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

Well, good morning, everyone, and thank you for joining us at our 2022 Industrials & Materials Conference. I have the -- for those who don't know me, my name is Emily Chieng, and I lead the metals and mining team here at Goldman Sachs. Today, we've got the privilege of hosting the Reliance Steel & Aluminum team. So to my left, I've got Jim Hoffman, CEO; Arthur Ajemyan, Senior Vice President and CFO; and then Steve Koch, Senior Vice President of Operations. Thank you all for joining us today. Before we dive into the Q&A, and we've got some prepared questions and we'll certainly open it up to the audience for you guys to jump in when you do, I would like to open -- turn it over to Jim for some opening remarks, and then we'll get through. I do think we've got some disclosures to announce, and I believe that should be a slide with the disclosures. Okay. Apologies for that, but I do have to say this, we are -- sorry -- we are required to make some disclosures in public appearances about Goldman Sachs' relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received on 1% or more ownership. We're prepared to read aloud disclosures for any issuer during the sessions upon your request. However, these are available in our most recent reports on our firm portal. In addition, updates to those disclosures are available by ticker on the firm's public website. With that, I will turn it over to Jim.

Great. Well, thank you. It's very nice being with you. I'd like to thank Emily for the great invitation and the folks at Goldman Sachs. I think we do this every year, but it's really great being here. It's usually a wonderful conference and thanks for joining us this morning. What I'd like to do when I talk about Reliance, it just makes sense to me to tell you who we're not, because there seems to be a question sometimes because of our name and what have you. I can tell you, what we're not, is we're not a producer of metal, okay? We don't make anything except money. But it's a -- we play a very important, intricate role in a very complex and ever-changing market supply chain, which is obviously an issue that we're dealing with today. The focus of our company, we focus first and foremost on the health and safety of the folks we get to work with, and that really helped us a lot during the COVID. And now here we are again. And as you probably know, you can see we set record after record, and we had another record quarter. And I think that really helped us with our focus on our people and health. That helped that. Our focus on our customers and our suppliers and our communities are extremely important to us as well. We run a very diverse company, diverse in product, geography, market and -- so I'm sure we'll get into it. Our customer base, they're smaller customers. Just to give you an idea of what that means, last year, we did a little over $14 billion, $3,000 at a time, meaning of our average order size is $3,000. So those customers that we get to work with and actually lead our strategy, they're not price-sensitive. We've become more a part of their business, which I think differentiates us from a lot of different people. We run a very resilient model. We've been around since 1938, I think, something like that. We've done 71 acquisitions since our IPO in '94. We run about 75 different entities right now. So you can see where the diversification comes in. Our model is very decentralized. We like to push decision-making down to the 315 operations we have worldwide. We operate in 13 different countries outside of the U.S. Another strategy that we executed very well, in my opinion, about 8 or 9 years ago, we did try to differentiate ourselves from people who simply move metal. And we went -- we spent over $1 billion in 7 years on value-added equipment and some greenfield sites and some energy-efficient facilities. So that was a decision we made consciously and it was a good decision. And what that enabled us to do is we have become a big part of the supply chain and our customers look to us as part of their business. So when you're in a situation where it's hard to get people, when it's hard to -- the balance sheets aren't as strong because of COVID or whatever this thing is going on right now, they look to us because we have a very strong balance sheet. And we can talk about the word recession. I'll just be honest with you, we're choosing not to participate in that because our business is good. And it -- and because of -- sometimes when things go bad elsewhere, if you look at a company like Reliance, we fill in a lot of gaps. So when people don't have strong balance sheets and they still have orders and demand for us is good, and Steve will talk about that later, we have a good position and we're going to continue to grow that position, and that's in the value-added stream. So let's see. So that's kind of our company in a nutshell. But again, I wanted to start off with what we're not, kind of give you a better view. And if you have questions, we'll be glad to answer those. But we're not just your typical metal service center. We happen to be the largest one in North America. But anybody can be the largest, but being the best, that's what our goal is. And our focus is on our people, health, safety and return for our shareholders. And when you run a company like that and you listen to your customers, things fall in line.

Fantastic. Thanks, Jim. You actually stole my first question around introducing the Reliance story, but maybe let's start with steel markets. You're not a steel producer, but you're very crucial component of the broader domestic steel industry. So maybe give us a sense as to what you're seeing on the demand side. I think that's been top of a lot of investors' minds as to are we seeing demand still extremely strong here in the steel markets. And I know you guys cover a lot of different industries, so maybe through the different end markets, we can touch on each of those.

Yes, I'll start with that and then Steve can kind of fill in. I can tell you that our business is good. It has been good. Again, if you go back to the way we run our model, we listen to our customers. And it seems because we've become such an integral part of their business, they see, if you have a recession coming your way, or I'm sure we can get into pricing later, they look to us because we have -- why would you go out and buy $2.8 million laser and run it an hour a day when there's a Reliance operation within 100 miles with 8 of them that's running 24/7 with the people and the more efficient business. So our business is good, and it looks -- it continues to be good. But maybe Steve can walk through a couple of markets and...

Yes. We service primarily 6 end markets. And as Jim mentioned, most -- all of the end markets are very strong. Our #1 market is nonres construction. And we started off January 2022 a little bit dealing with COVID, the flare-up of COVID and little weather issues. But by March, we were humming along and with a very strong bookings and backlog, and we think we're going to carry them into the rest of the year. The second market we service is auto, and we do that through tolling. We don't stock any inventory for the auto manufacturers. So there's been some component shortages and some microchip shortages, but our people have done a good job of running a flexible schedule. And the OEMs have chips and they're making cars. We're storing and processing their seal for them. And we have a flexible model. So they're doing a good job of servicing other companies. Underlying demand in the heavy industry for agriculture and construction equipment is strong, coming off of a strong fourth quarter. It's carried into 2022, and we feel good that it's going to continue to go forward. Semiconductor is one of the more robust industries we serve and through our strong bookings, we've made some investments to service a lot of the plants that we'll be opening up throughout America and we're going to be ready to be there and be part of that story. Demand in commercial aerospace is strong and it continues to be moving in the right direction. And that's 50% of our aerospace business, the other 50% is space and military. And the backlogs and the bookings are strong into the future. Energy and oil, which is something we didn't talk about for a couple of years, which was kind of sagging has had a great bounce back. And we feel pretty good that the high price of oil and gas and everything that is going on geopolitically, we're positioned to capitalize on that end market.

And just a couple of things to add, let's start to kind of go backwards. The energy sector is good. It continues to get better. I don't know when it was, 3 years ago, we took a real hard look at our whole energy investment and we rightsized it. And I think we made some really good decisions because what we ended up with were some really strong operations down there. So the pie got smaller and we became a bigger piece of that pie that and that's paying off really well. I'm not sure where it's going to go from here other than it's great right now. And it really lends itself to value added, and that's our thing. I'm sure we'll get into lead times from mills and what have you. SBQ bar is the big moneymaker in that. And I don't know what the lead times are, but they're way out there. And we're the biggest mover of value-added SBQ bar. So that's the energy. Steve mentioned also the semiconductor business. Just so you're clear, we don't make chips, okay? We make the -- I call it the plumbing, mostly stainless that goes into the clean rooms. We've been a big participant in that for a long period of time, not only in the U.S. but in Korea and China. And there's been a lot of reshoring and that's music to our ears because we have a substantial share of that business in the billions and billions and billions of dollars that are going into Arizona, Texas, Ohio. We're going to be a bit participant there. So it's not only the clean room, but also the vacuum chambers themselves. They're made out of aluminum plate, and that business is great, and it's all value-added. I don't know if you noticed or not, we put out -- I think we put out a press release, right? We said in our earnings that we cranked up our CapEx this year by about $100 million to, I believe we said it's $450 million. And a lot of that increase, not the whole $450 million, but a lot of the $100 million increase was related directly to semiconductor work that we've been at to participate by the big guys, they need somebody to continue to help them grow which really plays into our model. And also the campuses themselves. All the campuses are made out of metal, right? And the way that works is the mills, big guys, they get the big packages with the beams and plate. But we're a big participant in nonres construction and we throw infrastructure spending in there as well. And we're already getting orders. And my guess is -- it usually lags 6 months to a year before we start kicking in on those campuses. So we're looking forward to that. That was a big one. And he also mentioned our participation in automotive. That's by choice. I hope there's no automotive guys in the audience, but if there is, that's okay. They're difficult to deal with. They don't want anybody to make any money. That's not our thing. So what we've done is we've carved out a little niche called, toll processing, and we're good at it. And we actually have one company that designs and makes its own equipment, very specialized equipment to handle aluminum for content that goes into automotive right now. Aluminum is very difficult to handle, and it scratches easy. So we've come up with this equipment. And those folks would rather make product than cut and slit and make parts and deliver to the big guys 3 times a day. So that business has been wonderful for us. It kind of ebbs and flows right now, you never know, depending on what model you're working with. If you're doing the Ford 150 electric vehicle, you're busy. Thank goodness, that's part of -- that's one of the models we participate in. But there's a lot of, I guess, people call it pent-up demand. What it really is demand for automotive that's going to be pushed out, and we're good with that. So about 60% of our tolling is automotive. The other is, I would say, I don't know if it's a whole 40%, that would be appliances and things like that. And I don't know if you ever tried to -- if you're trying to build a house somewhere or get a new refrigerator, the lead time is a way out on that too, and that business is really good. So we like that business. People like to talk about that business, but it's been great because we don't own any of the inventory and it makes it really easy to do business because our customers are actually our suppliers. So they're our customers, we're their customers, negotiations go swimmingly when your friends. And they get it, they understand that that's a completely different business than they're in, and we like filling that gap. We see growth when it comes to those. So those are kind of our markets.

Maybe one I want -- I do want to come back really quickly before you moved on was just on the nonresi side. I know there are different pockets of nonresi, but any sort of bright sparks that you're seeing there? And maybe which are the ones that are perhaps lagging within that segment?

Yes, great question. Nonres is going quite well. We still haven't caught up to the level, that 2008 kind of crash, we're not there yet, but it's getting -- it continues to do well. Again, value-added, that market lends itself. The way that whole business has changed in 2008, it's pretty dramatic. It used to be that you've got a big job, they're going to build a skyscraper downtown, New York City. They'd pick up the phone and call one of the producers and they'd get multiple truckloads or train loads of beams and plates, and they'd ship it to a fab shop somewhere then they'd go to work. Well, I think since that time, people got burned and I think people realized, cash is king. And here we are now with interest rates going up, so your cash will continue to be a focus for a lot of these fabricators. And what we did is we went in and added value-added equipment. And so instead of ordering a truckload of beams and a truckload of plate, they call one of our companies and say, listen, I need 4 of these beams, miter cut, color coated on one end, holes drilled. I need you to put that on a pallet with these plates and gusset plates. And I need you to ship it right to the job site. And everything I said along the way we charge for, by the way. So that business is good. It continues to be good. There's a legitimate reshoring going on. I mentioned the most obvious one that everybody knows about is the semiconductor work. But we're -- it's kind of a slow burn up and we're loving every minute of it. And we're going to continue to invest heavily on that. And we haven't even touched on infrastructure spending. There are some orders that I'm still waiting -- remember the 2015 shovel-ready spend, we're still waiting on that to -- those shovels have been underground a long time. But there are some orders that are coming about that probably aren't as obvious to you, but we saw so many different customers. They could be things like water treatment plants, electrical grid. And we're getting some of that -- those things, but we really haven't hit second gear yet in infrastructure. When that does happen, we're more than ready. And we've got plenty of capacity. The equipment we've bought lends itself to higher usage and not as many people. So it's a great market for us. And I think it's our largest, right?

Yes.

Yes. Maybe just on that infrastructure theme, I mean we've got $550 billion of spend from the federal government coming next year. To your point, have we not seen any of that roll through yet?

Emily, we have. It's just when you do business like us, now think about what I said earlier, so we did last year, $14 billion, $3,000 at a time. Some of the things we can identify where it's going to go, but if they don't tell us, that's their business. We may get a handful of orders for something that are directly related to what you're talking about and we wouldn't know them. So -- but to verify, we do have orders that were legitimately, this is for 6 bridges in Pittsburgh that need fixed. So we're seeing those, we're seeing those, and we anticipate seeing more and more of those.

Yes. Now maybe the flip side of the equation is on pricing and that's one where we get a lot of questions. You guys aren't as sensitive to hot-rolled pricing because hot rolled is clearly not a big part of the business there. But how should we be thinking about your ability to continue to push higher prices across?

Great question. That's what our model is. The customers we sell, they're not as price-sensitive. Listen, if you want the lowest price, you don't call Reliance. If you want somebody who's going to get it there on time -- now think about all those orders we were talking about, 40% of the orders we're taking today are going to be delivered tomorrow. That's a service play, okay? We're over 50% of what we do now, value-added, okay? So it's just -- I hate to use the word anything other than they're less price-sensitive because that's not what they're coming to us for. When they've got a big job and they have -- and they need it, and in fact some of them have incentives to get some of this nonres, some of these other projects, finished quicker, they know when they're going to pick the phone up and call us, we're going to get it to them quick, on time in the form they want. So -- and it's really kind of taken on a life of its own. That's what our companies are known for. Now we have a couple of companies that sell, I call it, tons for fun, but that's not our -- that's not our thing. And I -- there's competitors, I'm sure that, that -- they think that's an interesting model, certainly isn't what we do. But I think it's just been a long period of time where we've catered to that market and they keep asking. I mean I'm not sure a week goes by that somebody doesn't call and say, hey, I got this request from this great company. They can't get people. I need another slitting line or I need another holding line or I need another tube laser. And we're all in, we're all in, because we have empathy for what they're doing, but it also helps us, too.

Maybe shifting gears a little bit on cost inflation, also been a hallmark of 1Q earnings. What are you guys seeing there? And how are you able to manage that?

Well, it is what it is. We don't get to control the price of the metal. We don't get to choose how inflation is going. And you can -- we can sit here all day and talk about politics and things that should have happened, things that could happen, where it's going. To your point earlier, a lot of those things, we can pass on to our customers. We like to run our own truck fleet, that helps a lot. But it's affected us, right? Our SG&A cost is up for a couple of reasons. One, the way we pay our people. When you're having record quarters and record years and record, record, record, the way we pay our folks, we pay on gross profit. Salespeople are paid on gross profit. The managers who run all these operations, they're paid on return on manageable assets. And we keep it really simple. They get graded on their pretax return to corporate, their inventory and their receivables. That's pretty simple. So those are our focal -- focus points when it comes to that. But inflation has affected us. We're paying people more money. We've done a really fine job in retaining talent because I think the companies who are going to win are the ones that can retain talent and attract talent, okay? But we're like everybody else, it's hard to get talent. We have -- I'm not going to bore you with all the things we have, but we have a lot of different things our HR department and our folks out in the field about retaining talent. And we did a thing on Fox News the other day about trying to get people to come in the industry. I mean everybody doesn't have to be a Penn grad or a Stanford grad, like smart folks I'm looking at right here. There's a lot of really -- you can really have a fine career working for a company like Reliance with a really fine balance sheet. And we're trying to get that -- I know we're not sexy, but it's a really fine place to work. It's a lot of technology involved and things that we're trying to get to attract the talent. But I can tell you, we've done a wonderful job retaining talent and the attracting talent is like anywhere else. We have the same aches and pains as a lot of people do, but we seem to be muddling through just fine. And whatever the Fed does, whatever the inflationary effect will be, we'll handle it properly. And we've got a lot of dry powder to do the right things, so...

So I might just pause here and see if there's anything from the audience that people want to ask.

As you think about the cycle growth of the business, and I appreciate you touched a lot of end markets, sort of the cycle is different. But what's the strategy there? Is it expanding to adjacent end markets? Is it expanding geographically? What's the strategy for sort of medium-term growth?

Well, that's a great question. Our strategy is, again -- sounds very simple, but it works. We listen to our customers, okay? We also don't just sit back and wait for our customers to do things. M&A is still a big piece of what we do. We acquired 4 companies last year. Those 4 companies have worked out great as anticipated. We were able to get in there and do our Reliance thing and get their margins up and get them to cash is king and things like that. But they also got us in a couple of new markets. We were never in residential construction, now we are. Red metals has never been a real big thing for us, but now I guess we're a lot bigger than we thought we were by buying 2 companies. And then PVC pipe, right? So those are pieces of the M&A that I believe I -- 3 or 4 years ago, I made the comment about we're going to look at adjacent businesses. These companies are adjacent. They're not your typical metals value adder. They're -- one of them is a master distributor of all things, right, but they're huge. And they do a wonderful job. They've got -- when I say they're huge, that's probably a bad word. They're -- they have a very big share in that market. So our strategy is to continue -- we talk about some very simple things. One of them is continuous improvement. We hold people accountable for the CapEx dollars that they ask for. Most of us have been in the business forever, 43 years, I don't know. I've had all the jobs. So we know the business quite well. But the M&A piece is really an interesting growth opportunity for us. I can tell you the pipeline is full. There are some good companies out there. Right now, it's a little tough, interest rates are going up, people -- the people that really want to sell right now, they want to be valued on 2020 or 2021 is what they want and the first quarter of 2022. We've been around a long time. Like I said, we've done 71 of those. So our strategy is to buy good companies. Our strategy is to look at whatever is coming at us. This is honest, we don't have a war room where we look at a map of the world and say, gosh, we need to be here, we need to be here. We don't do that. We just look at good companies. We're not going to do anything crazy. We're not going to go out and buy and get into the electric vehicle market. But the electrical vehicle market really plays into what we do and we do participate quite heavily in that. So the strategy is to continue to look for good companies. The strategy is continue to drive that value-added. The strategy is to do the best you could possibly, be as efficient as you possibly can be and just be a bigger part of our customers' business because they've got issues, right? And those issues are real and they're going to be with us for a while. And as I said earlier, we could go -- the real economy can go into a classic recession with 2 quarters in a row of GDP going up. I jokingly said we've chosen not to participate because it doesn't look like we're going to. All those things play into our model, right? So our strategy is sound. Now we've tweaked our model. The model has been around for a long time. But over the last 5 years, we've added a few things, some innovation. And I'd like to say, we want to be the disruptive innovator in our space. And that's what we're doing. We rolled out a couple of really cool, internal things that bring all these companies together and allow them to use the strength of Reliance without messing up our model. So very long answer to a very simple question. I apologize, but I hope you understand, there is a strategy.

Maybe as a follow-up on that, and the other side of the growth equation is the organic growth. And you have announced the new semiconductor facility. What is the opportunity set for more things like that, more value-added processing? How do you think about organic growth?

Well, I love organic -- that's my favorite, to be honest with you. The M&A gets a lot of -- people think that's cool and sexy, and gosh, they've done 71 acquisitions. They are a lot of work, by the way, but we'll continue to do those and buy good companies. But the internal growth for an operator like me, that's the fun stuff, right? That's when you really get the juices flowing on how are you going to be a better supplier to your customers. And the opportunities just continue. They continue. The worst things get, the more opportunities we seem to get. And when things get good, we get more, even more, faster, better. And one group I've left out and I shouldn't is our suppliers. Our suppliers, we do a lot of work with our suppliers. They don't -- I'm not talking about all of them. Now remember, we're also a domestic player. 95% of what we do is domestic for a reason. There's -- you have a model that you're going to go offshore and try to buy the cheapest steel, good luck. We don't speculate. We keep our toe in the water just to make sure we know what's going on. But our domestic partners are -- they're an integral part of our internal growth. We've been asked and it's public knowledge that we've been asked to be on campus. We're on a lot of campuses. The newest steel mills that you've heard about, we were invited but they're big competitors, but we're their largest customers. They asked us to come on campus with them and do their tolling, which is great and we can do that. So I think those opportunities will continue. This semiconductor thing, who knew? I think the pandemic was one wave of kind of change in the market. I think this war is a real one. I think people recognize now a long supply chain probably isn't the best thing in the world. We have a saying, we talk about cheap is expensive, right? If you want the cheapest thing, it's really going to cost you a lot. So why not bring it in and do more and more locally. And when I talk about local, I'm talking about North America. But we do operate in other countries other than that. So I think the opportunities, they're coming at us. And the good news is Arthur and his guys have done a wonderful job with our balance sheet and our ability to flex up and flex down. And gosh, we're making so much -- it's a good problem to have when you have a lot of cash. We can adjust very quickly when we do have an opportunity. And I don't want to leave you with the impression that we just throw money at things. We don't. We look for return and we expect a return. And so far, so good. I know this isn't wood, but we're doing the right things.

And just, Emily, on the CapEx side, Jim mentioned, we increased it to $450 million. Just to give you some context for what that is like for Reliance, we said, just like equipment, for example, we had over 200 pieces of equipment in that CapEx budget. So there's a lot of line items. So it's not like we have a handful of major projects that make up majority of it. It's rather -- it's an interesting report when you print it to get to that total number. So just to give you a flavor of what makes up that big number, right? So I think that's important contextually.

Maybe keeping with you, Arthur, but I wanted to touch on capital returns. I mean that's something, I think, that you guys do have the benefit of given the strong balance sheet that you can pursue both growth and returns at the same time. But how should we be thinking about Reliance's strategy as it relates to the buyback and the dividend?

Yes. Good question, Emily. You've heard us say that we have a balanced capital allocation strategy. And no individual quarter or a year is necessarily going to tell you that story, right? We take a longer view on that. And as a matter of fact, in our investor deck, there's one slide where we have a 5-year look back just to give perspective on capital allocation. We think that story for us comes out much, much better when you take that longer view, and that's how we approach capital allocation. These are long-term decisions. When you're going out buying companies, we don't necessarily target that we're going to buy x number of companies and spend x amount of dollars per year. So really, it's about making the right decisions. But just to kind of put it in perspective, over the last 5 years, we've paid out a little over 50% of our net income in forms of -- through dividends and share buybacks. Dollar-wise, we spent about $2 billion on shareholder returns and about $1.8 billion on growth, and that includes both organic and M&A. So we're going to continue to look at both and remain opportunistic, right? So don't necessarily have a prescriptive model in terms of returning a certain amount every quarter or year, but it's just stepping back, looking at it at a higher level and having that balanced view on capital allocation.

And the good news, we can do all those. So it's kind of a good problem to have.

Right. I think we are coming towards the end of our allotted time. So I do want to leave you with the opportunity to leave us any sort of -- what do you think is underappreciated about the Reliance story?

Well, it's just the idea of who we are. It's hard to compare us to anybody. There's really nobody that is that entity. So it's a little frustrating to -- you see the multiples that we get. But you know what? All we do is perform. We'll tell you what we're going to do and we do it. And most times, we do better. But the model, I think maybe is a little -- maybe seems or maybe the way we present it seems so simple. You would think that, well, then everybody could do that. Well, they don't. And it's hard when people can't compare. I would compare us to -- I wouldn't compare us to anybody in the metals business or mining business or materials. I'd compare us to an industrial distributor or a value adder. We're kind of like a, I don't know, a unicorn thing and -- which is okay, we understand how it works. And I think -- I wish people would just kind of take a view back and just believe that it's real. And I guess, I wish we could do a better job of differentiating ourselves from a lot of different things, like today's potential recession. We are not going to participate in that. It doesn't make sense. Our business is good. And all we can do is report what we report. And again, one other thing, keep that eye towards that infrastructure spend because I -- you've heard me say it before, America is going to need Reliance to rebuild, and we stand ready to do so. So those are some things that I'd love for people to think about.

Yes. I mean I think, the one thing that I would just highlight is the fact that your small order size and the number of different orders that you do allow you to kind of do -- really coast a little bit more than some of your peers.

Yes, we don't -- we're not a big contract, low margin guy. We make a lot of money doing it the other way, so...

Fantastic. Well, Jim, Arthur, Steve, thank you so much for your time today. We really appreciate you joining us, and we look forward to chatting again.

Great. Thanks for your time. Appreciate it.

Thank you.