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

Good day, everyone. Thank you so much for joining. I'm Timna Tanners. I'm Bank of America's Metals and Mining analyst. I'm delighted today to be joined by Reliance Steel & Aluminum. We've got Jim Hoffman, CEO; and Karla Lewis, President; and CFO, Arthur Ajemyan. I'm sorry if I just swallowed your last name Arthur, but we're delighted to have you join us today. For those of you who don't know Reliance, you're missing out. Reliance is a distributor of steel. It is the only distributor we have here, partly because it is the only one that meets our market cap requirements, because it's the large one and a successful one. And I've known Reliance over the years and watched them just grow pretty substantially. So we're going to do a bit of a fireside chat. Please feel free to submit your questions through the Veracast system or Bloomberg, I'll try to catch any there as well.

But first off, I feel like it would be great to get the perspective on Reliance of how you've navigated this past year? I think one of the big questions is, how did COVID not hurt you more? And where do you stand with regard to coming out of that? Are you back to pre-COVID levels? Or how do you think your operations are relative to that time frame?

Okay. Thanks, Timna. Good to seeing you again. Thanks for having us. Really appreciate BoFA having us here today. Great question. I'm going to start off by telling people -- probably what they don't know is, and that's what we're not. We're not a producer of metal, okay? We're a solutions provider. And we get -- we get thrown in with a bunch of people who just move metal around, but we're not that person. So -- or that company. So good question. I don't want to repeat it. I can tell you that. It was difficult. It was difficult. And I've tried to kind of forget everything about it. But to be honest with you, it hit everybody hard. And just because of the industry we're in, in our model at Reliance, we were able to react quickly, and our part of our models forever has always been the health and the safety of our folks, our customers, our suppliers and our communities. So that gave us a pretty good line of sight of what we needed to do right away. Once we determine that we were an essential business, we took a lot of steps to really try to figure out what was going on. If you remember in the beginning of the pandemic, a lot of misinformation out there. I don't think any of that was contrived. I think it was just be -- figuring out what they were going to do. We locked down into the CDC, put a whole lot of common sense in. But we focus on taking care of our colleagues and our customers and suppliers would have. So once we decided, that's what we're going to do. Question after question answered itself. We're going to do that first. Now once that we did decide we're in the central business, we just started listening to our customers. It took them a while, took them a while to respond. We didn't know what they were going to need because of -- again, because of our model and the fact we do listen to our customers. It became apparent that the service part of our business was going to be paramount to them, which played exactly into what we've done with our company over the -- that was last 7 or 8 years. We've invested heavily, as you well know, Timna, in the value-added equipment. We spent over $1 billion in the last 7 to 8 years. We'll say half of that was in value-added equipment. The other half was in maintenance and lease buyouts and things like that. So thankfully, we made the right call. Our customers as they opened, they came to us with a whole lot of different needs. And thank goodness, we were ready. We had been building our menu of value-added things we can do. And we just started going back to business and it ramped up quickly. And because of the fact that we may seem real difficult to understand because we've done 67 acquisitions since 1994. So we own a lot of confidence. It's very diverse -- very, very diverse group of not only markets, companies, geographies, products, but the folks that we get to work with. The other thing that really helped us is we run a very decentralized business. It'd be very difficult to try to run a $10 billion -- $10 billion company or whatever the top line is or whatever is going to be. It'd be very difficult running in actually Downtown, LA. The good news is that the folks we have out in the field run all these diverse businesses. They took our lead, and we tried to help them with, this is what we're going to do with COVID, this is the things we need to focus on. And it was multiple times a week that they were getting direction. And just trying to help them navigate themselves. We wanted to take all the guess work out of their decision-making and allow them to focus on taking care of the customers. And that's what they did. And I have to be honest with you, Timna. I mean immensely inspired with the way they work through this. The way they've run the model, the way they've executed on all cylinders, just -- it's just inspiring. I can't think of another word to describe how that's happened. A lot of the folks that supposedly are in our space weren't able to do that. So we kept it up, and I'm happy to report that we are up and running, not on all cylinders because we're still -- this thing is over. We're still very, very, focused on the health and the safety of our people, which has always been part, but running the thing during the pandemic is certainly a new level. We also -- our model also helped us tremendously right now with our relationships with our domestic mill partners for decades. We've always been very loyal and very strategically thinking in keeping a short supply chain. We have some great suppliers who, at this time, are doing what we expect them to do. We're getting what we've earned. Because when things turn around, things aren't so great. We help them. We continue to procure our metal from them. And we were there for them and we've been there for decades. And here we are in a situation with pipe metal, and we're getting what we need where some others aren't. So again, the resiliency of our model has played out to be a very good guide to go through a pandemic. Regarding, want to go through again? I don't want to test it again. But I can tell you this, we've learned a lot. We've learned a lot about how we can run Reliance better through this pandemic. And our thought and our guide will be to not lose what we've learned and to continue to take care of our customers and help our suppliers run.

Let me ask it differently then. What is operations like relative to pre-pandemic, what are end customers like pre-pandemic? And maybe in some of your key markets, so like aerospace, probably not where it was, energy may be not, but like other markets probably back to normal, is that a fair overview or in your own words?

Go ahead, Karla.

Yes. So I think, overall, Timna, when we report -- and hi, everyone out there. Thanks for joining us today. Thanks for having us, Timna. But overall, from our kind of shipment levels in the first quarter, we were still a little under a little under pre-pandemic levels, basically Q1 of 2020, which was a good quarter for us until the pandemic hit. Probably commercial, aerospace and energy kind of focused on the oil and gas part of energy, which is the way we usually talk about it. They were definitely the laggards. And so I think they probably made up about half of the difference where we were under pre-pandemic levels. So we've seen most of our other end markets come back and continue to be very strong, nonresidential construction for us. And remember, we're not a big skyscrapers. We're the 4 to 5 storey buildings and below, so a lot of what's going on. Demographic shifts and changes from the pandemic really fit very nicely with the type of projects that we typically work on in the nonres space. There's been some infrastructure, some bridges and other waterworks and public works. And we're seeing that even without the bill passed yet, we see that continue to show strength and could be a really good catalyst, if we do get an infrastructure bill out there in front of us. If you look at some of the heavy equipment, ag, construction equipment, those continue to be strong. A lot of demand for ag equipment. I think there's dealer replenishment on a lot of the heavy equipment there and with the construction equipment. And then we're so diverse, like Jim talked about, we sell into so many different end markets. A lot of the consumer, probably most people out there probably have something on order that's really delayed because the consumer demand has been strong. So we've got the smaller customers typically that we're selling to, but we see continued strong demand across general manufacturing and industrial. Automotive, we don't really sell metal into, but that's where we toll process the metal for a fee. About 60-ish percent of our toll processing goes into automotive. And then appliances right behind that. Both of those, auto, in particular, ramped back up very quickly from the -- it went down very quickly in Q2 of last year and then ramp back up very quickly. We continue to see strength there. We've had some minor disruptions because of the chip shortages. Typically, we're on the more popular platforms with SUVs and light trucks. So we've seen the auto manufacturers being pretty strategic on how they allocate the chips that they have. So we've seen pretty minimal disruption down. And the good news is that our general consumer base is so strong that if we have any downtime on our toll processing lines, we've got other business to fill it up if the automotive are temporarily down. So overall, we're very positive. People right now, they just want to know they can secure the metal with the tight supply. And that strong demand has helped pull and maintain prices at really strong levels.

Thank you for that. I think Jim touched on it, you just touched on it, it is the availability of the deal, right, that the challenging market. Certainly, some of our channel checks who are obviously smaller than you all, having trouble getting metal, and you alluded to not having those same challenges. So are you able to get 100% of what you want, when you want it? Or can you talk to us a little bit about what happens when lead times extend and how you manage around that?

Yes. No. The answer is no. We don't get -- we've not gotten 100% of what we want. We've got 100% of what we need . Those are 2 completely different things. And to be honest with, I think it would really be unfair of us right now to flex our muscles and force our partners to do things that they really don't want to do. I mean they've got businesses to run. They're here for us. We get -- we have -- what we get, what we need. And I think on a short-term basis for us to just be a bully and try to get other metal with, it'd be wrong. They don't do it to us. And we don't do it to them. We feel for them. They did the same thing we did and they did -- with this pandemic, there was a lot of work to be done. And they can't change the way we can change. We can change within a matter of hours to figure out how we're going to run this company. They have to do things like shutdown electric furnaces, lay off people. And it just took them a while to come back because demand took off so dramatically. So to answer your question, we don't -- we are not getting what we want, but we're getting what we need. The other thing that you know, we have an advantage. We may have a company with a whole -- in inventory. But there's 50-some-odd other companies that we own that they can call and get that product quickly. And we were able to get it to our customers without it -- without them even knowing where it came from. So that's a really a good advantage. So we that -- this built into our model. The second part of the question, how do we handle our inventory? Like we always do. Prudently. We're not going to get caught up in this. There's no reason to go and speculate what the price is going to be tomorrow. Our domestic play has been -- it's worked. Even when there's a lot of import coming in, they keep us competitive. So there's no reason for it to us to go undo that. And a lot of our customers learn, there's no reason for them to do that either. So I think as this thing goes and plays out, Reliance will be much, a bigger part of our customers' business. So their inventory, we can end -- we'll worry about your value-added inventory. You can worry about building whatever it is you're going to build. But our inventory, we've hit our inventory turns. We actually hit them pre-pandemic, which we're proud of. And we hit them again, and we're going to continue to be a prudent user of cash, and we certainly have a lot of it. We generate a lot of it, great problem to have. Not complaining, but tying a bunch of inventory, a bunch of cash up in inventory is never going to be a Reliance job. That's just not a good way to go. We've been -- some of us have been through a lot of these ebbs and flows and just not worth it to change now.

No. Don't worry, I'll [ back ] the above cash, I promise. But with regard to the inventory situation, I just think it's really interesting because, like if you have 8-week lead times versus 4-week lead times, you have to buy more, right? I mean, I just wonder like how much of this panic is just the longer lead times and having to buy more? And if lead time shrink, does this reverse? So how do you manage that kind of extension of lead times that's so unusual? Do you just buy what you need and then manage around that?

Yes. You listen to your customers. They tell you what you're going to do. And you don't speculate and you have relationship. And -- saying the word relationship, all relationships have a lot of layers to them, right? The suppliers that we have, I mean, we have VMI programs. They're -- we have a lot of different things. We figured out a long time ago, you had to really be a good customer. If you're a good customer, they're going to take care of you. So the things that we have that a lot of people probably don't or never thought of, they're paying off, they're paying off. So long lead time, short lead times, they are what they are. Now not selfishly, but realistically, long lead times lend themselves to our model because longer the lead time, our customers -- remember, we did in last year, $9 billion, $1,900 at a time. So our customer base, they're less sensitive to price. They're more worried about the service, and they let us handle all these different things. When the lead times go out, we go out with them. When they come back, we're able to create inventory within the family of companies. And it all looks like it's simple to do, which is not. But that's how resilient our model is because we've been at it a long time, but we've tweaked it over the last 7 years and certainly over the last couple of years to help us through things like this. Now I'm not telling you that we knew this pandemic when it was coming. Trust me, but it's worked out in our favor.

So have you heard much about customers switching to other products or holding off on projects because of inability to get steel or steel prices being particularly high?

Yes, Timna, so I would say at the beginning of the year, we did hear some customers pushing back a bit, thinking that they could wait it out on the price increases and then more dynamics. And things were happening in the industry, whether planned or unplanned that those customers, I think -- and all of us kind of recognized that this wasn't going to be that short cycle, maybe we've seen the last few times around and that the higher prices were probably there for longer. So people moved on quickly and got their projects going. So we continue to see new projects come up for bid and get kicked off. So demand seems to be strong even with the higher prices, more of, just get me the metal as opposed to I'm not willing to pay that price. So we obviously are always monitoring that and checking that with our customers. But we've seen continued strong demand across the most of the -- outside of aerospace, commercial space.

Right. All right. So let's talk about the market. Let's talk more about Reliance. There's 2 things I want to know. I want to know about your secret sauce, and I want to know what you're going to do with cash. So that's what we have the -- like next 10 minutes to sort out. But seriously, I mean, Reliance has defied the industry's norms in terms of profitability. And I really don't think I fully understand the toll processing. Is that your secret sauce? Can you talk a little bit about toll processing and what that does for your operations?

Yes. So toll processing, we really like that part of our business. We like all of our businesses, but toll processing is it's a large part of the business from a volume standpoint, even though we don't include their tons that have not been shipped. So that's where we're -- in our toll processing businesses, typically, the metal producers are our customers that we are performing services on their behalf. Typically, we sit between the producer and the end user, whether it's automotive appliance, et cetera. And so we will process the metal, slit, edge, trim it, et cetera. We will inspect the metal defects so that they don't send that metal into their end user. We may put special lubricants on the product, depending on what the need is. And then we'll also store it and deliver the metal to the customers. Some of the customers we may deliver to them 5x a day depending -- these are large volume programs. And so we're very vital to keeping their production lines running. And so they have to be really good at what they do. And we believe a lot of -- a lot of companies in our space do toll processing. But the toll processing companies, we have one -- primary one in the U.S. that we've owned since 2003. We acquired another 4 locations of a different, very good toll processing company down in Mexico in 2008. It was actually 3. We've added a fourth location, and then we picked up another U.S. company recently. But what really attracts us to them and what we believe sets them apart is, they really focus on the hard to do kinds of toll processing. So like I said, a lot of people can do it, but you're usually doing it in one of your service centers. These guys focus on it. They're very good, they design their own processing equipment to allow them to do things that a lot of other people can't do. So we think they've got that really niche sweet spot within toll processing. And with that, sometimes people think that the reason our gross profit margins have increased is because we're doing more toll processing, and that's not the case. It's incremental and positive for our company-wide gross profit margin, but it's not 100% gross profit. So we do load labor and overhead into cost of sales for that. But it's -- we just come back to them being a solution provider for our customers and us being in the sweet spot, we believe, of that toll processing segment.

I always find it interesting. Very interesting. I love them. It interest me while people are so focused on that growth on the toll processing. It's this much of our business, and people like to focus on it. We love it. But we have a lot of really cool companies that do better than that. But I guess that's what people think. That's what they think. There was a time where all of our toll processing was shut down for a period of time, too, and we did okay. So there's your litmus test. Is it all about toll processing? No. And by the way, it's a really hard business. It takes a lot of capital to keep these things up and going. And we have companies that think technically design and build their own equipment, which is unique. But that's a great business, but it's not -- that isn't all the secret sauce, that you like to call it secret sauce for Reliance. But we love them.

So there's more to the secret sauce. But it does sound like it's about the value-add. It's about doing more than just slicing and dicing and storing metal, right? Is that...

You know, Timna, you're on it. It's about execution. It's about understanding the model. It's about getting along within the FOC. It's about the relationships with the mills. It's about the things we don't do. It's -- we're not home run hitters, okay? We hit a lot of singles and doubles, and we had a lot of them. And it's buying the right companies. It's having the right 8 players in 8 slots. There's a whole lot of different things that make Reliance a good company. And I mean a simple fact is, we literally focus on the health and the well-being of our colleagues and customers and suppliers and communities, but it's also about focusing on quality of earnings. That's -- you know, that's what we do. We don't -- the top line is an interesting number to somebody. And I have to be honest with you, I never even notice what it is, until it's time to do an earnings call. As we look -- what's the best thing for our shareholders and we make decisions based on that. So there's a bunch of little interesting things about our secret sauce. But again, I can't tell you how inspired I am with the way our folks out in the field and the staff and support people really execute through this.

All right. So no more nice questions. Now I'm going to get to the meat of the concerns here, I think, or just really on your cash position. So I've covered you for 1.5 years -- a 10.5 years. And over the years, Reliance has consistently been an acquirer of different assets, a roll-up company, paid a bigger dividend every year. And now with interest rates really low, the cash is probably enough and you can't pay any more debt down. I know you know that, I'm just framing the question, okay? So what do we make of this? You're not going to tell us that you're -- what you're going to acquire. But how do we reconcile the next stage of growth for Reliance? And I'm modeling the company, I don't want to just have prices and gross margins. I want to know what Reliance can do to build things going forward? So there's your last [ zinger ] of a question in 4 minutes, if you can answer it?

Yes. We'll do it real quick. Jordan, bring up Page 10 on the slide. That will kind of frame it, and then I'll flip it over to Arthur, so he can figure out what we're going to do with all this cash. And by the way, we know that. We like the position. Everything is in play. Flexible -- remember word flexibility and opportunistic. Those things don't change. The numbers have changed. And if Jordan can bring that up. If he can't, I'll just slip it over to Arthur, you can tell the group, whatever you feel like telling.

All right. Good question, Timna. A fair question. We're certainly aware of it. Going through the pandemic, M&A wasn't on top of everybody's list for a period of time, as you know, it was all about liquidity, cash preservation. So -- and that's just like everybody else is, so we're focused on. And as you know, during the pandemic, our performance was phenomenal. We generated over $1 billion of cash flow from operations. Did we expect that to be the case and we have that level of performance, as Jim alluded? No. Going into it. But that's how the business -- that's how well the business performed. So investing back in the business, it remains a top priority for us, right? And on the organic growth side, that's it's a lot easier to control. We have the CapEx. But in this environment, now you have supply chain disruptions that's affecting the actual spend as well. Like, we can't spend that money as fast as we would like it because the delays for equipment manufacturers, et cetera. And on the M&A front, there's a lot of variables at play. And as Jim has said before, we don't necessarily target to close a fixed number of deals per year because that would lead us to doing perhaps bad deals. But the pipeline is pretty healthy. We continue to look at that. On the shareholder return activity side, we've been pretty active. The last couple of years, we've bought back close to $900 million of our stock. The dividend increases have been there every year. Just the most recent one was 10% increase. So again, a lot of activity on that front. So all in all, we have the balance sheet to be able to execute on all facets of our capital allocation strategy, whether that's M&A, whether that's organic growth, whether that's stock buybacks or dividends. So to recap, we're certainly aware of it. We're monitoring, but investing back in the business, continues to remain a top priority.

And Timna, just one more thing on M&A. And I know you know this. I mean we don't look as 6 years as we used to it buying all these companies. But we have a really good problem and that we look at companies and we get to make a decision. We look at this company and say, okay, do we buy this company and pay a premium for them? Or do we simply just spend some more CapEx dollars and add a few more lines or buy some more tube lasers or as Karla had mentioned, we have a couple of new toll processing operations that could have looked like an acquisition. And we've chosen to buy somebody, but we just didn't do that. We just said, why wouldn't we do that? Why don't we just spend some CapEx dollars. So we have that little added advantage in our pocket. But as Arthur said, there are some fine companies out there. And we are continuing to work hard. We're going to continue M&A. We've been courting companies for years. It's just a matter when they be becoming for sale. There's other companies that come about. I mentioned adjacent company, broadening our horizon a little bit. We've already done that. We've bought some companies. When you mentioned -- when I use words like that, all of a sudden, we get bombarded with companies that look like that. As long as they're good companies, we'll pull the trigger as long as the timing is there and the price is right. So M&A is integral part of what we're going to do, along with everything that Arthur just mentioned.

Well, with that, [indiscernible] we're out of time. Appreciate you guys joining and supporting our conference. It's always great to see you. Of course, it will be even better next year in Miami. And again, thank you so much for joining us, everyone on the line. And we'll talk to you soon.

Thank you, Timna. We appreciate what you did.

Thanks very much.

Thank you.