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

Jim, just give me a thumbs up if you can hear me okay. All right. Terrific. We'll get started. Good afternoon. I'm Sam Darkatsh. And on behalf of Raymond James, we'd like to welcome you to the Reliance Steel & Aluminum Group Investor Call, ticker RS. With us today from Reliance is CEO, Jim Hoffman; CFO Arthur Ajemyan; and President, Karla Lewis. For reference, Reliance is a leading global diversified metal solutions provider and the largest metals service center company in North America. Through a network of approximately 300 locations in 40 states and 13 countries, reliance provides metals processing services and distributes over 100,000 products to over 125,000 customers in a broad range of industries, focusing on small, quick turnaround orders and increasing levels of value-added processing. The format of today's presentation will be as follows: management will provide perhaps a 10, 15 minutes-or-so of prepared introductory remarks, followed by a fireside chat Q&A session, which I will host. [Operator Instructions] With that, Jim, Arthur, Karla, thank you for joining us today, and the floor is yours.

Great. Thank you very much, Sam. Appreciate it. And first of all, I'd like to thank all the folks at Raymond James for having us. It's a pleasure to be with you, and all the potential investors that we have listening to us. We're quite proud of our company, and I'll talk briefly about our company and leave a lot of room for Q&A. But first of all, I'd like to start out to talk about our company with what we aren't. We do not make steel. We do not make aluminum. We do not make titanium or copper or plastic. We are a -- the largest and most profitable, by the way, metal solution provider in North America. Sometimes people get us confused with -- because of our name, but that's not who we are. Our company started in 1939 in Los Angeles. We've got over 300 locations in 40 states, 13 countries. We have over 100,000 products to sell and 125,000 customers, of which 98% are report -- are repeat customers. So we're quite proud of that. Let me start off with the things we focused on at Reliance. First and foremost, it's the safety of our folks, safety and the health of our folks, which really has helped us through this pandemic. And I'm just -- I couldn't be more proud of the folks, the way they've been able to execute our model throughout this pandemic. So that's the first thing. We run a very diversified model by design. We like the decision-making to be down closest to the customers as we possibly can get because of the business we're in. We don't have backlogs, if you will. We -- 40% of the orders we take are delivered within the next day. About 50% of the orders we take now have a value added to them. That's also by design, and we'll talk about that in a little bit. And I can tell you one thing. If you look at our company over a long period of time, our model is very resilient. We do well in good times and bad, the situation we find ourselves in right now, with the pricing being what it is, is good. We have a lot of dollars going through the system, which enables us to continue to dig this moat of ours deeper and wider. Just a few other interesting things about our company. There are several ways to grow our company. We have internal growth and external growth. We've done 67 acquisitions since our IPO in 1994. We just announced last week or a couple of weeks ago, we have another one. So that will be 68 once that closes, but it's not closed right now, so I can't really expand a whole lot about it. But needless to say, we're really happy with this, our latest acquisition. And it's an adjacent business that will fit right in with our family of companies. We put a lot of money back in our company. We've spent over $1 billion in the last 7 years on CapEx, of which half of is for value-added equipment. And that's a strategy that we embarked upon about 7 or 8 years ago, and it's worked. That's enabled us to increase our margins. In this last quarter, we actually stated that our margins will go up to a sustainable level, and we're quite proud of that. A lot of the growth that we've had in our company, I wish I could say it was our idea, but were brought to -- some of the growth by our customers, and that continues, and we're glad that they see us for who we are. We're a very strong company with a very strong balance sheet, which enables us to do basically anything we want to do within reason. We've got a very strong balance sheet. We've got 4 basic cash buckets. And we've been known and we're proud of it, we are a very prudent capital allocator. We do acquisitions, I just mentioned that. We've done stock repurchases over the last 7 years. We've bought back over $1 billion worth of our own stock. We continue to pay dividends. We've paid dividends for 68 consecutive years. And like I said earlier, we put money back in our company. We've got a CapEx budget this year of $310 million. I'm not sure we'll spend all that, but the money is there if we decide to spend that. And we've got a -- kind of saying inside of Reliance, it's good to be us because we can use -- we're generating a lot of cash, and we're doing just fine, and we're able to hit on all of those cylinders if we choose to do so. So that, in a nutshell, is what Reliance is. Like I said, I'm very proud of the company and more proud of the folks who I get to work with, but I'd like to kind of swing it over to Karla to add anything she'd like to say about our company.

Yes. I'd just briefly say -- Jim gave a great overview. We think we're differentiated a little bit from the other public service center companies in our focus on small customers, small order sizes and that service that we provide through some of the things he talked about, which helps us keep our earnings less volatile in our opinion. We've purposely worked on diversifying the company through the acquisitions and the organic growth. There's a lot of opportunity for organic growth. One of the unique parts of our business is our toll processing business, which is a pretty substantial part of the business from a volume standpoint. But in that business, we're not buying and taking ownership of the metal. We're just performing services on large volumes of metal, a lot of it going into the automotive industry and also appliance. And we think that is much less risky for us. And there's a lot of growth opportunities for us there that we've been executing on recently with greenfields to support the increased aluminum usage in autos, and then also with some of the new mill capacity expansions we've gone on site with a few of those. So a lot of good growth opportunity for us there. And I think if Arthur wants to also comment on a little bit of our earnings consistency that we get from our inventory accounting and anything else he wants to add.

Sure. Thanks, Karla. And thanks for having us, Sam. Yes, and as Jim alluded to, the deep and white economic mode, I think, it's fair to say when you look at Reliance, you have kind of an incredibly unique investment in the sense, given our scale, and importantly -- more importantly, the profitability being the largest in this -- in our space, and most profitable by far. And given our unique model that's focused on service, next-day delivery, it -- our supplier relations, the margin profile, the consistent cash flow generation, it just -- it makes it an incredibly difficult model to replicate by anyone else. I think that's important to recognize. And from an earnings perspective, Jim mentioned performance during bad times and good times. We just demonstrated that going through the pandemic in 2020, the consistent profitability and cash flow generation. So those are all very important key attributes of Reliance. We also are on LIFO method of accounting that's kind of a built-in stabilizer. It minimizes volatility in our earnings, essentially what LIFO does, in essence, it reflects your cost of sales at replacement cost. So when prices go up, you end up booking a higher LIFO charge. It sort of normalizes earnings over a cycle. So those would be a couple of things that I'd want to highlight, so thank you.

Terrific. I don't want to be presumptuous. Do we want to begin the fireside chat element of the presentation at this point, Jim?

Fire away, Sam, we're ready for you.

Terrific. Thank you. You represent, I don't know, about 15% of all U.S. service center tonnage in the U.S. So I would say that you're very representative of the overall market. What are you seeing with respect to demand right now? How would you rank order, end market activity, be it general manufacturing, nonresi construction, transportation, what have you?

Yes. I can start with that. I think Karla is a lot closer to it than I am now, but I can tell you they're all good. How's that? So that's what -- I'd rank them all 1, but no, I'm teasing. They're -- we're very lucky. The -- our diverse model works. Right now, pretty much across the board, we're seeing really good demand. Certainly, energy is coming off the map. We think we've turned the corner on that. I'm talking about oil and gas energy. Now renewable energy, sustainable energy is doing well, and we're participating in that. But we're seeing some signs of life, but I think technology changed that business. That -- I'm not sure there will be -- never is a long time, but the use of metal with the new technology and energy, I'm not sure we'll get there. And we've made some moves over the last couple of years to kind of rightsize and get ourselves in a position to dominate that market, and we're doing it. It's just a smaller pot right now. The other one that -- yes, a little slow. A little slow, but coming -- getting better and better. And I know Karla can really expand on this as the aerospace. Our aerospace business, like everybody's aerospace business, had gone down. But it's coming off -- its coming back, which is a good thing. Travel is getting better. Single-aisle jets is -- seems to be the future. Our domestic aerospace is -- has been doing quite well. And of course, our nonres construction continues to get better and better. And that's without an infrastructure spend. When that does happen, we will be ready. And I've said over the last couple of years, America is going to need Reliance to rebuild. And I sincerely mean that, and we're ready. We're ready when that happens, and we're looking forward to whenever that comes across. And we probably will talk about an acquisition, we announced one a couple of weeks ago. I can't talk a lot about it because it's not closed yet, but that also plays into the nonres and residential end. So Karla, why don't you talk a little bit about maybe ranking some markets for Sam.

Yes, I'll try to hit on it briefly. And I would say most important to us, just because it's about 1/3 of our overall revenue dollars, would be nonresidential construction, and we throw infrastructure into that. I think just for people who may not be familiar with Reliance in the service centers, when we talk about nonresidential construction, we're primarily talking about 5-story and lower types of buildings. We're not selling directly the big quantities into the large skyscrapers and things. So our sweet spot is in the smaller structure, smaller projects. Again, it's very important to us. A lot goes in there, infrastructure, bridges, water works, things like that. We've seen continued steady improvement. We do get a project delayed here or there, but overall, still see good strength there and a lot of activity. We sell into really almost any industrial market that's out there, a lot of our product is seen in a lot of different places. We're selling to the machine shops and fabricators who are making components or end products that go into a lot of different uses, and we don't always know where it's going. So we have kind of limited visibility, but it's really about for our customers, can I get the metal, right? It's not about what's the price? It's I've got the demand, can I get the metal? We've heard from some of our customers because we go through different pricing cycles. And we've been through some where there hasn't been underlying inflation, but we believe there is true inflation with chunks of it that are here to last. And we finally heard from some of our customers that they've been able to increase their prices to cover the metal and other cost increases that they've had. So we think that's a very positive sign, and kind of plays into the higher for longer metal prices that you hear about. But overall, as Jim said, other than aerospace and energy, we're seeing a lot of strength. I will just clarify, in aerospace, about half of our aerospace exposure is commercial; the other half, military defense and space. And that's where we've seen the strength continue. We were in a strong environment pre-COVID. We're back up to those levels in the defense, but still behind on the commercial side. So unless -- Sam, unless you had any specific questions, I think that kind of gives our main comments on the end markets.

I think that's terrific. You -- in your -- touched on it a little bit in the prepared remarks and certainly on the slide deck you have -- you covered this a fair amount. But you cite numerous commonalities with your business to industrial distributors, whether it's Grainger or MSC or WESCO or MRC, can you get into some more of the specifics around these commonalities beyond just gross margins, which are, I think, a little bit too broad? In terms of go-to-market and structurally, how does your business compare to some of those types of businesses?

Yes. So we'll hit on a couple of characteristics that we kind of identified. And really, Sam, a lot of how we started to look more at the industrial distributors was through conversations over the years with a lot of the shareholders of Reliance who said, "We don't think you guys are getting the right multiple. We don't think your valuation is right because your results have been consistently better than the public metal service center companies and metal producers, right?" We have different structure than a lot of the producers. So we really looked at, well, what do we more closely align with? And in addition to the margin profile that you just commented on, we think kind of the logistics expertise, right? We're delivering. Our trucks we own, and manage our own fleet of trucks. Our trucks go out and they probably, on average, stop at 8 to 15 different customers, small order sizes. So we look at that expertise that we have with getting the metal kind of that last mile or normally within 100 miles of our customer. We look at that being similar to the industrial distributors. It really comes down to inventory management for that type of business. A lot of SKUs, right? We carry over 100,000 products. We don't carry every 1 in every 1 of our 300 locations, we're somewhat specialized. But we think having the systems, the visibility and the purchasing relationships to be able to manage a very diverse set of SKUs, so to speak, is similar to -- and being good at it, is similar to the industrial distribution companies. We think it's kind of fragmented markets. We're the largest in our space, and there are a lot of other folks industrial distribution, similar. I know some folks have been growing through acquisitions, but we look at that, just the diversified end markets that we sell into, the scale across that. And then we come down to kind of sticky customer relationships as well. We really try to become embedded within our customers' processes and make it just be a natural that we're their go-to, right? It's kind of that easy button. We just contact Reliance because we know they have what we need, and they're going to have it here when we need it, which we think is similar to a lot of the industrial distribution companies that their customers just rely on them to have what they need when they need it. So those are some of the key similarities that we think we've identified, and I think our announced pending acquisition of Merfish United is even closer to an industrial distribution company and kind of gets us even closer to that group of companies.

So educate me or educate us as to how specifically pricing works? I'm guessing it's cost plus, but is there a list discount element to it? How contractual are your arrangements with customers? And when you have rising or falling prevailing metals prices, does it affect gross margin? Or is it just a flow-through on OpEx? Help us understand how pricing works.

Yes. So I'll take a stab at explaining that. Whatever I miss, Jim and Arthur can pipe in. But at Reliance -- and again, we -- our model, we purposely focus on those small orders, $2,000 average order size, 40% customer calls us today, we deliver it tomorrow. We want to be the service person for our customers. And so in our business, generally, the biggest component of our price to our customer is the metal component. And so we pass that cost through to our customers. So if there's a mill price increase announcement, we actually try to get that increase from our customer even prior to us getting the higher cost metal in our inventory. So when metal prices are increasing, we don't get it from everybody on every order, but we typically enhance our gross profit margin, that markup on the material cost as prices are rising. When prices come down, we turn our inventory generally faster than our competitors. So we try to hold on to that price depression try to keep it up a little longer because of our good inventory management. And then we also have kind of our adders, if you want to call it that, right, all the service we provide. So do we do value-added processing? And that's typically a time or a piece type of charge. So our value-add processing charge doesn't change if the price of metal goes up or down. Our delivery cost, right? And we passed through if there's increased fuel charges or just freight costs being up, I mean, we control our delivery fleet for the most part, which we think is a key competitive advantage, but we also have to charge our customer for that. Our customer might want specialized packaging done, we charge them for that. So everything that we do, we feed into our price. We're not a catalog price company. We figure out how much does this -- is this order worth, right, to our customer? What's the value we're providing to our customer? Certainly, we do have some price discounts depending on the relationship with the customer, the volume being purchased, the frequency of the purchases, a couple of our business will do some quarterly index pricing. That's a small part of the business. But -- so we've got various pricing arrangements throughout the company, depending on the customers, the end markets and the products.

And if you don't mind, I'd like to add something to that, Sam. COVID changed a lot of things for individuals and certainly the whole world, but also the supply chain itself. Pricing is not such a major decision maker now, it's everything else. I mean the price is probably -- we get it, we're the largest. By design, we're the largest customer of the domestic producers, whether it's aluminum or steel or whatever. And that's by design. So are we getting rewarded for that? Yes, we are. Are we getting rewarded on better lead times? Yes, we are. But we earned those so we keep those, okay? And from a customer standpoint, it's more about can you get the metal. It's more about what can you do with the metal. Value-added is a two-way street. It's value added for us because we make more money, it's value added for them because they don't have to do the work. And once you become a part of a good customer's business, they just rely on you. And they understand that they're going to have to pay for it. And if -- so through this pandemic, us being able to function the way we function, the way we execute it, a lot of things Karla mentioned, it's not really a big part of the decision. Certainly, you're not going to gouge somebody or get somebody to overpay for anything, but the price -- if you look at the definition of price, it's whatever the market will bear. And what the market will bear now is a solution provider like Reliance. Because of our balance sheet, we can spend $310 million. We can go out and buy multiple $2.8 million tube lasers. We can afford to do that. There's -- a lot of our customers, they can't afford to do that. They're not going to do that. And they recognize that we can, and we run those things 24/7 around the clock. They -- if they do invest in something like that, they may run it for 3 hours. I'm not sure that's a good return. So like I said, the price is not a great differentiator right now or for in the future, I don't think. It's all about partnering with the right company. And certainly, Reliance has proven once again to be that partner.

Let's talk about M&A, if we could. You mentioned the 68 deals since the IPO. I understand you have a reticence to talk specifics around the recent Merfish deal since it hasn't closed yet, but you do have a margin sensitivity to metals prices. So how do you determine valuation for a prospective M&A? And then along those same lines, how would you recommend public investors look at your valuation and model through the gives and takes around the commodity.

Okay. I'll take the first one, and I'll give a real short answer on the second one. They're not modeling high enough on us. We're worth more. But anyway, I'm kind of joking but kind of not. As far as M&A, we do it the same way we've done it for a long time. We don't -- we simply -- we don't look at a company and say, "Gosh, if we bought this company, even though they don't make any money, we have all these synergies, and we can do this, and we can do that." We just don't do that. We buy good companies. They have to -- there's a certain bar that they have to cross. They have to be immediately accretive. They have to be good people. They have to have a really good name in the marketplace. Integrity comes in on so many different levels. They have to be for sale. And they have to be realistic, okay? So once you cross all those hurdles, then we start really working. And we've -- the volume of customer -- of potential acquisitions we've looked at, it's over a couple of hundred over the last couple of years, I can tell you that. We work real hard looking and trying to find the right fit. I -- like I said, it's a couple of hundred. We pulled the trigger on one last year, which is a great company. We're so proud to have them. And this new company, like I said we can't really expand on everything, but suffice it to say, it met every one of those criteria. But we look at a company and we say, "What have you done? I mean, what does your EBITDA look like over a long period of time? What's your pretax earnings look like over a long period of time? What do we project that to be under Reliance?" Then that leads you to a multiple of EBITDA or a multiple of pretax. And we come up with -- and there's a lot of other things you have to look at, whether it's a -- what -- how much money you're going to have to put into it, if they -- real estate. But every -- it -- all those things are second nature to us, and we're not going to lower our bar. We're just not going to do it. And there's plenty of really fine companies out there, fine companies. Now we're looking at adjacent companies now, which opens a whole new area for us to invest in. So we're real happy with the volume. As far as the quality, there's some good companies. but there's a lot of companies right now who are just fishing. I don't blame them. If I own the company, why not? Throw it out there and see if somebody will pay some crazy amount of money for 1 year's worth of earnings where the price is high. We've been doing this a long time. I've been in the business, 41 years. Karla literally has been around for every single one of those acquisitions. So we kind of know what we're looking at. We know who's fishing and who's legitimate. And we're really blessed because we do have quite a few companies that tell us, "When I -- when it's time for me to sell, I'm selling to Reliance because: a, you're going to give me a fair price; b, you've got a wonderful track record and you take care of your people, you take care of our people." And believe it or not, keeping Grandpa's name on the side of the building really helps. So we do that as well. Karla, do you have anything to add?

Yes. And I mean -- I think we're almost out of time, but just we do look for the valuation part of your question, Sam. Really, we look -- try to come up with a normalized number. We don't pay on trailing 12 months. And we think we're fortunate that the acquisitions we've completed, especially in the recent years, we probably own a company who sell similar products into similar end markets, so we know how that company performed that we can look at the target company and say, "Are they performing at levels that we think are reasonable? We think we can make them a little better." We don't value any synergies in -- when we're acquiring a company. We think those belong to us if we make that company better. But it's really about, I think, the -- our history and our familiarity with the markets to be able to come up with what we think that right normalized number is to value from. And because we're buying the good companies who care about their business and their employees, it's generally a very good, reasonable conversation with them to agree upon valuation.

15-second question. Your stock correlates on hot-rolled cold -- coil, I should say, not cold, coil, what should it correlate to?

Yes. So we've kind of tried to lead you guys a little bit towards, we think, some place between the metals companies and the industrial distribution companies because we do have some metal price sensitivity. However, we think our prior performance shows that we should be valued at a higher multiple than them. And the one we've most closely identified would be the industrial distribution companies.

Thank you very much for your time and your participation in our conference, our Industrials Conference. And I look forward to increasing our exposure and relationship with you folks going forward.

Great. Thank you, Sam. Really appreciate it.

Thanks, Sam. Thanks for having us.

Thanks for having us, Sam.

Be good. Be well.

Take care.

You too. Bye-bye.

Take care.