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

Good afternoon, everyone. Thanks for joining us for this session at the Goldman Sachs Global Metals and Mining Conference. I'm Karl Blunden. I run our credit research effort for this space. Delighted to have with us here today, Reliance Steel & Aluminum. From the company, we have Jim Hoffman, who's the President and CEO of the company; also Karla Lewis, who's SVP and CFO. In terms of how we'll use this time, we'll run the session for about 40, 45 minutes. It's going to be mostly Q&A. We have a couple of questions prepared here at Goldman. And we'll take questions from the webcast or you could e-mail those to me or send them to me over Bloomberg. We'll kick off with just some brief introductory remarks from the company before we move to questions. So without anything further from me, I'll turn it over to you, Jim. Thanks very much.

Okay. Thanks, Karl. Good morning or afternoon, wherever you are. It's nice to be with you virtually today. Karl said I'm Jim, and that's Karla. What I thought I'd do is just give a real brief, so on a 60,000-foot presentation on our company. Hopefully, you all received our corporate fact sheet and our presentation, and we'll be glad to answer any questions you have after that. We were founded in 1939. We're a global diversified metals solution provider. RS on New York Stock Exchange. We have over 300 locations in 40 states, 13 countries around the world -- 13 countries outside the U.S. We have 125,000 different customers. We have over 100,000 different metals products that we add value to. Just to kind of put that in perspective, in 2019, we did roughly $11 billion. Our average order size was about $2,000. So we did $11 billion, $2,000 at a time. So you can only imagine how many transactions you have to do to hit those numbers. Basically about 51% of the products that we sell, we add value to, which is up historically from our 40% range. That was by design. Several years ago, about 8 years ago now, we decided to really get into the value-added end of our business, mostly because our customers asked us to do that, and we decided that was a good idea. So we spent over $1 billion in the last 7 years with high-tech value-added type equipment, and we don't see how that will change any. Our customers continue to ask us to do more and more as we go. Our model is fairly simple. We focus on the safety of our folks who work out in the field, our suppliers, our customers and our communities. We focus on the quality of earnings, not on our top line. We focus on customer service, our supplier relationships and things that will make Reliance grow in a profitable way in the future. Basically, we have an extremely diverse model by design in products, geography and services that we provide. We grow our business a couple of different ways through acquisitions, and we got to answer questions about that and through organic investments. As far as the acquisitions, we've done 67 acquisitions since our IPO of 1994. And we continue to look for opportunities there. We've got plenty of dry powder, if you will. We've got a nice cash position. We refinanced our debt and our credit here in September. So we're in good shape there. And as far as on the organic investment side, I had mentioned the money we spent on value-added equipment recently. Earlier this year, we had a $250 million CapEx budget. With the COVID situation hit, we cut that back. We kind of went into a cash preservation mode, and soon thereafter, we started performing very well actually. So we've not only put that CapEx back in, but we've increased it to $270 million because during this COVID situation, we've had a lot of very nice opportunities come our way. And it's not unexpected. Unfortunately, when we have these downturns, and this is a health-related one, so this is somewhat different. But when we get these downturns in business, we've noticed over the years that customers ask us to do more. And just like other downturns, they're coming out of this COVID situation and asking us to do more and more, and we're becoming a larger part of our customers' business, and we're more than happy to be there for them. So that is basically a Reliance. And if anything, Karla, you'd like to add, please feel free. And if not, we'll take questions.

Waiting on Karla. I'll jump in with a couple to get us started. And the audience questions, we'll weave those in as we go through this. I wanted to talk a little bit about the demand environment and what the outlook there is and then shift into operations and growth and capital allocation. So just starting with something that's top of mind right now. I think one of the developments we've had since the earnings is the U.S. election. As you think about the opportunity set for Reliance going into 2021, what changes with President-elect Biden's policies that you see out there today?

Well, we'll have to wait and see. I read the same things you do. There's still an election going on in Georgia that will have something to do with what kind of things they'll put in to either hurt or help the economy. As far as how that relates to Reliance, we're a positive forward-looking company. I'm a glass half-full kind of guy. I think that there'll be an issue with corporate tax rates, but we'll have to wait and see. That's okay. There's nothing wrong with that, but we'll deal with that as it comes. But the good news will be, I don't care who the President is or what the administration here is and what the House and Senate is going to be. This country is going to need an infrastructure spend. This country needs to get back on its feet. I've said before that America is going to need Reliance to rebuild. I mean that, whether it's through an infrastructure spend or however they decide to get the economy going again. I've said in the past that history doesn't always repeat itself, and it certainly rhymes. If you go back up to the Second World War and Eisenhower was the President. He passed the largest infrastructure bill in history. And it got America up and running again. I think something is going to help that out. Somebody asked me a political question the other day, and I'm not a politician, but I know some. And the ones I know, they mostly want to get reelected. And the best way to get reelected when you're in a downturn like this is to get people back to work. And I don't think this current economy is going to get back up and running by opening restaurants and having hair salons open back up, that would be great for those people who have suffered with that. But to get real manufacturing jobs, that's going to take some effort, and it's available. And that is through an infrastructure spend. And certainly, the 15,000 or so folks that we get to work with, they're very good paying job with benefits. And if the administration sees the pathway and decide that that's a good way to get America up and rolling again, we would applaud that, and we're actually positioning ourselves to be there to do those types of things. But even if we don't get a spend or even if we don't -- if it's a prolonged spend, like I said, we've learned a lot through this COVID situation, unfortunately. We've learned how to be more efficient. We've learned that some of the decisions we've made in the past were good decisions. We've learned that the equipment and the software and things we've spent money on over the recent history really helps our customers. Our customers, they are having a hard time. And when you have a hard time opening back up, it's hard to get people to come back to work, qualified people to come back to work. The coffers, they're empty in some situations. However, the businesses are still viable, and that's where Reliance has come in. And we have spent the money, and we're prepared. And we've got plenty of upside, plenty of capacity to be able to handle any business that comes our way. But certainly, to answer your question, we would hope that the new administration would care enough about the folks who live here to get this economy back up and running again. So we're hopeful for that. But if it doesn't happen or if it's prolonged, we'll continue to rely on our model that has been extremely resilient for good times and bad times, countercyclical as far as the cash situation is that our model stood the test of time, and we continue to improve that, and we have as well during this.

This -- it's a decision by the administration inside. As you think about what you're seeing at real end market demand these days, we've seen a nice uplift in automotive and that supply chain. Construction has held in quite well. What's the latest you're seeing as we go through this second or third wave? And what are customers saying?

Yes. Well, we've talked about it on our third call and nothing's changed much in a positive manner. The automotive market has come back very well quickly. And we were prepared for them when they did come back. Unfortunately, it was hit hard, right, in the beginning of the second quarter, and they shut down for the better part of the quarter. And we took the right action. Unfortunately, we've had -- we've done this before. This isn't our first rodeo, if you will, when it comes to the automotive folks. And I will remind everybody, when it comes to automotive, we're talking about toll processing. We don't sell directly to the automotive folks. We sell to -- our customers are actually the producing mills who make metal, whether it's steel -- high-strength steel or aluminum. And that's a nice relationship because we're their customers, and they're our customers. So that business has been very good for us. Like I said, it hurt when it hit. But we knew it'd come back. So we were able to keep our people extended health care and things like that to keep our people hold, if you will. And when they did come back, they came back very quickly, and we were there for them. There was a slight delay, and which is a good lesson to be learned. The pipeline for product coming out of Asia really slowed the automotive guys down. So maybe there's a lesson there. Maybe there's a lesson there. A good friend of mine told me one day that cheap is expensive, if you think about it. You think about the millions and millions of probably billions of dollars that this country has lost because of the -- because they've decided to chase cheap. Hopefully, we've learned a lesson there or 2. But automotive is a great spot for us. Toll processing, a wonderful spot for us. The SAARs numbers have come down recently from historically crazy high numbers to a level that makes sense. The good news for us, our business continues to get better because our sweet spot is light vehicle, light trucks and SUVs, and that business is growing. And the light weighting of automotive, the CAFE standards are still in effect. So the light weighting has brought in a whole new market for us, and that's aluminum. And aluminum is very difficult to handle. Very difficult to handle. And we've got several companies, one big company, in particular, who actually designs and builds their own equipment for handling aluminum. So that's worked out well. We've expanded that business. We bought a company in that space. We've increased the size. We've expanded 3 facilities in Mexico. Added a couple of facilities in Kentucky. And we just talked about on our third quarter call that we've got 2 brand-new tolling operations that are in process right now. So really good business for us. That's automotive. Again, toll processing. Another good one for us, semiconductor. I said before, I remember, semiconductor, we don't make chips, okay, we make the plumbing that goes into the clean rooms and the vacuum chambers themselves. That business is doing outstanding. And probably because of the kind of what we're doing today with the Zoom calls and things like that. So business is good there. Now I'll talk about a couple of them that aren't so good, but that's okay. We're -- our model is designed to absorb businesses that are in a trough in other parts of our businesses were up. Energy, meaning oil and gas, that business has been changed forever. Technology has changed that business. There's just not as much metal that goes into that end of the energy business, and we recognize that. And in the first quarter of this year, we took an impairment to right size. We closed facilities. We merged facilities. We did everything we needed to do. We're really happy with the decisions we made. It positioned us to dominate that market. It's a much smaller pie now. But we're still -- the companies that we have in that space are here to stay and they're doing fine. It's just a smaller pie. So that was not COVID related. That was technology related. The good news also in energy, we also -- there's a lot of metal that goes into solar and wind. And we are heavily involved there, and we're keeping our eye on that. Going back to your original question, if the President -- the new administration wants to go with alternative energy, Reliance is more than ready to participate there. Some of the other businesses we -- another one we'll talk about briefly is the aerospace business. And we've got some good news today. You probably read where the 737 is ready to fly again. And that only took 20 months to get that done. Now I'm not -- I haven't talked to anybody from Boeing or -- today, but my guess is their order book just didn't spike today. My guess is -- it's not a guess. I haven't been to Arizona right now. And there's a lot of jets out there in the desert, where they store these brands like a new 737s that are ready to go. But unfortunately, the commercial aerospace business has been hard hit. And I don't know when they're going to come back. We're certainly not experts in the -- we're experts in adding value to metal that goes into landing gears and things like that. And that's a good business for us. And that's been hit. And I don't know when it's going to come back. I -- your guess is as good as mine. I've heard an optimistic point of view that a year, and I've also hurt 3 years. So somewhere in between there. And we'll all know as soon as we're all ready to jump on a plane and take our family to Italy for vacation, that's when we'll know the business is -- the aerospace business is up and running again. The good news for Reliance is that 50% of our aerospace business is defense. And that business is doing very well. And that will continue to do very well for a long period of time regardless of the administration because the contracts, and we don't do a lot of contracts. The contracts we do are in that defense aerospace business, F-35 and even some legacy jets, F-18s are going well, and ballistics and things like that. So aerospace, half of our business is really going poorly, but sustainable. And the other side of the business is going quite well. The rest of our industries, I'll just touch on real quickly. Ag, construction, open for construction to continue to ramp-up, which it has. Heavy industry, again, kind of flat. Road construction equipment, it's been okay. Nonres, which is our -- basically our largest market we think going -- perform value-added functions in, that's been okay. It's -- I've said it before since 2009, it's been a slow burn up and continues to be that way. If you really know the inner workings of Reliance, you'll know that our market isn't skyscraper. So the 52-story building downtown L.A. like the one Karla is sitting in right now. That's not our business. That's mill business. That's a completely different world that we don't participate in. We participate in the 3-story kind of assisted living facilities, data centers, giga plant for the batteries and all those types of things. That business has -- hospitals, unfortunately, hospital expansions. That's been good for us. So that end of the business is chugging along, going quite well. We're really happy with it. We don't see anything on the horizon that's going to change that. And we like it. It's a good business for us. We'll continue to invest and continue to get our unfair share, if you will, of that market. So that's a good market for us. I think I didn't -- Karla can fill in the blanks.

Yes. So a lot to dig into, and the Goldman house view, at least, is pretty constructive on that vaccine rollout and the impact there to some of the end markets. But I just wanted to kind of focus in on some underlying trends. You touched on some of them and get your view on where the Reliance is a winner for those trends. So first of all, in auto, you mentioned aluminum and light weighting growing. Do you care if aluminum or high-strength steel wins, which one benefits you more longer term?

Well, that's a loaded question because there might be steel people watching this or aluminum people. So the real answer is we're good with either one. Aluminum is really nice for Reliance because there's -- there aren't a lot of people who can do that. So we enjoy that end of the business. And the more difficult a process is, more Reliance like stuff because we have the wherewithal to buy the technology to be able to participate. So the more intricate, we're good with that. And on the steel side, they're not going to give up. They're not going to give up. They're coming up with lighter, thinner gauge, higher strength steels. And we're good with them as well. So we'll take it both ways. Both markets are strong and continuing to get stronger. So we're good either way. I'll say it for a political answer.

That's just fine. Maybe I might be getting a little too detailed here. But have you think about technology within the mills, right, integrated versus mini-mills, as I think that they broadly at this conference around market share shifts between mini-mills and integrated is going -- taking more downtime during the middle of the year COVID production disruptions. But ramping back up now, what's your exposure to the various types of milk products? And again, do you care which one wins at the end of the day?

Well, I -- we are a lot of people's largest customer which is a good thing by design. We're here for a long period of time. Since our -- since we went public have been a domestic buyer for a lot of reasons. One, we really do care about the economy here. We have great relationships with these folks, whether it's mini-mill, electric turners folks or are they fully integrated guys. So we play both. They're also both our customers on the tolling side. So we participate heavily with both of them. Now saying that, there's 2 big mini-mill companies that are expanding, and we applaud that. People talk about capacity. I like to talk about capabilities. Both of them are adding new capabilities. In the year 2020, one of them is standing and actually going into 2022 with a plate mill. And we applaud that. We think it's a great idea. They're going to be low cost, and I'm talking about low cost in the world, not just compared to an integrated mill. And the quality is there, all the things that people thought was not going to be there is there. So either way, we're good with it. It's quality steel. They have to be competitive, which they are. And mini-mills have really done a nice job of spending in the right places, and we're going to participate heavily with them on the toll processing with both of those folks. And with the integrated folks, like again, steel industry is interesting. Nobody gives up. Nobody gives up. So they will continue to do what they do. I'm sure they have a fine model. And I just -- in my opinion, cash is still king. So if you're able to have a good balance sheet and keep your -- keep those big assets full, then you'll make money in the steel business. But we're not in the steel business. We're a value-added problem solver. We don't really pay attention to -- well, we do pay attention what they're doing, but we don't do business like they do.

And Karl, I would just throw in that Jim in the opening comments, he talked about our broad product mix. And so the diversity of our products, we're able to partner very effectively with both on the carbon side, the mini-mills and the integrated. So there's value they provide us in all those areas. And then also, we have a big portion of our sales in stainless and aluminum, and so we partner very well with those mills as well. Thanks.

All right. It's a helpful overview of the customer landscape. When you think about your own margins and operations, margins have been fairly steady and fairly high for some time despite the volatility we see in underlying prices of the product, and the substrate that you're transporting. Can you talk a little bit more about how that works and how you are able to maintain margins despite the end market volatility?

I'll take a stab at the first part, and Karla, you can jump in. It's by design the value-added play was to get our margins up. We recognized years ago that the landscape is changing. Just moving metal is not a real great model for -- to be able to be consistently profitable in these troughs that the economy goes through. So we looked at that and said, okay, listen, how are we going to do that? How are we going to diversify even further? And we chose to do it in the value-added stream. That allows us to have higher margins than some folks that don't do that or so maybe some folks try to participate in that. We've got a pretty good lead on the field. And we're not going to relinquish. In fact, we -- our plan is to extend that. Like I said in my opening remarks, our historic value-added was 40% of what we sold. Now it's 51%. I don't know how far north of that it's going to go. I hope further north. That's a plan anyway. The other thing to remember is about 40% of what we sell, whether it's value-added or not, is delivered in 24 hours. You have to have a lot of equipment and a lot of high-tech equipment to be able to do the things that our customers continue to ask us to do. And by the way, when you're doing a $2,000 at a time, if you think about it, our customer base, they're less sensitive to pricing. They're more sensitive to getting -- taking care of their customers. And we are part of their business. And they don't mind paying for that. Remember, the term value-added is a 2-way straight. It's value-added to us because we garner more profit dollars, and it's value-added to them because they don't have to do that in-house. I mean there was a time years ago, we got -- one of our companies will get a call for a truckload of beams or a truckload of play. That's interesting. They can get that anywhere. But now they call and say, okay, I need 3 beams cut to this, miter cut, tap drill, painted on one end, put it on a skid with some gusset plates burned out by laser and ship it directly to the job site. Everything I mentioned there has a dollar figure attached to it. So that's how we're able to do it. And again, the customers that we sell, they're more quality and more focused on their quality of earnings versus just moving steel at a cheap price. So that's the way I see margins. Karla, I don't know if you have anything to add to that or not.