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

All right. Good evening, everyone. With us tonight, we have Reliance Steel & Aluminum. Reliance is the largest metal service center in North America. And they provide metal products and processing to customers in a wide range of end markets, including non-res construction, transportation and manufacturing. With us from the company, we have Jim Hoffman, the company's CEO; and Karla Lewis, Reliance's President; so with that, I'll turn it over to Jim and Karla. So thank you for joining us, and we'll start with some prepared remarks, and then we'll turn it over to Q&A.

Great. Thank you, Tyler. Appreciate it. Good afternoon, everyone, and thanks for joining us today. My name is Jim Hoffman, I'm the CEO of Reliance. And presenting virtually with me today is my friend, Karla Lewis, our new President of Reliance. I'd like to -- we'd like to start the formal presentation today and then leave some time at the end for you to ask questions. So Slide 2, we're going to move to Slide 2. At the outset, we'd like to highlight our safe harbor statement. The information we'll be sharing with you today will be webcast live on the Investors portion of our website in investorsrsac.com (sic) [ investor.rsac.com ] and is subject to Regulation FD. Now we're on Slide 3. We're very excited to share with you the story and take a deeper dive into our business model with you today. Reliance is a leading diversified metal solutions provider. We are the largest processor and distributor of metals in North America, so we play an integral role in the industrial supply chain. Reliance is not a metals producer. During our 80-year history, through both acquisitions and organic growth, we have grown to approximately 300 locations in 40 states and 13 countries outside of the U.S. We are strategically located near both metals producers, also known as mills, and our customers to optimize logistics and minimize our environmental impact. At Reliance, customer service and quality are the cornerstones of our success. We focus on smaller customers who value our ability to provide high-quality products and services in small quantities on a frequent when-needed basis. Slide 4. I'd like to spend a few moments talking about the latest demand trends in our key markets. Nonresidential construction, including infrastructure, is our largest end market. Quoting activity remains strong for projects related to schools, data centers and warehouse distribution. We have also seen an increase in certain infrastructure projects such as bridges. As such, we remain cautiously optimistic that demand for nonresidential construction activity will continue to improve in the first quarter of 2021. We serve the automotive end market on a tolling basis, which means we process the metal for a fee, but do not take ownership of the metal. Automotive represents about 60% of our tolling volume. Our tolling demand has remained strong as automotive OEMs and steel and aluminum mills continued to ramp up production as a result of reopening following COVID-19 shutdowns in the second quarter of 2020. We are positive on our automotive tolling outlook, and we'll continue to focus on growth and innovation, including the expansion of our tolling operations. General, industrial and heavy equipment markets, including both agriculture and construction equipment, is an important end market for Reliance. Based on positive feedback from our diverse range of industrial customers, we are cautiously optimistic that our businesses serving the broad industrial market should continue to improve in the first quarter of 2021. Looking at the aerospace market. Demand in the aerospace defense market remained strong during the fourth quarter of 2020. However, demand in commercial aerospace continued to decline as a direct result of reduced air travel due to COVID-19. We are maintaining a positive outlook for the aerospace defense market and are cautiously optimistic that demand in commercial aerospace may begin to slowly recover in the later half of 2021. Finally, demand in energy, which is mainly oil and natural gas remained under pressure in the fourth quarter of 2020, with modest improvement expected in the first quarter of 2021. We believe we are well positioned to support a recovery in this market. Although our current outlook for certain of our end markets remains challenging, we believe our resilient business model will continue to serve us well to the recovery that will follow these extraordinary times. Moving on to Slide 5. Reliance went public at $14.50 per share or $3.22 a share on a split adjusted basis on September 14, 1994. Over 26 years and 3 stock splits later, we closed at a record high of $152.83 per share on March 12 this year, resulting in a compound annual total return of approximately 16.7% since our IPO. Moving on to Slide 6. Because we cannot control external factors, such as end market demand and global metal 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 periods by remaining focused on the following key business fundamentals. First and foremost, the health and safety of our employees, customers suppliers and communities. Extraordinary customer service, effective inventory management, focusing on high-margin business. And finally, our most recent emphasis on innovation and a commitment to continuous improvement. We believe these business model fundamentals as well as a few other characteristics of our model, which I will discuss in more detail, set us apart from our peers. Moving on to Slide 7. Two of our most important operating matrixes is our gross profit margin and inventory management, which we believe directly influence each other and contribute significantly to our cash flow. In 2020, we achieved a record annual gross profit margin of 31.5% and reduced our inventory by $225.3 million. This helped generate significant cash flow provided by operating activities of $1.17 billion. Importantly, our business model enables strong cash flow generation throughout economic cycles. Even in times of reduced earnings, such as the second quarter of 2020, we generated a strong cash flow as we reduced our working capital. Slide 8. We believe our investments in innovation over the years have significantly driven growth and continuous improvement to our business, as evidenced by our higher gross profit margins, which leads to increased earnings power. Over the last 5 years, we've made CapEx investments of nearly $1 billion, significantly outpacing our peers. In 2020, our capital expenditures were $172 million, of which over 50% was allocated to growth activities. Our 2021 CapEx budget is $245 million as we remain dedicated to growth-focused investments in many strategic projects to support our customers and deliver a strong ROI. We continue to be there for our customers through all cycles. I strongly believe that when the time comes, America is going to need Reliance to rebuild. In uncertain times, our customers often rely on us to do even more for them, and we are well positioned to continue to support them. I'd like to highlight our investments in growth through acquisitions and activities. We've invested nearly $650 million in acquisitions over the last 5 years. Having completed 97 acquisitions since our 1994 IPO, M&A has been and remains a core element of our growth and diversification strategy. Slide 9. We've paid regular quarterly cash dividend for over 61 consecutive years, and we've increased our dividend 28x since our 1994 IPO. Our most recent dividend increase was 10% for the first quarter of 2021. Our increased annualized dividend is now $2.75 per share. We've also repurchased $1.25 billion worth of our common stock over the past 5.5 years as a part of our opportunistic stock repurchase strategy, including $37.1 million in the fourth quarter of 2021 at an average cost of $108.43 per share. Our strong financial profile enables us to execute on all of our capital allocation priorities, whether it be in investing in organic growth, acquisitions, paying out dividends or repurchasing shares of our common stock. Slide 10. Reliance's scale has depicted in the -- as depicted in this chart, far exceeds that of other metal service centers companies with totals 2020 net sales $8.8 billion, nearly twice that of the next largest service center. And 2020 pretax income dollars of $478.2 million, nearly 3x that of the next largest service center. Moving on to Slide 11. Now I'd like to take a deeper dive into our key business model differentiators, which we believe are our key competitive advantage. First, we are highly diversified in terms of our products, customers and geography. We maintain a decentralized operating structure. Our individual businesses benefit from our scale and supplier partnerships. While maintaining customer relations at a local level and operating in an entrepreneurial setting, ensuring the decision-making and resources are kept close to our customers. We emphasize when needed inventory management, ensuring that our inventory quantities reflect current demand levels, and we incentivize our managers closely against this matrix. Our managers in the field are also responsible for pricing discipline and expense control and understand the value we provide to our customers. 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 emphasis on organic growth and innovation, we continue to make significant investments in our business. We are highly focused on innovation, investing in state-of-the-art processing equipment in order to provide even more high-quality services to our customers, while simultaneously improving our gross profit margin. Now I'd like to turn the floor over to Karla. Karla?

Thanks, Jim. Hello, everyone. Next, on Slide 12, let's turn to our end-market diversification. We believe our diversification has been instrumental in our ability to produce industry-leading operating results on a consistent basis through all market cycles as many of the industries in which our customers compete are cyclical in nature. We have benefited from this diversification in the current environment as declines in commercial aerospace and energy are being offset by more stable markets like nonresidential construction, defense and semiconductor. The end market breakdown of our shipments, depicted on this pie chart reflect our best estimates since it is very difficult to track which specific end markets our products are ultimately used in. You turn to the next slide. In addition to end markets, 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, and we try to balance our sales across the major metal commodities with an emphasis on specialty projects -- products. On Slide 14, when we talk about a decentralized model, what does that really mean at Reliance? There is not one model at Reliance. In addition to diversity of products, end markets and geography, our family of companies are structured differently. They go-to-market differently, they price differently, and they buy differently to name just a few distinctions. Our FOC managers make the day-to-day transactional decisions with limited oversight from corporate. We drive them to make good decisions by keeping it simple with consistent KPIs and a compensation structure that is heavily weighted to how they perform. We'll move to the next slide. The final key business model differentiator I would like to highlight is our best-in-class service. At Reliance, we focus on smaller customers who value our ability to provide high-quality products and services in small quantities on a frequent when-needed basis. Our average order size is small at approximately $1,900 per order. Putting this in more context, we produced net sales of $8.8 billion in 2020, $1,900 at a time. Through our proprietary fleet of trucks, and decentralized structure, we can provide quick order turnaround. Over 40% of our total orders are delivered within 24 hours of our customer placing the order. And in 2020, we performed value-added processing on 49% of our orders, up significantly from our more historic levels of about 40%. Our growth in value-added processing has helped support our higher gross profit margins over time. If you'll move to the next slide, this slide shows the improvement of our gross profit margin from our historical range of 25% to 27%, up to our current increased, estimated sustainable range of 28% to 30%, which we announced in February of 2020. We believe our higher level of value-added processing services along with an increased emphasis with our sales people to properly price the value we provide to our customers has been key to expanding our gross profit margin and is a significant factor behind this improvement. We believe our performance-based compensation structure motivates our people and supports our consistent and growing gross profit margin and increased earnings. We flip to the next slide. No matter the operating environment, our gross profit margin is consistently best-in-class in the industry. This chart illustrates Reliance's gross profit margin in green, consistently exceeding the metal service center group in yellow. And we're also showing the mills in red as we are often grouped with metals producers from an investment standpoint because there are not many publicly-traded metal service center companies to compare us to. However, as you can see from this slide, our gross profit margin is both much higher and more consistent than both the service center and mill groups. And we have begun to compare ourselves to the industrial distributors peer group, shown in blue, as many characteristics of our business are similar. And if you flip to the next slide, we believe our differentiated model of diversification, small order sizes, growing value-added processing and focusing on providing value and service to our customers is the key to our stronger margin profile making our earnings more resilient to fluctuations in metal pricing and, therefore, should support a higher valuation multiple than the metals group. We believe that Reliance should trade more in line with the industrial distributor group. On the next slide, turning now to capital allocation. 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 Jim discussed earlier, we're focused on organic growth and acquisitions to drive our earnings higher, and we believe that these activities represent the best long-term use of our capital. But we're also committed to returning capital to our stockholders primarily through regular quarterly dividends and opportunistically, repurchasing our shares. On the next slide, despite the unfortunate circumstances of 2020 resulting from the pandemic, we maintained strong financial performance with a record gross profit margin of 31.5% on net sales of $8.8 billion. And due to our strong margins, we generated strong non-GAAP earnings of $7.71 per diluted share on the heels of a record year in 2019. Next slide, please. Our enhanced gross profit margin and effective working capital management contribute to our consistent, strong free cash flow generation. And while the first half of 2020 was impacted by COVID-19, we continued to generate strong cash flow from operations of $1.17 billion for the year. And at December 31, 2020, our total debt outstanding was $1.66 billion, and our net debt-to-EBITDA multiple was 1.1x. To capitalize on the low interest rate environment, we completed a $900 million senior notes offering in August 2020, comprised of $400 million of 5-year notes at a coupon of 1.3% and $500 million of 10-year notes at a coupon of 2.15%, and this improved our already strong liquidity position and extended our debt maturity profile. And in addition, in September 2020, we entered into an amended and restated $1.5 billion, 5-year unsecured revolving credit facility and had no outstanding borrowings at the end of the year. And I'll now turn the presentation back over to Jim for concluding remarks.

Thank you, Karla. Moving on to Slide 22. I would like to conclude our presentation today, talking about safety, and sustainability, our most important core values. Moving metal safely is no easy task. We take the health and safety of our employees, customers suppliers and communities very seriously. Our executive team supports a company-wide safety program, and we have a team of safety professionals that encourage and monitor safety best practices across the organization. We remain strongly committed to reducing the rate of injuries and achieved a 23% year-over-year improvement in our incident rate in 2020. And our fleet accident rate has remained significantly better than the national benchmark over the last 4 years. While we are proud of these improvements, we will not stop until these rates go to 0. And have implemented a company-wide program and a recent focus that we would like all of our employees to keep it personal. We have heightened many of our health and safety measures in the current COVID-19 environment. At the onset of the pandemic, we took immediate action to lower the risk to our employees by promoting remote work from home, when possible, implementing special benefits to encourage employees to stay home if experience any -- experiencing any symptoms and have continued to implement strict social distancing and improved sanitation measures. Move on to Slide 23. We are also dedicated to sustainability and ensuring that our operation minimally impact the environment. Most of our inventory is produced or recycled metal, and our buildings are energy-efficient and our service centers are strategically located close to our customers to reduce our carbon footprint. Slide 24. In summary, we believe Reliance is a strong investment. Given our strong set of company-wide core values, including our most important one, safety and sustainability, our diversification of products, customers, end markets and geographies, our decentralized operating structure, our ability to expand and sustain industry-leading gross profit margins, consistent profitability achieved throughout all economic cycles, a strong balance sheet and countercyclical cash flow generation, which helps fuel our growth and long-standing history of stockholder returns, and we have a strong and resilient business model and provide the -- proven ability to successfully execute in all environments. Our diversification, coupled with our strong balance sheet and cash flow enables us to remain profitable despite the current extraordinary market challenges and to preserve jobs for the significant majority of our employees, provide enhanced solution to support our customers' changing and growing needs as well as to support the growth and stockholder return priorities. Thank you very much for your time and attention today. I'll now open the floor up to questions. Tyler?

Yes. Thanks, Jim. For those people who are -- who've joined online, you can ask -- submit a question, and then I can relay it to Jim and Karla. Maybe just to start, and obviously, sort of prices for steel and other metals sort of has seen pretty strong gains over the last 6 months. And then I guess, do you have a sense on how much those price gains are being driven by improved demand versus the supply lagging and kind of sort of not anticipating sort of the jump in demand?

Tyler, I think it's a combination of both. I think the stronger of the 2 is the demand. I think the demand was somewhat unexpected. For those of us who operated in this pandemic, I can't even remember how many decisions had to be -- had to have been made on a day-to-day basis. First of which we had to figure out if we were an essential business or not. Once we figured that out, our immediately -- our immediate thought was how can we keep our people, our customers, our suppliers, our communities safe. So we had to go through all that. Once we figure that out, we turned our attention to, okay, we're in this game, we're essential. If you look the word up essential in the dictionary, it's important to be us. So we went to work. And the demand was the demand. There was plenty of customers who weren't even open, who slowly but surely became open. A lot of our competitors didn't do what we did. But we figured it out, we figured out how we're going to do this. And the same thing with producing mills, nobody saw this coming. Nobody saw it coming. Nobody knew how to come out of it, but I think they did a wonderful job of coming out of it, doing the exact same things we were doing. In fact, we shared -- we've got very good relationship with our domestic suppliers. And we -- and we're all in this thing together. When it comes to safety and how do you manage a pandemic, it was everybody. Whoever had a good idea, we were working with. And so, I think the demand surprised some people. I think they did the best they could do. In our business, we can jump right back into business very quickly. In fact, our businesses run day-to-day, week-to-week, month-to-month. That's just what we do. The way our business operates, we can turn on a dime. I can't even tell you what we're doing tomorrow until later on today. That's the kind of business we do. In fact, I think we mentioned earlier, 40% of our orders are delivered the next day. Well, they're in a completely different business. So I think they did the best they could to get back in business. The demand hit them hard and fast. So I think that was the driving force. I think they're showing great restraint in not bringing their mills back up to whatever the level they think is running at capacity. I think that would be a difficult decision to make, because we're still in a pandemic. We're just getting better at it. We can see the light. It's a little closer, but we still have to make some really difficult decision. So I think the -- I think what they're doing is they're doing the best they can do. We applaud their efforts, and we support them. So I'm not sure what you're going to point to and say that's why the price is what it is. It went up rapidly. The good news for us is, we are getting what we need. We're taking care of our customers. The price is the price. But people don't buy from Reliance for the price. They buy from Reliance because they need the metal and our value-added strategy. So that's the way I see the whole pricing situation right now.

No, that's very helpful. And then just and maybe going on to demand. Obviously, there's been sort of talk about sort of infrastructure bill. And can you talk a little bit about sort of sort of -- I know it's hard to predict, the likelihood of that happening? And then sort of -- are there certain, I guess, components of a bill that would make it sort of more metal intensive? Just sort of your thoughts on there would be great.

Sure. I got my fingers crossed. I -- not just because I work with a great company like Reliance, but just as in America. It just depends on where you grow up. I happen to have grown up in Pittsburgh, Pennsylvania, and there's a lot of bridges there that I wouldn't cross. In fact, a lot of them are closed. America needs to do this. It has to happen. We've been talking about this for years now. And it used to be a matter of if and when, it's not a matter of if anymore, it's a matter of when. I can't tell you it's going to be this year. I think the President, this administration is pretty well focused on the pandemic right now and getting the COVID shots out there, and it seems to be working. I think this big $1.9 billion relief bill that is just coming out. Looks like. It's great. Putting it down on a piece of paper, then you have to figure out how you're going to pay for it. That should be interesting. I have a feeling I know who's going to have to pay for that. It's probably a lot of people on this call, but that's okay. We need to do that. As far as the infrastructure has been, there was a bill in 2015 if you remember. And it was called a shovel-ready bill, meaning all the prints are in, everything has been approved. They have the shovel in the ground, they're ready to go at it. And they're trickling in now, and that was several years ago. So eventually, they'll come about. At Reliance, so I can tell you, we're seeing infrastructure type orders. But the infrastructure -- I think that people think about infrastructure, they think about repaving roads. Well, that really don't -- that's a temporary bandaid. What needs to be fixed are bridges that -- unfortunately, it's going to -- it would take a tragedy to get people to fix these bridges. So there's bridgework. There's things like water treatment plants, electrical grids. And it just goes on and on. And everything I mentioned is just chock full of metal, which is a good thing for Reliance, and it's a good thing for the economy, by the way, because Reliance employees, I don't know how many Karla we have, 14,000, 15,000 people right now, and they're good jobs. And I've said this several times, America is going to need Reliance to rebuild. And I'm sincere about that. Not only because they're going to need our expertise and the fact that we've got so many locations ready with the metal that's going to be needed and this high-tech value-added activity, but the jobs themselves, those are good jobs. Those are jobs that get the economy going again. I'm not sure if you can get the economy up and running again on nail salons and barber shops, that would be -- I hope that would be good. But I think the majority of getting America rolling again will be a higher paid manufacturing jobs. And I think we've learned something. I know at Reliance, we've learned a lot about ourselves, how could we be more efficient. And we're not going to go back. We're going to keep those and continue to drive those. But one thing that we learned is that what we've been spending money on over the last several years was important. And it's timed almost perfectly and we stand ready, whenever that does come about. So I hope that answers your question. I'm not sure I hit the second one. But it doesn't matter. Any one of those projects are going to take a lot of metal. And like we said before, we stand ready to do the right thing for -- to get the economy up and running again.

No, that's definitely helpful. And then do you have a sense for how much sort of spare capacity you have within sort of your nonresidential construction business if sort of that market were to really sort of start going?

I can -- I'm not going to give you a number. I can tell you that we have capacity. We're still not to back to pre-pandemic levels. And I can't even tell you on a non-res, we're back to 2008 levels, right? So we've got the capacity to go. I just don't know what it is. Karla, you might have a better feel for that. And it's operation by operation. We have so many operations. But Karla, you might answer that.

Yes. I mean, on a -- compared to a pre-pandemic level, we had many of our non-res operations that were probably still running at least 20% below kind of 2006, 2007 levels on a volume basis. As Jim talked about, we are doing a lot more value-added processing in those facilities now. So we're running more dollars, more profits through, but we definitely have the ability to put more volume through. We're typically running 2 shifts, 5 days a week, you can always add another shift. So we are very ready and able to process and ship a lot more volume if we see that come from the infrastructure bill and what we currently have in place.

And then I think sort of another sort of theme that we're seeing in the sort of the metals and mining and industrial space is sort of the decarbonization sort of trend. If that were really to move forward, would your leverage be in sort of modifying the sort of electrical infrastructure of the country. I don't know if it's light-weighting autos? Are there any sort of areas where you kind of see sort of Reliance sort of playing a role and sort of benefiting from that trend?

Yes. And I think we would actually participate in several of those areas already in our toll processing operations, which -- that's where we do not own the metal, but we process it typically for the steel or aluminum producer, [ whomever that may be ]. And we store it, we inspect it, we deliver it to their end-user. And we've seen a big shift and big growth in our toll processing businesses over the last 4 to 5 years with the automotive aluminum being used to lightweight cars. There continues to be opportunities, whether through aluminum or high-strength steels, where they're trying to continue to lightweight automobiles. So we participate in all of that on both the steel and aluminum side. Renewable energy, we kind of dumped that in our non resin infrastructure group. So we're participating with solar, wind, there's a lot of work being done just in upgrading power grids and water treatment plants, not as much as sustainable. But most things use some form of metal. And because we have such a broad set of products that we participate in, we would anticipate benefiting from a lot of those moves into various -- whether it's the structures for the batteries and the electric vehicles to ride on. There are multiple different ways that we would touch some of those markets that stand to benefit from that.

Great. And then I think I have a couple of minutes left. Maybe just a sort of final question. In terms of capital allocation, maybe could you just talk a little bit about your preference right now, anything sort of organic growth, acquisitions? I don't know if it's been sort of harder to look at sort of acquisitions in this environment, sort of dividends and sort of share repurchases, just kind of give a sense of sort of how those sort of rank at this time?

Yes. I'll start and Karla can jump in. We really don't have any priorities when it comes to those things. We've worked real hard to be able to do all of them at any point. Sometimes, I mean, I love buying shares of Reliance stock. That's a great investment. That's my favorite company. When you get to buy some Reliance stock, that's a good thing to do. So we'll do that. M&A, it's still a core strategy of ours. We look at a lot of companies. We continue to look at a lot of companies. We just refused to lower our entry level. We want good companies. We want immediately accretive companies. We want to spend our money wisely. Because we've grown to the size and the success we've had in our balance sheet. We have a nice problem. We have a lot of cash, and we can do a lot of different things. So on the M&A front, do you look at a company and say, okay, it's an okay company. We can do that, and we've got plenty of cash to buy them. Do we buy a company and pay a higher multiple, do we pay up for this company? Or do we just simply look at the companies we already own and give them 3 more lasers to use? Or do we add another line? I'm not sure paying a premium is the best thing for us to do when we can simply look at the companies we already own. So we have those kind of decisions to make. The dividends. We run our company based on the quality of earnings. That's the way we run those. We know who owns our company. And we like to give them back what we can give back. We've paid a dividend for 62 years. We bumped it up 28x. We just bumped it up again another 10%. It's at a nice level right now. We like to do that. We obviously pay debt down. We're an investment grade company, which we like to be that. So I don't really -- and the CapEx, we love internal growth. That's the fun stuff. That's where we can really stretch our legs and take advantage of the innovation that's out there and the things that our customers need and want us to do and the things we can charge for. So every one of those, I mentioned, is a -- is -- we really like it. So there's really not a priority. Karla, you could probably have an opinion on some of that or one of those?

I think you covered it well. Primarily, we just always want to be able to execute on any 4 of those buckets that Jim talked about. Generally, we feel that organic growth or acquisitions, doing the right ones are the best long-term uses of our capital to continue to grow the company. But certainly, we've been active and like to opportunistically repurchase shares of our stock and pay a steady dividend. So we continue to be able to do all of those. Thanks, Tyler.

Perfect. Yes. Well, I think that's about all the time we have for tonight. So again, thank you, Jim. Thank you, Karla, for joining us. We appreciate it.

Thanks for having us, Tyler. Thanks for the support. We appreciate it.

Thanks, everyone.