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

Okay. Well, good morning, everyone. I'm joined by Karla and Steve from Reliance Steel for our fireside chat today. So thank you both for coming.

I guess I'd begin with a question on sustainability. Specifically, if you could share your views around the sustainability of your gross profit margin?

Yes. Thanks, Will, and we appreciate Wells Fargo having us here today. And those of you who are joining us, we appreciate your time. As far as sustainability of our gross profit margin, that's something we've been talking about for the last few years. We've seen a lot of opportunity probably beginning about 8 years ago with advancements in the value-added processing equipment that we use to service our customers. And we also, at the same time, saw a lot of our customers asking us to do more for them, things they were doing in-house. So we started increasing our investments, bringing in more value-added equipment. And we've seen that benefit our gross profit margin. So historically, we were more in a 25% to 27% gross profit margin range, and we've steadily increased that. We're currently at 29% to 31% sustainable gross profit margin range. So we've got up about 500 basis points. And when you apply that to last year's $17 billion of revenue, that adds up to a lot. And we think supports are continuing to invest in those opportunities. We expect to continue to increase that sustainable gross profit range as we do more value-add processing. Our gross profit margin also gets impacted just generally by what's going on in the market with demand and with pricing. We can make more pretax income dollars, more EBITDA when metal prices are higher because that falls through, but the value add is the sustainable part of the margin that we continue to increase. We used to process about 40% of the orders we ship. We're up to 50% now. And so we do expect that to continue to grow as well. And the amount we charge for processing is not sensitive to changes in metal prices. So that also helps preserve a more resilient and sustainable margin levels. Anything to add?

Okay. In terms of your competitive advantage, right, as you see in the marketplace, what it allows you specifically to win in the marketplace from your perspective?

Yes. So I think our model, especially for being the largest service center is a little different than some other service center companies you see out there. Reliance, we operate a very decentralized structure. So we need great people out there running our businesses, which we think we have. Our business, we still really focus on relationships. And Reliance typically, although we sell to a lot of large OEMs, we really focus on smaller companies who are feeding into the OEMs. We think they value the fact that we're close to them. We deliver our average order size and $17 billion of sales. Last year was $3,700 in order. So we're doing a lot of transactions every day. 40% of the orders the customer calls us today, we deliver it to them tomorrow. And that's where these smaller customers that we really focus on that's really important to them. It really helps them run their business efficiently, keep their working capital load lower. Lets them be more flexible as they're servicing their customers. And we own our own trucking fleet. For the most part, we have about 1,600 trucks every day. So that allows us to be able to service the customers the small orders, the next-day delivery. We think that model doing more value-add for our customers, we think that really kind of gives us the advantage in the market for the business that we want to focus on.

And I would add that you're only as good as your customer base, your supplier base, and we have great people running our businesses out in the field. We have the best, most professional, well-trained and aggressive managers running our businesses. We buy 95% at least of our material domestically that we count on our [ multipliers ], they count on us to be part of the supply chain. And our small to midsized customer base helps us. They appreciate the value service that we deliver, and they're willing to pay a fair price to receive that.

And -- sorry, Will, I'd probably throw into, we do very little contractual business. So we're -- we think we're able to manage our inventory better. We don't have to speculate because we're locked into some fixed sell price with our customers. So we buy in the spot. We sell in the spot. Turning our inventory quickly is very important for that. But we also think that helps mitigate some of the risk from inventory.

And you commented on value add, which certainly is a large part of your business and increasing. Could you explain a little bit more about value-added processing and specifically how much of your volumes could ultimately be value-added?

More, it's our general answer. So as I said, we've gone from 40% to 50%. And -- we also, by the way, in the end of 2021, we acquired a company that their model is that they don't do any value-added processing. It was a decent sized company. So if it was apples-to-apples, we'd probably be a little higher than 50% right now. But anyway, we brought it up 10%. We have a lot of equipment on order right now. Lead times are pretty -- have been extended for a lot of the equipment we buy along with other things. So we've kind of got some pent-up capital spending that we're waiting on the equipment. So just with what we have on order, it should take it higher than 50%. We don't know what that number is. We see our customers continuing to ask us to do more for them. We think through COVID, everyone suffered a bit with labor shortages. We think we saw a lot of our customers maybe suffer a little more than us, which is another factor in them being able to rely on our Reliance companies to help support them and then not have to deal with some of the labor issues as we move forward. So we think there's a continued trend for us to continue to do more, but we haven't set any target of what that percent is. And the other thing we talk about, too, with the equipment we're buying sometimes it may not be incremental orders. It may be replacing some value-add equipment we already have, but now we can do it faster or to a tighter tolerance or give our customer a better product.

Yes, our customers ask us to do more and more. We communicate with them closely, and we've found that as we've invested in the equipment and we deliver our product to them, they ask us to take that 1 machine to 2 machines to 3 machines. So we'll hire people, train them, get the material to market, but we're kind of beholden to our equipment suppliers who I think do a really good job of getting us our equipment when we need it, but lead times have been extended. So we will, as long as our customers keep asking us we'll deliver for them.

Okay. So your business is highly cash-generative. What is your future plans for capital allocation? What are some of the more important projects you're currently working on?

Yes. So we've been pretty consistent on what our capital allocation priorities are. We think the best long-term use of our capital is continue to grow our business. So that comes through M&A and through organic growth. So on the M&A front, we've acquired 72 businesses. Since we went public in 1994, we focus on buying good, well-run companies with good management teams in place because we do run decentralized. We generally want them -- we buy a good company, we want them to keep doing what they've been doing. But we think we can give them some know-how by them interacting with all of our other companies. There's a lot of knowledge, as Steve said, a lot of the great people we have that they can learn from, and we've got the capital to help them continue to grow. So we're always looking at opportunities, but we're fairly selective on the companies that we think fit within us. And we also have to be able to agree on what a reasonable value is in our opinion and the sellers, and they've been a little inflated the last couple of years, but we think we're -- there's a little correction there. So we want to continue to buy the good companies. The organic growth, a lot of that is the value-added processing equipment that we talked about, and I'll have Steve in a second talk about some of the bigger projects there, but also on the other 2 buckets would be dividends. Reliance has paid a regular quarterly dividend for over 60 years. We try to consistently increase it. We just increased it 14% in the first quarter of this year. We don't have a formal target, but we always want to continue to pay it and we never want to reduce it. So we try to have it at a sustainable level. And then we're also opportunistically in the market repurchasing our stock, which we think, is a great investment and the best acquisition we can make. But, Steve, do you want to talk about some of our...

Yes. So we've had a few bigger projects, one in Texas for -- we like to partner some of our mill suppliers. So that's material that we are either toll processing or shipping down to Mexico for our own toll processing facility, and that's services, automotive and appliance. We've invested in Kentucky, alongside of supplier. And we've been adding on to that location. We've ramped up a little probably a little quicker than them. So as they catch up, we're going to be able to continue to grow there. We bought a warehouse in Canton, Michigan, to be alongside a supplier with [indiscernible] doing storage and logistics for them, and we have a new slitter that has been installed recently. So there's 3 examples of investing right alongside our mill suppliers. In Texas, we have 2 plants that are -- one is under construction and putting out some product now in the first quarter and the second quarter that is cleared towards the semiconductor industry. And so we have that location from welding and cutting and forming and kitting for that industry. And the other location is about 20 minutes away, which we'll be doing stainless steel to electropolishing with semiconductor business and that will be ready probably sometime in 2024.

You commented on M&A and specifically the focus around value add. Any additional insights you can share on your M&A process and kind of your views around opportunities that you're presently seeing?

Yes. I mean I think we kind of hit that a little bit. At Reliance, we really look at all the opportunities that are out there and then determine if it fits. While there are some geographies where we could be stronger in a certain product or an end market. And we'll go there, we'll do organic or we'll do an acquisition. But overall, we don't limit ourselves to just those opportunities. So it's really based upon each opportunity, like what's our current presence there. Does it make sense to make this acquisition. Do they bring something of value that we're not already doing. We've been buying some more nichier companies recently. A couple of our acquisitions more recently. We've grown in some red metals where we didn't have a huge presence. So again, it's -- there's not [ for ] hit list of these are the 4 things we're trying to do. There's a lot we still want to do. And so we look at the opportunities.

You recently talked about increasing volumes by taking business you may have not accepted in the past. Can you elaborate on the strategy?

Yes. And that's -- I guess, we're struggling with how to properly work that to make people understand that back, I said around 8 or so years ago, we started investing more, doing more value-add processing. And we, at that time, started also talking about the quality of earnings partly because we felt that Reliance wasn't really being recognized from the investor base in our stock price and trading at the multiple where we thought our business model and our results should be. So we started really saying, okay, let's focus on the quality of earnings. And so we were focusing our people on really achieving a higher pretax income return. And that's been very successful. Our companies, I think, learned how to price for the investments we were making in the value-added processing. Price for the value they're providing to our customers, and that was very successful. But while we were doing that and pushing them for this higher pretax income margin, we maybe let some pieces of business that we had go to others. And now we want to continue to maintain that pricing discipline and maintain that high margin business we have. But we do have some underutilized assets. And so if we can put some more volume, it's got to be profitable. It's got to be smart. We're not going to go out and chase every piece of business we can find. It's very targeted, being smart about it. But we do have a little more focus on volume growth now in addition to maintaining and increasing the margin growth.

Can you talk about your tolling business and its impact on the overall company?

Yes. So our toll processing business, it's something we've been -- so in toll processing, if anyone doesn't know, that's where we're not taking ownership of the metal. We're just performing services to it. We're processing it. We're storing it. We're delivering it to the end user, sometimes we're doing lubricants on it. So whatever our customer needs, typically, our customer on the toll processing business is the producer of the metal, whether it's carbon steel, aluminum, stainless. So they're our customer, they're negotiating with the end user. The majority of what we're doing is automotive and appliance through toll processing. So Reliance strategically years ago. I don't want to offend anyone here, but we chose not to sell metal directly to the automotive companies, the [ impliance ] companies because pricing leverage isn't great when you're doing that in our view. And so we felt the toll processing business, which we acquired the first one in 2003, that, that was a good way to touch those markets that consume a lot of metal with taking on limited price risk. So we don't have any price risk on the metal component. And so it's a good profitable consistent cash flow and earnings profile for us in the toll processing businesses. And we've continued to grow those. The company we bought in the U.S. in 2003, I think, had about 4 locations then. We're up to, I think, 14 for that company. We've acquired some other companies in the U.S. and Mexico. Some of the growth projects Steve just talked about are related to that. One of the big growth areas for us has been processing surface exposed aluminum for the auto industry with the CAFE standards and the lightweighting going on. That's been a big growth market. You've seen a lot of the aluminum producers increased capacity here in the U.S. And so we're there supporting them, expanding with them. Handling that is very difficult, not that many people can do it. But our company here that does that is really good at what they do. And so that's been a high-growth market for us over the last 5 or 6 years in toll processing business. And we're doing very large volumes. Our average order size there is not -- well, a whole different basis. But they actually in our toll processing locations, they handle more metal than we ship in the entire rest of the company of our total 315 locations. So it's a high-volume business. That's a little different than our traditional service center business.

And you commented earlier just on -- as a highlight, really, your decentralized model. To that end, how does your family of companies work together? How do you spread best practices and share information?

Yes. So we do that a couple of ways, but we try to, to have it really happen more organically between our people. We do have twice a year. We have meetings where we bring in the top leaders from all of our companies, a lot of that is to let them network, get to know each other. We do put up their results on the key -- KPIs we look at. And we hope that if someone is at the bottom of the ranking, they pay attention to who is at the top of the ranking and they go introduce themselves. "Hey, can I come visit you? Can I send my people to come talk to your purchasing people to see how they do turns or how your warehouse is laid out. How do you do next-day delivery." So we try to have a lot of that happen organically, but we've really been from the top over the last few years driving this idea of collaboration. Our companies have -- they're all good, solid, successful companies that have really focused on running their business. But now we're trying to have them understand like the breadth of what Reliance can bring to their customers and to support them. So Steve and some of his folks have been trying to put some teams together and drive some of this.

Yes. So over -- since 1994, I believe we purchased 72 companies, which were part of each acquisition. So you collect a lot of companies. And at some point, you rationalize what you have and you get them to speak to each other about best practices, safety, which products are they stocking, what services do they have available. And it's kind of been a cultural thing over the years where we're just kind of making sure like we're in Chicago last night for dinner. We brought 18 of our local people together to just talk about what they see in the market, what are they seeing at the mill level. It's just an overall -- over time has just been kind of an adjustment to the way we look at the market and look at the family of companies.

And I would say examples are -- especially, there are a lot of positive trends going on in the industry, some big projects out there with all the stimulus that's coming and the reshoring. We're seeing a lot of opportunity and having them work together. And maybe in my company, my Reliance company, I specialize in carbon steel plate and that's all I've ever worried about, but I have this customer doing this big project, but they need some stainless, they need some aluminum. So if I can take the other Reliance family people, if I can bring someone with me, who's at one of our aluminum companies, someone who's one of our stainless companies, that's a bigger opportunity for Reliance. So that's really why we're trying to build these relationships and have them look at the market and their opportunities more broadly to leverage more of what Reliance can bring.

I guess I'd open up to any Q&A. I think that concludes my questions.

[indiscernible]

Yes. So it will vary depending on the company that we bring in and what their specific capabilities or niches that -- overall, we want to continue to grow the company to increase stockholder value. So we have to buy the right companies. And sometimes certain companies that we've brought in, they -- we may have them work with one of our existing companies, especially some of our smaller companies. So like the acquisition we just did in May, one of our existing companies had been looking to grow in the Memphis, Tennessee market. They thought that was a strong market for their products. And we could have either done a green field, but there was a good company there with a good reputation. So now our existing company can add -- they have a wider product breadth, so they can add that for this company. That gets us into that geography. Sometimes, we bought -- I think I mentioned earlier, some -- more red metals companies. We've got more copper and brass exposure recently. And by bringing in those companies, that's increased our importance to the suppliers where we were a smaller buyer before. So that helps us from a buying perspective, not just on price, but also just having that strong relationship with the supplier when we need metal. It also makes us smarter in our existing companies we have been working together who are selling those products just to, again, look at opportunities and see how to get better.

Yes. Just getting back to the Southern Steel acquisition we made in May. So you mentioned how to help the network or work with the network. So actually, the owner of the company went to 1 of our companies out in the field, and said they were going to put themselves on the market. So our company brought them to us. So we were able to work together because they were a good customer, well run over the years. So they just -- we're a good bolt-on for what we were trying to accomplish there. So it didn't really go out into the market. It was just kind of a seamless transaction that's going to help us immediately.

Any other questions? If not, well, I appreciate everyone's time for joining us and Karla, Steve for your time presenting.

Great. Thank you. Thanks, Will. Thanks to all of you.

Thank you.