot of metal involved in infrastructure. And I can't tell you if this is a V, I don't -- probably not a V-shaped bounce. Most likely a U. Naysayers will say, maybe a W, but the, very few people are saying it's an L. Meaning the leg goes straight down in straight lines, except maybe in energy. That could be. But I just have a lot of faith. I'm an optimist, and I know I've been around a long period of time, and I know the caliber of the folks we get to work with. And I just believe in them. I believe in the fact that the economy needs manufacturing. And I sincerely believe that the supply chain needs Reliance. So those are some feelings that just come about with a lot of years of experience and a lot of intel and discussion that we've had with our -- not only our suppliers but also with our customers. And depending on where you live, whether it's New York City or Pittsburgh, Pennsylvania or San Francisco, there's a lot of bridges that need fixed. And there's a lot of water treatment plants that need to be redone and a lot of power grids that are going to need more power, and that, and there -- and demographics will tell you there's a lot of assisted living in hospitals that will need to be built and rebuilt. And everything I just mentioned there will need value-added metal that Reliance can supply.

And Timna, just to reinforce that, we continue, and we talked about this on our earnings call, we're just trying to evaluate and listen to that feedback from our customers and see how they're reacting on a day-to-day basis. So we're not thinking V, but when I said in my comments earlier, shorter term, that shorter-term compared to the '08, '09 recession, which we've been in a 10-year recovery since that. So I wasn't signaling a V. I was signaling less than a 10-year recovery.

Okay. That's helpful. It turns out that we have 1 minute to hear all about your secret sauce. But no, in seriousness, obviously Reliance has been able to hold up better growth margins through the cycle and through the years and actually grown them over the years relative to competitors that have not. So in a couple, I guess, of short sound bites, can you tell us why that's been the case and maybe point to some of the slides that back that up.

Wait a sec. I'll just be as quick as I thought. You were supposed to say, "it's all leadership, Jim," Timna, but we know better than that. But I think it's the model. I think our model is sound. I think it's tried and true. We've done it for a long period of time. We buy good companies. The value-added play has been a home run. It was based on our customers' needs. We continue to spend money. We've spent close to $1 billion over the last 5 years, close. And a lot of that was on the value-added growth side of the business, all predicated on doing more and more and more for our customers. The other part of our secret sauce is, we don't -- a lot of companies, I assume, they focus on the buy side of their business, to try to prop up their margins. That's not what we do. We focus on the sale side, the value-added. And we don't see great value in beating up suppliers. We see great value in supporting domestic suppliers. We want them to make money. We want them to be strong. We want them to invest in their future. So they -- so we can continue to be their best -- not only their largest customer, we want to be their best customer. So those are just a few things that we do. I guess it's different. I'm shocked that people haven't tried. We bought companies in the past that tell us that they've tried to emulate some of the Reliance model. And it's flattering and it's nice to hear. But we've got a good thing going, and we're going to continue with that. And I can also tell you we don't chase tons. We call it tons for fun. That's not our thing. We focus on smaller customers who need 24-hour service or next-day delivery and a lot more value added. That's what we do. And I don't see any reason to change that. But then again, I don't know what other people do. Somebody told me a long time ago, when I worked, started working with Reliance, listen, don't take every order. Just take the good ones. So that resonated with a lot of people in our organization. So that's it, as quickly as I could say it.

All right. Great. Sorry. Next time, we'll go on about a little more, but we are running out of time. So thank you both for joining. Thank you, Reliance, for your support. And again, hopefully we'll see you next year in Barcelona. Thanks again.

That'd be great. Hey, thank you for the support. And stay healthy, everybody. We appreciate you.

Thanks.

Thanks. Bye-bye.