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

Yes. We've -- we worked real hard to look at our business differently. Certainly, our model has helped us. As I said earlier, we've focused on the health and safety of our colleagues and customers and suppliers and communities forever. But certainly, because of that in our DNA, it helped us through this pandemic. And we've worked real hard not just to eliminate, is to rightsize ourselves. We've said, "Hey, how can we get better during this?" You don't want to waste the pandemic, trust me. So we've changed internally how we do business. And the equipment we've bought, doesn't need as many operators. We've changed some of our layouts in some of -- in our operation. We have people working remotely. We just have done a lot of things differently. So we're not going to be bringing back all the people that we let go unless we continue to grow dramatically, which should be a good problem to have. But right now, we can do just fine with the way we've developed -- the way we service our customers. So that's -- Reliance is a better company now than we were when this pandemic hit. Forced to be -- which is -- that's okay. It doesn't matter where the continuous improvement comes from as long as you're continuously improving. Innovation is a wonderful thing. You can steal innovation. You don't have to pay for it, and that's what we've done. And the equipment manufacturers that we actually sell steel to also have come up with some really innovative things that will help us run our business more profitably. As far as where pressures are coming, Karla, you could probably speak to that. Certainly, one of them is from a trucking standpoint, inbound, but Karla, you can kind of run through what we've seen.

Yes. So from an inflationary cost perspective, we have seen a lot of different costs go up, whether it's fuel cost, packaging materials. We use quite a different -- few supplies to package materials. However, our customers want those delivered to them. So we've seen cost pressures in those areas. Those, we generally are able to pass over to our customers. We give them kind of an all-in price. And so that would include any of those higher costs we have to be able to service them. We have seen some pressure on wages. With the economy recovering, a lot of companies, not companies in our space, just companies in general, are having to pay fairly higher wages to get people to come to work. I think, hopefully, with some of the government assistance coming off, it's going to help us drive more folks back into jobs. But it has caused us, in certain cases, to increase wages for our workforce, nothing material. But we do see some pressures there. At Reliance, Jim talked about how we've always focused on taking care of our colleagues. We have had consistent wage increases every year. So it's not that we're really behind the curve because we haven't done that. We just, with the shortages, have had to bump up a little more, but again, not to a material level. And our headcount, Phil, first quarter of this year compared to first quarter of last year, our tons shipped were down about 6.7%, and our headcount was down about 8%, 9%. So we're able -- to Jim's point, we're able -- kind of our motto is, right, do more with less and because of the innovation and changes people have made that we've learned throughout the pandemic and just through continuous improvement we've been able to achieve that.

Great. Can you give folks an idea or your mindset on capital allocation priorities and how you make those -- how you go through and make those decisions. Clearly, your balance sheet is good right now. It typically is good and so -- and you generate a good amount of cash. So you have options and choices, but how do you go through that process to determine the best pathway?

Yes. I can start, and Arthur, you can jump in, but that's -- Arthur is really good at that. And we've got a good problem, we've generated a lot of cash. We have opportunities, like you said. But Phil, really nothing's changed other than the volume of cash that we have right now. M&A is still an important part of what Reliance has been. It still is. We're working real hard. We're looking at a lot of different types of companies. And we've broadened our scope a little bit on what type of companies we'd be interested in, not just because we need to do that, just because we've done it. We've done smaller ones that really don't hit anybody's radar, but we like it. It's a good place to make money. So we're continuing to look at standard metal service centers that we think will fit the family of companies. They have to be immediately accretive, good in the market, good people, all those types of things, good fit. As you know, we've walked away from companies that seemed like a good fit, but they weren't. But we're -- the M&A front is still very important to us. It's just a matter of getting the right 1 or 2 or 3 or whatever. We've got enough dry powder to do them all. That's an important one for us -- certainly stock buybacks. Arthur can talk about that. Our dividends, we've increased that again. And our debt, I don't think we can pay any more debt down because Arthur has done such a good job of getting us almost free money. But Arthur, why don't you talk about our cash position.

Thanks, Jim, and good question, Phil. Yes, as Jim alluded, I mean, investing back in the business remains a top priority. Our CapEx budget has been at record levels the last couple of years. You may have heard us say with the supply chain constraints that we see everywhere that's also affected our ability to spend the cash for organic growth whether it's purchasing equipment, et cetera. So even though we have record CapEx budgets, it's just become a little difficult to obtain the equipment with the regular lead times that you used to get them. So on the acquisition front, that kind of ebbs and flows, and there's no real targets per year, so to speak. But with our balance sheet now, we have the ability to be very aggressive, both on the M&A side, organic growth and stockholder return activities. The last 2 years, we've purchased almost $1 billion of our stock back. We regularly look at our dividend rate. And just recently, we increased that in February. Historically, we target about 30% to 40% payout for our dividends as a percentage of our earnings. This year, we're going to be below that, given the record earnings levels. But that's something we continuously evaluate and adjust. So it's something we'll continue to do. So all in all, we have the balance sheet to be able to execute on all fronts of our capital allocation strategy, whether that's M&A or organic growth, stock buybacks or our dividend policy. So I hope that answers your question, Phil.

It does. And I think on the M&A side, there was -- there were some comments made by you all, I think last call and maybe even the call before that, around perhaps looking at targets that haven't been the traditional or the orthodox kind of sense of the bread-and-butter part of your business from where you stand today. I don't know if that means going more downstream in terms of first-stage manufacturing or what that alludes to. But was I correct in sort of picking up that change in tone or commentary? And what may have you been alluding to?

Yes, Phil. I think I used the word adjacent businesses. And like I said earlier, we've already done a couple of them. They're just small. And we like it. We like it. There's just some good, really well-run businesses out there that we think we could enhance because of our size, because of our model, because of the expertise we can bring to the party, our buying power, all those types of things. But we're not going to get crazy. I can tell you that. We know what we're good at. Distribution, value added, those types of things will always be part of whoever we're able to get to join the family of companies. But like I said, we've bought some really good companies. We bought a company a couple of years ago that basically does pieces and parts for the nuclear business, which has been great. We've got some really neat companies that are strictly emergency breakdown type companies that they -- we go in fab parts and what have you. So we've done that. We've owned perforating companies. There's a whole lot of different types of adjacent businesses that we're -- that we'd like, and we're opening our eyes to. But rest assure, we're not going to get crazy. It does -- we're not -- we know what we're good at. We're going to continue to be good at those things. And there's other ways to look at. I mean, we consume a lot of packaging, for instance. Why don't we own a packaging company? I don't know. We'd probably be their biggest customer [indiscernible] equipment. There's just a lot of things we'll look at. It will be downstream. We're not going to go upstream. We like -- like I said, when I first began speaking about our company, we don't make metal. Those guys are good at that. Let them do it. That's a completely different model than what we have. But downstream, we can bring a lot to the party, especially with our size and the fact that we can move in a lot of different directions within the family of companies. We just think that's a good way to handle this problem we have. "Problem we have with having too much cash."

And then the last batch of questions I had were more high level. Where is this business going long-term from a technological standpoint? Maybe touch on some of the things that you've done to make yourselves better from a technology standpoint. And then also in terms of competition, why couldn't -- why or why not, couldn't Amazon be a competitor of yours? Because I know that's something that came up multiple years ago, and I think it got dismissed. But why couldn't they become a bigger player in metals? And then additive manufacturing, where does that play in the next few years? So what you've done, the threat of competition and then also additive?

Okay. That's a bunch right there. We've done a lot, as folks -- as we mentioned in our equipment. And the equipment today is so much quicker and safer and better than it has been in the past. And the tolerances are so close to finished parts. It's expensive, by the way, but that's okay. That's -- again, we've got the wherewithal to do that. We've added a lot of that type of equipment. It's interesting, Phil, our bottlenecks have changed from -- throughout the plan. Now our biggest bottleneck -- when you add this kind of equipment, it's offloading, the -- this really advanced technology equipment. So then you get into robotics. So we've done that. We've also, from an ESG standpoint, look at different types of energy. I can tell you that we don't build a building or put a new roof on any of our operations, and thus we -- until we look at some kind of alternate energy source, and we have added several places with solar energy. And we'll continue to do that. Those are some innovative things we're doing. We're always looking for better ways to -- more efficient ways to run the equipment internally. The -- we have our own fleet of trucks. Most of those are diesel fuel. But we're looking at electric. We're looking at anything that will help us service our customers. So we've done a lot. We continue to look at that. We've got a whole team of innovators that happen to be less experienced folks. They've got a different look on the world than some of us more experienced folks, if you will. So we'll continue to innovate and steal as much innovation that's out there. You mentioned additive. Well, we've looked -- 3D printing, it's pretty cool. I mean, it's really, really interesting. We've looked and we tried, and it's really hard to find one that can make money. You don't want to fall in love with the innovation, you want to fall in love with how much that they can bring to the party and how much we can bring to them. But we'll continue to do that. Additive metals, it's not as easy as a lot of folks seem to think it is. It's a -- it's in the future for sure. But the metal part of it still has a little way to go. But we'll continue to look at those type of things. Karla, Arthur, you guys have anything you want to add to these answers?

I would just throw in, Jim. I mean, you talked about we're always looking in innovation. And also with technology, we've been developing some better tools for our customers and for our internal operations to create efficiencies. So we're making some advancements there, more to come. And then you also asked about the Amazon threat, Phil. And Amazon does -- you can buy metal through Amazon, but it's usually pretty basic sizes. We think that we differentiate ourselves more and more with the higher levels of value-added processing that we provide to our customers. We have very close relationships with them. We try to become a part of their business and really feed them as needed. So while it's a threat, we think that helps widen the gap a bit to protect our business a little more. Also, our delivery fleet, our ability to service our customers next day, you have to have a lot of know-how and a lot of assets to be able to service the types of business that we focus on. So we think that that creates a bit of a gap, makes it a little more difficult for them. Certainly, on pure distribution, they can, I'm sure, compete with us at some place in that space.

And just one other thing with -- on the Amazon front. We're not in the business of telling our customers how they should order from us, that we're in the business of making it easy on them. And you want to order online, you've been able to order online with -- from Reliance for a long time. That's nothing new. In fact, we opened a company, I don't know, a couple of years ago, kind of a greenfield startup that we have. And -- but it was a need -- a request from some of our customer base to have catalog pricing. Most of our pricing is not catalog. But certainly, if somebody wants to do that, it's called Fast Metals. You can go online right now and order from a catalog, just like you can from Amazon, and they'll get it to you next day or same day in some instances. But we have very large customers within the family of companies that have a really robust system to do those digitalization type orders. But to this date, relationships still matter. We have a lot of customers still like to call in, talk to a human being, talk about what they're trying to do, look for solutions. We train our folks to be able to discuss different types of metal. Certainly, we don't design end products, but we're there to answer questions and to talk about different ways to attack a problem. And our on-site people, they're trying to go and sell in depth, not just go call on the purchasing person. They're trained to get in the back door and try to look around and see what solutions that can be provided. So human beings still matter in Reliance, and I think that's going to be a part of it for a long period of time. But hey, listen, you want to send a fax in, we can do that. You want to text? Text. You want to email? Email. You want to go online? Go online. But that's -- we just decided we're not going to tell people how to buy. They can buy any way they want, and we'll accommodate.

Thanks, Jim. It was a multipart question from me and some integration of ESG in your response. I think we just had a very European moment here. Greta would be proud. Appreciate your time. Any closing remarks you want to make?

No, Phil, I think you had some great questions. It's been a great conference. We appreciate everybody's support. We're really happy with the way the company has been going. We're positive. We've gotten through this thing so far. We're not finished yet. This pandemic is not over. And I'm just absolutely impressed and inspired by our folks in the field, how they're able to run our model and execute on all the points. And we're going to continue to do that, and we're going to continue to focus on the health and safety of our folks and our customers, suppliers and communities and focus on the quality of earnings because we really appreciate anybody that feels good enough about our company to own our stock. So thank you, Phil and KeyBanc. You've been very kind to us for giving us this time.

Thanks, everyone. Have a great afternoon.

Thank you. Thanks for having us.