Reliance Steel & Aluminum Co. (NYSE:RS) Q3 2023 Earnings Call Transcript

Reliance Steel & Aluminum Co. (NYSE:RS) Q3 2023 Earnings Call Transcript October 26, 2023

Reliance Steel & Aluminum Co. misses on earnings expectations. Reported EPS is $4.99 EPS, expectations were $5.03.

Operator: Greetings, and welcome to the Reliance Steel & Aluminum Co. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host Kim Orlando with Addo Investor Relations. Thank you, Kim. You may begin.

Kim Orlando: Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance’s Third Quarter 2023 financial results. I am joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.rsac.com. Please read the forward-looking statement disclosures included in our earnings release issued this morning and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance.

Karla Lewis: Good morning, everyone and thank you for joining us today to discuss our third quarter 2023 results. Reliance’s business model is designed to provide resilient performance throughout economic cycles, including both pricing and end market demand fluctuations present in the metals industry. The unique facets of our business model highlighted by strong pricing and inventory management discipline, a highly diversified product mix that is sold into various end markets and geographies, small order sizes, quick delivery, value-added processing and increasing collaboration across our family of companies collectively support our ability to deliver consistent profitable results and generate cash flow. I’d like to commend the entire Reliance team for successfully executing our strategy during challenging times and delivering another quarter of solid financial performance.

Our overall financial performance in the third quarter was in line with our expectations. While our tons sold were down slightly more than anticipated, we outperformed broader service center industry trends and delivered year-over-year growth. As expected, our average selling price declined throughout the quarter across virtually all of our major commodity products, but our pricing discipline and industry-leading value-added processing capabilities provided us with gross margin stability and lessen the impact of falling prices on our gross profit margin. As a result, we delivered non-GAAP earnings per share of $5 in line with our guidance. Our profitability coupled with effective working capital management generated strong operating cash flow of $466 million for the quarter.

Investing in growth remains our top capital allocation priority with approximately $125.5 million of capital expenditures. Our capital expenditure budget for the full year 2023 remains unchanged at a record $520 million with approximately two-thirds directed towards growth projects to advance our value-added processing capabilities, upgrade facilities and expand into new markets. Our total 2023 CapEx cash outlay is expected to be in the range of $450 million to $475 million. While we did not complete any acquisitions during the third quarter, the pipeline remains robust. We will pursue opportunities that meet our disciplined criteria of well-managed companies that would be complementary to our diversification strategy and immediately accretive to earnings.

Our acquisition strategy is supported by our strong balance sheet and consistent ability to generate cash throughout industry cycles. Along with growth, returning value to our stockholders remains a core element of our capital allocation strategy. During the third quarter, we returned $185.1 million to our stockholders through a combination of dividends and share repurchases and we continue to opportunistically repurchase shares in the fourth quarter. Since 2018, we have invested over $2.3 billion in organic growth and acquisitions and returned nearly $3.1 billion to our stockholders through dividends and share repurchases far surpassing our metal service center peers. In summary, we are very pleased with and thankful for the ongoing efforts of our entire Reliance team.

All of whom expertly execute Reliance’s strategy on a day-to-day basis operate safely and produce industry-leading results through all operating environments. We will continue to leverage our strong balance sheet and significant liquidity to fund profitable growth and return value to our stockholders. We are excited about the many growth activities underway and that we anticipate arising under the Infrastructure Bill the CHIPS Act and the Inflation Reduction Act as well as on-shoring and near-shoring activities in the markets we serve. Thank you all for your time today. I’ll now turn the call over to Steve who will review our third quarter demand and pricing trends.

Steve Koch: Thanks Karla, and good morning everyone. I’d like to echo Karla’s comments by thanking the Reliance team for delivering another quarter of profitable results and for the continued focus and effort to ensure the safety of our workforce. I’m pleased to report that the third quarter was our strongest safety quarter in all of 2023. I will now turn to our third quarter demand and pricing trends. Our tons sold were up 1.1% from the third quarter of 2022 and are up 3.4% on a year-to-date basis reflecting solid underlying demand in key markets including non-res construction aerospace as well as contributions from our organic growth activities. Our year-to-date 3.4% increase in tons sold outpaces the 1% increase across the broader service center industry.

When compared to the second quarter of 2023, our tons sold decreased 4.3% predominantly due to lower carbon flat-rolled shipments at a declining pricing environment led to more cautious customer buying activity normal seasonality and one less shipping day. Our average selling price per ton sold of $2,552 was down 2.8% from the second quarter of 2023, but in line with our expected range of down 2% to 4%. I will now turn to a high-level overview of the trends we saw within our products and key end markets. Carbon steel tubing plate and structurals our three largest product groups represented about one-third of our third quarter sales. All of these products experienced higher shipments compared to the third quarter of 2022 and stable or only slight declines in daily shipments compared to the second quarter of 2023.

We continue to believe new public infrastructure projects under various federal state programs in addition to industrial reshoring efforts will continue to support non-res construction and infrastructure demand in the medium to long-term. Aluminum and stainless products represented 31% of our total third quarter sales with aluminum stainless aerospace products comprising approximately 9%. Although, common alloy aluminum and stainless shipments and pricing declined slightly in the third quarter aerospace product demand and pricing remains strong with shipments up significantly year-over-year. We primarily service the automotive market through our toll processing operations, which as a reminder are not reflected in our tons sold. Our tolling business in the third quarter of 2023 was consistent with the second quarter at approximately 4% of our total sales, and improved year-over-year on increased processing demand from the automotive market.

We did not experience a material impact resulting from the UAW strike during the third quarter. We saw a wide range of products diverse sectors of the general manufacturing market. Shipments declined both sequentially and year-over-year due in part to both seasonality and a pullback in carbon flat-rolled demand as prices decline. Sales for the semiconductor industry declined both sequentially and year-over-year. However, our long-term outlook for this market remains positive due to the chipset and active reshoring. We continue to make investments to increase Reliance’s capacity in semiconductor space support active and anticipated opportunities. Please refer to our earnings release for additional commentary on our end markets and product diversification.

I will now turn the call over to Arthur to review our financial results and outlook.

Arthur Ajemyan : Thanks, Steve. Good morning everyone. Reliance delivered solid performance across all financial metrics this quarter. Our net sales were in line with our expectations down 6.6% from the second quarter, mainly due to seasonally lower volumes and lower selling prices. Pricing pressure across our major commodity products in particular carbon flat-rolled contributed to lower-than-anticipated tons sold. Despite pricing declines in various macro headwinds, we produced year-over-year growth in tons sold and gained market share. While the pricing declines for most of our products resulted in temporary pressure on our margins as our cost on hand exceeded replacement costs, we nonetheless maintained a solid gross profit margin of 29.7%, supported by our value-added processing capabilities and generated earnings per share of $4.99 for the quarter.

Higher-than-anticipated declines in carbon steel product prices contributed to a revision of our annual LIFO estimate from $120 million of income to $140 million of income. As a result, we recorded LIFO income of $45 million in the third quarter. Year-to-date, our LIFO income totaled $105 million. Based on our newly updated estimate, we expect $35 million of LIFO income in the fourth quarter. As of the end of this quarter, LIFO reserve of approximately $639 million in our balance sheet remains available to mitigate the impact of possible further declines in metal prices and benefit future period operating results. Moving on to expenses. Our third quarter same-store non-GAAP SG&A expenses declined by $25.3 million or 3.9% compared to the second quarter, due to reduced compensation costs associated with lower FIFO profitability, along with lower variable costs associated with fewer tons sold.

On a year-over-year basis, our same-store non-GAAP SG&A expenses were down $6.1 million or 1% due to lower incentive-based compensation resulting from lower FIFO profitability, partially offset by higher compensation expenses associated with increased headcount and wage inflation. Our third quarter pretax income and margin of $388 million and 10.7% declined from $510.9 million and 13.2% in the second quarter, as a result of the aforementioned pricing pressures and their impact on our volumes and gross profit margin. Nevertheless, our EPS of $4.99 or $5 on a non-GAAP basis was within our guidance. Turning to our balance sheet and cash flow. For the 2023 nine-month period, our operating cash flow was $1.15 billion compared to $1.31 billion in the same nine-month period in 2022, as the impact of lower profitability was partially offset by lower working capital needs in 2023.

Our inventory turn rate based on tons came in at 4.7 times or 2.6 months on hand for the first nine months of 2023, matching our company-wide goal of 4.7 times and it compared to 4.3 times in the comparable period in 2022. Our healthy inventory turn rate not only contributed to strong cash flow generation, but also helped soften the impact of declining prices on our gross profit margin. As announced in our earnings release, our Board of Directors approved an amendment to our share repurchase plan, replenishing our repurchase authorization to $1.5 billion. Our share repurchases in the month of October were $146.7 million, bringing the total purchases under our July 2022 $1 billion share repurchase authorization to $705 million. I’ll now turn to our fourth quarter outlook.

Overall, we expect that underlying end market demand will remain relatively healthy in the fourth quarter of 2023. We expect 3.5% to 5.5% growth in our tons sold compared to the fourth quarter of 2022 were a sequential decline of 4% to 6% consistent with seasonal trends. Although Reliance believes pricing for many products will be near trough levels in the current cycle at some point in the fourth quarter with certain product leveling off or increasing modestly, we expect our average selling price per ton sold for the fourth quarter to be down 4% to 6% compared to the third quarter. We also anticipate continued modest temporary downward pressure on our gross profit margin from the declining metal pricing trends. Based on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $3.70 to $3.90 for the fourth quarter of 2023.

In closing, we believe we have an industry-leading and a proven business model, designed to navigate economic cycles and challenges and a strong balance sheet that collectively give us the confidence to continue pursuing profitable growth and fueling our strong cash flow and capital return activities. That concludes our comments. Thank you for your attention. We’ll now open the call up to questions. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session [Operator Instructions] Thank you. Our first question is from Martin Englert with Seaport Research. Please proceed with your question.

Martin Englert: Hello. Good morning, everyone.

Karla Lewis: Good morning.

Steve Koch: Good morning.

Martin Englert: I wanted to first touch on SG&A and you did comment a bit on it in the prepared remarks $627 million for the quarter down from $651 million I believe sequentially. Could you briefly touch on your thoughts around SG&A for fourth quarter? Should we expect another step down sequentially here but kind of still remaining above that $600 million mark.

Arthur Ajemyan: Yes, Martin, good question. It should be consistent with seasonal patterns. So I mean with fewer tons sold there should be a little bit of a downward trend. But we’re not necessarily putting out a specific guidance on SG&A though.

Martin Englert: Thank you for that. Looking across the different metals product lines here and your comments more broadly within the guidance on modest gross margin pressure quarter-on-quarter here. But are there any particular products where you feel here’s where you’re seeing the majority of the pricing pressure or margin pressure rather.

Karla Lewis: Yes, hi, Martin, it’s Karla. That’s going to vary a lot based on each of the different products, the markets we’re selling into the amount of value-added processing that we’re doing. So generally at a high overall level when mills are announcing price increases we’re typically able to get a temporary margin expansion on those products. But when prices are declining and we’re selling off our higher cost inventory that’s on hand you can see a little compression, so most products have been declining really for about the last seven months. We’ve seen some consistent pricing pressure. So we’ve been dealing with that for several months. And I think our team has done a great job of being able to manage through that and maintain a very strong gross profit margin, although not at some of the peak levels we had seen recently.

And with the current outlook, although there are price increases on certain products announced and we anticipate there could be more and on some additional products. Overall, we’re anticipating downward pressure at least compared to the average from Q3 into Q4. But we do think in a lot of our products we’ll see some leveling off. But overall, we expect some continued pressure.

Martin Englert: Okay. Understood. I appreciate all the color. If I could one last quick one. And again, you just touched on this a little bit in the prepared remarks and no material impact in the tolling business from the UAW strike but is this something like there might be just a bit of a delayed impact. Or based on what you’re seeing today well kind of similar in kind of negligible implications on 4Q.

Karla Lewis: Yes Martin. So in our tolling business, about 60% to 65% of our tolling is automotive related. And then a portion of that is related to the big three where the strike activity is occurring. And we’ve seen very limited impact so far. However, each time the scope of the strike expands, we could see more impact. So there is some impact based on there being more locations on strike, in particular the Ford plant in Kentucky. We will see a bit more impact, we anticipate in Q4 but we’re very hopeful that the strike will be resolved soon and everyone will be back at work and will be back to normal levels. But even if there’s a broad expansion, it will not be material to Reliance as a whole in the fourth quarter.

Martin Englert: Okay. All right. I appreciate that. Nice job navigating the down market. Thank you.

Karla Lewis: Great. Thanks, Martin.

Arthur Ajemyan: Thanks.

Operator: Thank you. [Operator Instructions] Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.