Reliance Steel & Aluminum Co. (RS) on Q1 2023 Results - Earnings Call Transcript

Operator: Greetings, and welcome to the Reliance Steel & Aluminum Company First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations. Please go ahead. Kim Orlando: Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's first 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. The press release and the information on this call may contain certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors, including the impacts of inflation, geopolitics and the COVID-19 pandemic and related economic conditions on our future operations. Which may not be under the company's control and may cause the actual results, performance or achievement of the company to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, but are not limited to, those factors disclosed in the company's annual report on Form 10-K for the year ended December 31, 2022, under the caption Risk Factors, disclosure in our press release this morning and other documents, Reliance files or furnishes with the Securities and Exchange Commission. The press release and the information on this call speak only as of today's date and the company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Karla Lewis, President and CEO of Reliance. Karla Lewis: Good morning, everyone, and thank you all for joining us today to discuss our first quarter 2023 financial results. I'll begin with an overview of our performance and capital allocation strategy. Steve will then speak to our operating results and demand trends by end market, and Arthur will conclude with a review of our financial results and outlook for the second quarter of 2023. Beginning with our first quarter performance. We started the year off strong as our highly diversified business model continued to yield favorable results in an uncertain business environment. Our first quarter net sales of $3.97 billion increased approximately 10% from the fourth quarter of 2022. Our sales benefited from solid demand in the vast majority of our end markets, with our tons sold up 17.7% from the fourth quarter of 2022 which were partially offset by a lower average selling price. This was the highest sequential increase from the fourth quarter we've seen in our tons sold in the last decade. Our strong volumes which benefited from our investments in organic growth, a robust gross profit margin of 3.9% and disciplined expense control helped drive pretax income of $508.5 million and diluted earnings per share of $6.43, well ahead of our expectations. Our strong profitability along with effective working capital management enabled us to generate significant first quarter operating cash flow of $384.6 million. Turning to capital allocation. Our consistent cash generation continues to fuel our strategy of investing in growth activities and returning capital to our stockholders. Our capital expenditure budget for the full year 2023 remains a record $500 million, with spend of $102.9 million in the first quarter and an expected total cash outlay of approximately $400 million to $450 million this year. We expect approximately 2/3 of this budget will be invested in growth projects up from roughly 50% historically as we continue to invest in various facility upgrades, efficiencies and expansion into new markets. Our investments include new cutting-edge equipment to expand our value-added processing capabilities to further bolster our market position and margin profile as well as investments to provide safer working environments for our employees. While we did not complete any acquisitions during the first quarter, the pipeline remains healthy. We continue to evaluate a wide variety of prospective opportunities and remain well positioned to pursue those that meet our disciplined criteria for high-quality growth. Concurrent with our growth initiatives, we returned $100.9 million to our stockholders in the first quarter through a combination of dividends and share repurchases. Since 2018, we have allocated over $2 billion of capital towards organic growth and acquisitions and nearly $2.8 billion towards stockholder returns in the form of dividends and share repurchases. In summary, we are very pleased with our first quarter performance, both operationally and financially. We continue to execute our strategy in a dynamic environment with metal pricing volatility, ongoing inflationary headwinds, recessionary concerns, supply chain disruptions and labor shortages. Nevertheless, our managers in the field continued to do an excellent job upholding our superior levels of service and providing increasing levels of value to our customers. We maintain our belief that Reliance remains very well positioned to capitalize on opportunities resulting from the Infrastructure Bill, the CHIPS Act and the Inflation Reduction Act in an environment with relatively higher metal pricing versus historical levels. Thank you to our extraordinary team at Reliance for your commitments to working safely and successfully executing our model. Thank you all for your time today. I'll now turn the call over to Steve, who will review our first quarter operating results and demand trends. Steve Koch: Thanks, Karla, and good morning, everyone. I'd also like to express my gratitude to our dedicated team at Reliance for their outstanding operational execution and ongoing commitment to safety. I'll now turn to our first quarter demand and pricing trends. Our tons sold increased 17.7% compared to the fourth quarter of 2022, surpassing our expectations of up 11% to 13% and vastly exceeding the typical seasonal recovery. Compared to the prior year period, our tons sold were up 7.2% higher than the service center industry increase of 5.5% as reported by the MSCI. The performance was supported by our organic growth activities we've invested in over the course of the past several years, along with our end market and product diversification, broad value-added processing capabilities and ability to service quick turnaround orders. Continued strength in the nonresidential construction, general manufacturing and aerospace end markets further contributed to our strong shipment levels in the quarter. Additionally, rising metal cost trends incentivized many customers to reenter the market ahead of further price increases, which led to strengthened demand for our carbon steel flat-rolled products. Shipments for the other carbon steel products we sell also increased both sequentially and year-over-year. Our first quarter average selling price per ton sold of $2,623 declined 6.3% compared to the fourth quarter of 2022, exceeding our expected decrease of 3% to 5%, largely due to shifts in product mix. Relative to the fourth quarter, the increase in carbon steel product shipments, which have a lower average selling price than stainless steel and aluminum products contributed to a shift in our product mix, resulting in a lower realized sales price per ton sold. While our overall quarterly average selling price per ton sold decreased, pricing for most products we sell stabilized during the first quarter. It's also important to note that announced carbon steel flat-rolled price increases were only partially realized during the first quarter, with more to come in the second quarter. Arthur will cover our second quarter 2023 outlook in more detail. On a non-GAAP FIFO basis, which is how we monitor our day-to-day operating performance, our gross profit margin increased by 190 basis points to 30.5% compared to the prior quarter due to the -- due to better alignment of inventory cost on hand with replacement costs. I'll now turn to a high-level overview of the trends we saw within our key end markets. Notably, shipments improved both year-over-year and quarter-over-quarter in nearly every end market with continued strength in non-res construction, general manufacturing, auto through our tolling operations, aerospace and energy. While sales to the semiconductor industry declined sequentially and remained at elevated levels compared to the first quarter of 2022. And our long-term outlook for this market remains positive and we will continue to make investments to increase Reliance's capacity in the semiconductor space to support the significant expansion of semiconductor fabrication underway in the United States. Separately, we will also continue to make investments in our businesses that sell into infrastructure and clean energy to support anticipated higher activity in these areas. Please refer to our earnings release for additional commentary on our end markets. Overall, we remain confident underlying demand will remain healthy across the majority of the end markets we serve in the second quarter of 2023. I'll now turn the call over to Arthur to review our financial results and outlook. Arthur Ajemyan: Thanks, Steve. Good morning, everyone, and thank you for joining us today. As Karla highlighted, ongoing strong demand contributed to non-GAAP earnings per share of $6.37, well ahead of our guidance of $5.40 to $5.60 per share. The stronger-than-anticipated 17.7% sequential increase in our tons sold also exceeded our guidance and accounted for the majority of the earnings per share outperformance, while our overall quarterly average selling price per ton declined from the previous quarter due to the entry point into Q1 being lower than the prior quarter average and a shift in our product mix. Our selling prices remained relatively stable throughout the first quarter. In an environment of relatively flat pricing for the vast majority of the products we sell, we improved our transactional or FIFO gross profit margins that's without the impact of LIFO adjustments from the fourth quarter of 2022 as our inventory turn rate accelerated and costs on hand continued to better align with lower replacement costs. Additionally, we realized a significant amount of operating leverage on the incremental tons we shipped, these factors collectively contributed to the better-than-expected results for the first quarter. We recorded LIFO income of $15 million in the first quarter of 2023 and compared to $99.1 million of LIFO income in the fourth quarter of 2022 and LIFO expense $37.5 million in the first quarter of 2022. Our current estimate of $60 million of LIFO income for fiscal 2023 remains unchanged from our previous outlook. As a result, we currently expect to record $15 million of LIFO income in the second quarter of 2023. Consistent with historical practice, we will update our expectations quarterly to account for actual inventory cost and metal pricing trends. As of March 31, 2023, the LIFO reserve on our balance sheet was about $729 million, which will generate LIFO income and benefit future period operating results to mitigate the impact of potential declines in metal prices. Moving on to expenses. Our first quarter non-GAAP SG&A expenses increased $43.2 million or 7% compared to the fourth quarter of 2022. Due primarily to higher incentive compensation associated with higher profitability as well as higher variable warehousing and delivery expenses associated with higher tons shipped. On a year-over-year basis, non-GAAP SG&A expenses increased $43.3 million or 7.1% primarily due to incremental variable costs associated with higher tons shipped and inflationary wage adjustments, which were partially offset by lower incentive-based compensation resulting from lower FIFO profitability. Turning to cash flow. Despite about $100 million of working capital investment in the first quarter, we generated cash flow from operations of $384.6 million, supported by our strong earnings. Our inventory turn rate based on tons improved in the first quarter of 2023 to 4.9x or 2.4 months on hand, up from 4.4x or 2.7 months on hand for all of 2022 and exceeding our company-wide turn goal of 4.7x. Our days sales outstanding was approximately 40 days in line with our historical range of 39 to 43 days. Our operating cash flow funded $102.9 million of record quarterly capital expenditures and the return of $100.9 million to our stockholders in the form of $62 million of cash dividends and $38.9 million of share repurchases. As of March 31, 2023, approximately $641.8 million remained available on our $1 billion share repurchase authorization. I'll now turn to our second quarter outlook. While we expect underlying demand will remain healthy in the second quarter of 2023, we expect our tons sold will be flat to down 2% in the second quarter of 2023 compared to the first quarter of 2023 due to one less shipping day in the second quarter of '23 and the absence of the demand pull forward experienced in the first quarter of 2023. We anticipate overall pricing to remain fairly stable with slight upside from recently announced carbon steel price increases. Accordingly, we estimate our average selling price per ton sold in the second quarter of 2023 will be flat to up 2% compared to the first quarter of 2023. Based on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $6.40 to $6.60 for the second quarter of 2023. In closing, we are very pleased with our solid start to the year with strong shipment levels, earnings and cash flow despite continued macroeconomic uncertainty. This concludes our prepared remarks. Thank you for your attention. And at this time, we'd like to open the call up to questions. Operator? Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Emily Chieng with Goldman Sachs. Operator: Next question comes from Timna Tanners with Wolfe Research. Operator: [Operator Instructions] Our next question comes from Phil Gibbs, KeyBanc Capital Markets. Operator: Next question comes from Martin Englert, Seaport Research. Operator: Since there are no further questions, I would like to turn the floor back over to Karla Lewis for closing comments. Karla Lewis: Thank you. And thanks again to all of you for your time and attention today. Before we close out the call, I'd like to remind everyone that we'll be in Boston in late May, attending the KeyBanc Industrials and Basic Materials Conference. And in Chicago in mid-June, presenting at the Wells Fargo Industrials Conference. We hope to see many of you there. And thank you again to our team at Reliance for your continued strong performance so far in 2023. And thank you to all of you for your continued support of and commitment to Reliance. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
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Reliance Steel & Aluminum Co. Achieves New 52-Week High in Stock Market

Reliance Steel & Aluminum Co. Achieves New 52-Week High

Reliance Steel & Aluminum Co. (RS:NYSE) has been making headlines with its remarkable performance in the stock market, achieving a new 52-week high of $342.20 on April 8, before slightly adjusting to close at $337.08. This achievement is a testament to the company's robust growth trajectory, with a market capitalization that now stands at approximately $19.4 billion. Over the past year, RS has seen its shares soar by 37.1%, significantly outpacing the industry's growth of 4.4%. This impressive performance is largely attributed to the strong demand in its major markets, including non-residential construction, commercial aerospace, and automotive sectors, which have remained resilient despite the challenges posed by macroeconomic uncertainties and geopolitical tensions.

In its quest for growth, Reliance has strategically expanded its market reach and diversified its product portfolio through a series of acquisitions. The company's recent acquisitions, such as Rotax Metals, Admiral Metals, Nu-Tech Precision Metals, Southern Steel Supply, Cooksey Iron & Metal Co, American Alloy, and Mid-West Materials, Inc., have not only broadened its market presence but also enhanced its value-added processing services. These strategic moves are indicative of Reliance's aggressive growth strategy and its commitment to strengthening its position in the market.

Furthermore, Reliance has demonstrated a strong commitment to delivering value to its shareholders. Over the past three years, the company has repurchased approximately 7.5 million shares worth $1.43 billion and increased its quarterly dividend by 10% to $1.10 per share. In 2023 alone, Reliance returned $479.5 million to shareholders through share repurchases and generated a remarkable $1.67 billion in cash flow from operations. These actions reflect the company's strong profitability and effective working capital management, underscoring its financial health and operational efficiency.

Looking forward, Reliance is poised to continue reaping the benefits of strong demand in its key markets, particularly in non-residential construction and the commercial aerospace sector. The company's strategic growth initiatives, both through organic growth and acquisitions, coupled with stabilizing product pricing, are expected to bolster its performance in the upcoming quarters. With the scheduled release of its earnings report on Thursday, April 25, 2024, Wall Street anticipates an earnings per share (EPS) of 5.51 and revenue projections of approximately $3.76 billion for the quarter, signaling continued optimism about the company's financial prospects.

In addition to Reliance's promising outlook, other stocks in the basic materials space, such as Carpenter Technology Corporation (CRS), Denison Mines Corp. (DNN), and Innospec Inc. (IOSP), have also been highlighted for their impressive performance and favorable Zacks Ranks. These companies, alongside Reliance, represent attractive investment opportunities within the sector, showcasing the potential for sustained growth and profitability.