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

Welcome to the final presentation of our iron ore and steel stream. It is absolutely my pleasure to have with his Reliance, who's actually first time at the conference in several years. So it's really exciting to have you guys here. And representing Reliance, we, of course, have Karla Lewis, who's President and CEO; and Arthur Ajamian, who's the CFO. Both of you, welcome.

And thank you for being here. Where I'd like to start to maybe just kind of set the stage is, can you walk us through Reliance's priorities for 2024 and objectives and where we are year-to-date in terms of achieving those.

Sure. And first, like who in the audience does not work for BofA, like -- thank you for showing up of 530 today. We appreciate it. So thanks, Lawson, for having us here. I did suggest they serve drinks. Maybe we would have had a few more people here, but maybe next year, we'll put that on the agenda.

If you come to Barcelona, we'll have drinks for your presentation.

Okay. and anyway, thanks, everyone, for the time. As far as Lawson's question 2024 objectives. We're pretty consistent at Reliance with what we think we've done and try to do and continue to do building the company for the long term, which is really trying to improve our business day-to-day. If you don't know Reliance, we're a service center, we're the largest in North America, but we really differentiate a little bit by focusing on smaller customers and smaller order sizes. Last year, our annual revenue was $15 billion. Our average order size was $3,200 in order. So we're doing a lot of transactions, 40% of those customer orders today, we deliver tomorrow. So we run a pretty decentralized company to be able to service our customers that way. So it's continuing to focus on servicing those customers. Our customers over the past 8 to 10 years have been asking us to do more value-added processing for them. So we really had stepped up our investment in value-add processing as we see continued opportunities from our customers. So our CapEx budget this year is $440 million. That's hundreds of different items in the CapEx to do more of that value-add processing that we continue to build on, to continue to increase our gross profit margins. We also have grown quite a bit through acquisitions. We just -- we've completed three acquisitions so far in 2024 with the last one being our 75th acquisition since our IPO 30 years ago. So continuing to try to grow the business both organically and through acquisition as well as returning value to our shareholders through dividends and share repurchases. So that's kind of our capital allocation bucket. I think what are we doing a little differently and specific to 2024, but again, it stays very consistent. We also now in our company are talking more about smart profitable growth, which means there was a period where we only went after the really high-margin business, and we said don't go after kind of that medium to low margin business, and we're focused on retaining the high-margin business, but also getting a little more throughput, especially with prices declining a bit through our existing assets, we can take some of that medium margin business to still supplement our earnings. And also our companies, we're a family of companies. And typically, they really focused on their specific business. And we talk more about collaboration now and having our companies work more together going after opportunities together to improve the overall profitability of Reliance. And of course, we also just have our continued focus on keeping our employees safe.

Yes. That's fantastic. I wanted to address the name change as well. I guess, initially, what's the feedback been from your investors in terms of the name change. But then I think more importantly, what does the name change ultimately mean to the folks at Reliance? And what does it mean to all the different family offices that make up Reliance?

Yes. So we were Reliance [indiscernible] since our founding in 1939. Very proud to be Reliance Steel and Aluminum Co. This year was our 85th year in business. But really, from our investor base, long-term shareholders over the years, it first started with many of them saying why doesn't Reliance get a higher multiple, you outperform a lot -- most of the companies, you're compared to in the metal space, defense against any of the other metals companies. But they said, maybe we look at you more like an industrial distribution company. We think you should have a higher multiple. And so we started to try to reposition ourselves a little more in our discussions, our investor materials, shareholders that we met with to drive our multiple up. And I think we've had some with that. And the other thing that the investors said along with that was, can you please drop steel and aluminum from your name because some people won't look at your company because they don't invest in metals, we think you could get a broader reach by doing that. Being there for 32 years, it was kind of hard for me to drop those names, but we felt it was the right thing to do and response from investors has been positive. We listen to you. We take the feedback internally. And one of the things to know about Reliance is with all of these companies we acquire running in a decentralized manner, we leave the name in place. We buy good well-run companies who have a good reputation, a strong position in their market. So we don't change their name to Reliance. They continue as whatever their brand has been for all of those years. So it did mean a lot to them. We actually didn't have any operating companies under Reliance Steel and Aluminum. We have Reliance companies. But we actually had a much more positive internal response than we anticipated. It was a little bit of like we're a little old school. Our industry is a little old school. So it was felt as maybe a little more progressive Reliance moving into the future. So it actually created a lot more excitement than we had anticipated.

That's great. I wanted to touch on M&A. You addressed it in your opening remarks. Thank you. That was a good starting off point. You actually addressed a lot of things in your opening remarks I'm probably going to come back to. But after a fairly long hiatus in '22 and '23, aside from one small acquisition, year-to-date, you've done three that total nearly $500 million. Can you maybe speak to how the M&A environment has changed, for example, on the bid-ask spread and whether or not maybe there's more willingness to sell given the more challenging environment and just speak to maybe the dynamics of that. And then most importantly, I think, for everybody here is what's the outlook going forward?

Yes. So Reliance's appetite for acquisitions has always been high, but it has to be the right companies with the right value. We feel we're pretty disciplined when we look for acquisition opportunities. And so there have been periods maybe a year where we have not completed an acquisition. It's not because we weren't looking. It's not because we didn't want to acquire good companies. We either just didn't see companies that were the right or maybe we were interested but valuation expectations were different. At Reliance, the way we've consistently valued acquisitions. And because we're in the business, we understand the different market dynamics that occur. So we try to look at peak and trough for that target company based on the products and end markets they're selling into. And then we come up with what we believe a normalized go-forward pretax income EBITDA number is, and we value off the normalized number. So we don't value off of projections. We don't value off of trailing 12 months. We come up with that longer-term view because we acquire companies for the long term. And things were really nice and a little crazy in the pricing environment in '21, '22. So we saw a lot of sellers who were hopeful to have us think those pricing levels were going to remain forever. We've been in the business a little too long to believe that. So it was harder to agree on valuations. We've seen some of those companies come back around because they weren't able to get the numbers that they were looking for at the time. As far as kind of deal flow opportunities out there, I think people do have more realistic expectations on value now. We've also seen companies that probably kind of fit Reliance a little better in the last year to 2. A lot of these are companies where the owners are reaching retirement age. It's a generational turn and Reliance is an attractive home for their good business, they're good employees that have grown with them over the years. And so we anticipate more activity, but we never know when or who...

You have a very strong balance sheet. The acquisitions you've done year-to-date have been more bolt-on given your relative size. Is that because of the lack of availability of large transactions? Or is it just that you're shying away from large transactions and preferring a more bolt-on type of approach?

So we are not shying away from large transactions if they're good companies that fit Reliance. Not every company that sells metal is a good fit for Reliance. So there are some good public and private, larger, multibillion dollar revenue companies out there that could be attractive to us. But the majority of the companies in our space are kind of the family-owned small to medium-sized businesses, especially, again, back to our model of focusing on the smaller customers, smaller order sizes, we see that more in the model of a lot of the family-owned companies more so than some of the larger chains. Not that there aren't any, but...

Understood. I wanted to come back to the name change and just ask if there's an implication or read through from the name change that you might be interested in other metals as part of your business?

Well, I mean, we're involved in a lot of metals already. We don't talk about but we've got some high-end like zirconium and one of our small companies and some other exotic metals there. We do a lot of titanium, brass, copper. I mean, we do touch a lot of different metals. But the name change is not signaling that. Like I said, we're proud of what Reliance has done. We want to continue building with one of our recent acquisitions, American Alloy, they do PVQ carbon steel plate, not that exotic, but something we didn't carry in our portfolio before. So we are often expanding products a little bit, but we are not looking to take a right turn and go in a different direction from where we've been.

So no uranium?

You never know. Well, we have a couple of companies that sell into the nuclear market. They're not selling uranium. But yes, we'll leave that maybe to some of the other folks to handle.

And I wanted that you touch on CapEx in the beginning. So I wanted to step off from your comments on CapEx. The -- I mean they have been elevated certainly for the last 2 to 3 years, your level of CapEx spending, a lot of that's been associated with value-add product, of course. But just based on your conversations with customers and the end market outlook, how long do you see that elevated level of CapEx persisting?

Yes. I mean, we've -- for the last few years, we thought, gee, we're probably not going to see this much opportunity again next year, but then we see it. Our CapEx is built from the ground up at each of our operating locations, what do they see with their customers. They make their requests at corporate, we go through it and decide where to allocate the dollars. But if it's a good business opportunity for us, we're -- and it's team that can return we're generally supportive of that. Some of the increased dollars, quite honestly, is inflation related. It just costs more to do everything, whether it's a piece of equipment or a greenfield, the actual cost is higher. Like I said, we keep thinking it will slow down, but we continue to see opportunity. A lot of our customers, especially again, the smaller companies, that processing equipment, maybe they already do that in their shop, but the new equipment is a lot more expensive. It's harder to find labor, train the labor to do that. With our size and scale, we can we could run that same piece of equipment for multiple customers, making it more cost efficient. We also throughout Reliance. We already have people generally running that type of equipment, so we can get up and running faster by our internal resources training.

Okay. That makes a lot of sense. I just wanted to mention to the folks in the audience that if you have a question, we are more than happy to take it. Just raise your hand and we'll get to you as quickly as possible. I wanted to ask about...

Just update on the macro conditions, how is demand versus like what booming or normal market is? And what sort of end markets are doing better or worse than what's your outlook?

Yes. So for quite a while now, I don't think we've known what a normal market is. There's always something happening. But overall, we're not booming in most industries, but we're healthy. Our biggest end market is nonresidential construction, and we would throw infrastructure and someone like the renewable energies and with that market, that's probably 35% to 40% of our sales dollars. Reliance and in the service center industry, we're generally not selling the large volumes of metal direct for like skyscrapers and the large projects. We deal more in like the 5-story and below buildings. So we've been pretty active, schools have been active, data centers, medical facilities, even airports, stadiums, these smaller projects, we're still seeing new activity building for manufacturing facilities with the reshoring that's happening has been a very strong market. I don't know if I mentioned data centers continues, things related to solar, wind, electrification, power grids. We've seen a little bit come from the infrastructure bill so far, mainly bridgework, but there's -- it's very early in the actual spend on the infrastructure bill. They are the big semiconductor chip manufacturing plants going in. we're participating in selling some like structural metal into the building of the facilities. We also have kind of a specialty company selling into semiconductor. They do the ultra-high purity gas system. So when the new chip manufacturing plants come up, this is the clean electropolish stainless steel tubing that they'll pipe the gases in through. So it's not a huge market, but it's a very good market. So we're expanding capacity with a greenfield in Texas to support that growth. So that's positive for us. Plus once these big chip plants are built, then there's all the infrastructure of their subcontractors, their employees. So we think there's a lot of good activity to come from that. Automotive, we approach that market a little differently. At Reliance years ago, we looked at the auto market and the appliance market. They're big consumers of metal. But typically, you have to lock into like an annual fixed sale price to them and you can't get a supplier to lock into that. So we do very little contractual business. We stayed away from the direct material sales to them, so we don't have to take on the price risk, but we do toll processing. So we're inspect -- so on behalf of the producers, we're inspecting the metal, we're edge trimming it, we're blanking it, we're lubricating it. We're delivering -- storing it. We're delivering it to the automaker. And that's very high volume for us. And we've been expanding -- that's been -- auto is good for us. We've been increasing our volumes there. And in particular, our company that does that here in the U.S. handles aluminum. And so with the higher aluminum content going into autos now, we've been expanding their operations and seen a lot of growth there. Aerospace is a good market for us. About 10% of our sales. About half of that is like defense and space, which continues to be strong on the commercial side, build rates at certain of the airplane manufacturers aren't what had been anticipated. So we're expecting a bit of an inventory glut in that supply chain, which will slow down activity for us and others until they catch up. Semiconductor that's been in near -- the last year, again, there was an inventory glut there as well. People overbought. And with some of the export markets changing, people are trying to rightsize that. We feel we're close to that market correcting, long term, still very bullish on that. Also, long term, still very bullish on aerospace. The order books are there. And then general manufacturing would be a lot of a lot of different things that we touch, ag equipment's been down, consumer products has been down but I think we've seen a little improvement in industrial machinery. Arthur, anything to add there?

No, I mean, I think general manufacturing has been contracting for some time and maybe there's some signs of expansion in the last couple of months. So the ISM index, et cetera. So -- and to Cardless point industrial machinery, we're seeing some military applications in that space that hadn't been a trend up until recently. So there should be some positive momentum there, hopefully.

You guys touched on two businesses, actually, I'd really like to ask about and particularly in the context of your smart profitable growth. So you're going to take slightly lower margins to drive like absolute EBITDA growth. You have some interesting businesses that have far higher margins. Is the idea that those businesses can help offset some of the margin and ultimately kind of maintain gross margins. And the two businesses, I'm particularly thinking of or tolling, obviously, that's been a big driver of gross margins for you. But what about the high-purity gas semiconductor business? Is that a business that can grow very quickly and materially impact margins?

So what was the first part you asked?

So the context being just the smart profitable growth. And the potential negative impact on gross margins? And then what are the businesses that can offset that? And I was particularly curious about those two.

So the smart profitable growth should not doing it right the way we intend to, and we're setting targets with specific companies of ours and how to look at that. They need to maintain and they're incentivized to maintain that high margin business but also show some growth going after reasonable margin business. And I think in 2023, we definitely demonstrated that. We outperformed the market from a shipment level. So we took some market share, but we also maintained our gross profit margin in that 29% to 31% at the high end of the 29% to 30% range. So I think doing well and trying to balance that. Tolling those are good margins in the tolling business because, again, we don't have the metal price risk. Semiconductor, the ultra purity gases, it's a great business. It's a really high-priced product. And we do -- we're close to manufacturing in certain products. We do some valves and fittings, some manifolds in that. The market isn't huge, and we have a pretty good spot. We're spec-ed into most of the projects, but there will be more MRO in that business, started in the U.S., but we kind of followed some of the semiconductor chip plant growth. So in the early 2000s, we opened a location in South Korea, which we've grown a couple of times, then went into China. We've grown that business a couple of times. Now our main investments Right now are back in the U.S.

Okay. This is amazing. Thank you so much for being here. Thank you, everybody, for listening in, and have a great rest of your conference.

Great. Thanks, everyone.

Thanks for having us.