Reliance Steel & Aluminum Co. (RS) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings. Welcome to the Reliance Steel & Aluminum Company Second Quarter 2021 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Kim Orlando of ADDO Investor Relations. You may begin. Kimberly Orlando: Thank you, Operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's second quarter 2021 financial results. I am joined by Jim Hoffman, CEO; Karla Lewis, President; and Arthur Ajemyan, Vice President and CFO. Bill Sales, Special Advisor and former Executive Vice President, Operations, will also be available during the question-and-answer portion of this call. 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 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. Jim Hoffman: Thank you, Kim. Good morning, everyone. And thank you all for joining us today to discuss our second quarter 2021 financial results. I will begin with a high level overview of our second quarter performance and capital allocation priorities. Karla will then speak to our operating results and demand trends by end market. And Arthur will conclude with a review of our second quarter 2021 financials. Our resilient business model, coupled with favorable market conditions drove a second consecutive quarter of record financial performance. I am inspired by the ongoing operational excellence and performance demonstrated by all of my colleagues within the Reliance family of companies. Despite lingering disruptions associated with the global pandemic, including limited metal availability, and various other supply chain constraints, our managers in the field exhibited tremendous execution and most importantly, maintain the relentless focus on safety. During the second quarter, we continued to experience considerable strength in metals pricing, led by multiple mill price increases for carbon and stainless steel products in particular. The favorable pricing environment along with continued strong underlying demand in the majority of the end markets we serve drove record quarterly net sales of $3.42 billion. Our business model, which is strategically highly diversified in terms of our products, end markets and geographies, and focused on small order sizes with quick turnaround, is particularly effective during periods of tight supply and volatile pricing. In addition, despite metal supply constraints, our strong, long-standing relationships with the domestic mills and our unique ability to cross-sell inventory among our Family of Companies allowed us to source the metal we needed to satisfy our valued customers. Through continued pricing discipline by our managers in the field, we generated a strong gross profit margin of 31.7% which, when combined with our record sales, resulted in record quarterly gross profit of $1.08 billion in the second quarter of 2021. Both our record quarterly gross profit and our continued focus on expense control contributed to our second consecutive quarter of record quarterly pretax income of $444.1 million. Our quarterly earnings per diluted share of $5.08 were both another record and substantially in excess of our guidance as well as up 23.3% from our prior quarter. Our resilient and continuously improving business model has enabled us to maintain industry leading gross profit margins throughout various metals pricing and demand cycles. We most recently increased our long-term sustainable gross profit margin range to 28% to 30% during the first quarter of 2020, and we have remained above this range throughout the uncertain COVID-19 pandemic environment. We believe our sustainable outperformance resulted from our managers disciplined approach to pricing and increased value added processing that led to a greater focus on high quality high margin business. Karla Lewis: Thanks Jim. And good morning, everyone. I would like to begin by thanking all of my colleagues within the Reliance family of companies for their record setting performance during the second quarter. I would also like to recognize and thank Bill for his many contributions to Reliance during his successful career. I was fortunate to work with Bill for all of the 24 years he spent at Reliance and wish him all the best in his upcoming retirement. Additionally, I'd like to extend my appreciation to our customers for their ongoing trust in Reliance and our mill partners for their continued support. Arthur Ajemyan: Thanks Karla, and good morning, everyone. I'll start with a recap of our quarterly results. Once again, record pricing levels, healthy demand, and strong gross profit margins contributed to record gross profit dollars, which in turn, drove record pretax income and record earnings per share. The significant increase in metal pricing and ongoing strengthened demand resulted in record quarterly sales of $3.42 billion, up 20.4% from the first quarter of 2021, and up 69.3% from the second quarter of 2020. Strong pricing momentum for most carbon and stainless steel products contributed to the 19.7% increase in our average selling price per ton over the first quarter of 2021. As Jim and Karla mentioned, the continued pricing discipline we focus on higher margin orders by our managers in the field, along with our ongoing investments in value added processing capabilities collectively resulted in record quarterly gross profit of $1.08 billion and a strong gross profit margin of 31.7% in the second quarter of 2021. Our non-GAAP FIFO gross profit margin of 37.5% in the second quarter of 2021 was a record and exceeded the prior quarter by 40 basis points and the prior period by 730 basis points. Please refer to our earnings release where we provide a reconciliation of LIFO to non-GAAP FIFO gross profit margin for each reported period. We incurred LIFO expensive OF $200 million or $2.31 per share in the second quarter of 2021 compared to LIFO expense of $100 million, or $1.16 per share in the first quarter of 2021. As a result of higher than anticipated costs for certain carbon and stainless steel products, we revised our annual LIFO expense estimate to $600 million from $400 million for 2021. Consistent with our accounting policy, we allocate our annual estimate on a pro rata basis in each quarter and had to true up to our new annual estimate in the second quarter of 2021 by incurring $200 million of LIFO expense, bringing our six month 2021 LIFO expense to $300 million. Our current projected LIFO expense for the third quarter of 2021 is $150 million based on this revised annual LIO expense estimate. As in prior years, we will update our expectations each quarter based upon our inventory costs and metal pricing trends. At the end of the second quarter of 2021, Our LIFO reserve on our balance sheet was $415.6 million and is projected to be $715.6 million at December 31, 2021 based on our current $600 million annual LIFO expense estimate. This reserve can benefit earnings in future periods that include declining metal prices. Now turning to our expenses; our second quarter SG&A expense increased $44.8 million or 8.6% compared to the first quarter of 2021. The bulk of the quarter-over-quarter increase was a result of higher incentive based compensation, given our record gross profit and pretax income levels. Additionally, inflation contributed to increase variable expenses, most notably for fuel and freight as well as packaging costs. In comparison to the prior period SG&A expense was up $124.8 million or 28.5%, primarily as a result of higher incentive based compensation to variable plan and delivery expenses associated with 70.5% increase in shipments and to a lesser extent, inflationary increase. Overall, our headcount was relatively flat, compared to both the first quarter of 2021 and the second quarter of 2020. Our non-GAAP pretax income of $442.8 million in the second quarter of 2021 was the highest in our company's history. Our non-GAAP pretax income margin of 13% was also a record. Our effective income tax rate for the second quarter of 2021 was 25.6%, up from 20.9% in the second quarter of 2020, mainly due to higher profitability. We currently anticipate a full year 2021 effective income tax rate of 25.5%. We generated record quarterly earnings per share of $5.08 in the second quarter of 2021, compared to $4.12 in the first quarter of 2021, and $1.24 in the second quarter of 2020. Now turning to our balance sheet and cash flow; our operations continue to generate cash, despite significantly higher working capital needs attributable to rising metal costs. In the second quarter, we again generated strong cash flow from operations of $101.6 million despite over $300 million in additional working capital requirements. In addition, our second quarter of 2021 cash flow from operations was impacted by approximately $174 million of income tax payments, compared to $7 million in the first quarter of 2021. As of June 30, 2021, our total debt outstanding was $1.66 billion, resulting in a net debt to EBITDA multiple of 0.7x. We had no borrowings outstanding on our $1.5 billion revolving credit facility, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy, while maintaining our investment grade credit ratings. I'll now turn to our outlook. We remain optimistic about business conditions in the current environment, with strong underlying demand in the majority of the end markets we serve. However, we expect factors impacting shipment levels in the second quarter of 2021, such as metal supply constraints, labor shortages, and other supply chain disruptions will continue to persist in the third quarter of 2021. As such, we estimate tons sold be down 1% to up 1% in the third quarter of 2021 compared to the second quarter of 2021. We expect metal pricing trends to remain strong in the third quarter as metal prices at the beginning of the third quarter of 2021 are higher than the average for the second quarter of 2021. We estimate our average selling price per ton sold for the third quarter of 2021 will be up 7% to 9%. Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $5.55 to $5.75 for the third quarter of 2021. In closing, we're thrilled with our operational and financial performance in the second quarter, supported by strong pricing and demand trends, as well as outstanding execution by all of our colleagues in the field, who continue supporting our customers' needs. These factors, coupled with our resilient business model resulted in yet another quarter of record financial performance and solid cash flow, enabling us to continue executing on our capital allocation priorities of investing in the growth of our business and returning value to our stockholders. That 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: And our first question is from Sathish Kasinathan with Deutsche Bank. SathishKasinathan: Yes. Hi, thank you. Good morning, Jim, Karla and Arthur. Thanks for taking my questions. You mentioned that shipments to non risk construction market are back to pre pandemic levels and that shipments to heavy industry are above pre pandemic levels. Can you also provide similar comparison on what the current shipment levels are for other end markets? Mainly automotive, tolling, commercial aerospace and energy. And when do you expect the volumes to recover to previous levels? KarlaLewis: Hi, Satish. How are you today? I'll hit that. So we did point out a couple of end markets where we did see and when weren't comparing to pre pandemic in our comments here, we compare to the second quarter of 2021 to the second quarter of 2019. And so there were obviously different levels of strength in some of those end markets in the second quarter of 2019. But we called out those areas where our Q2, '21 shipment levels were higher, to the best that we can tell us, I think you're familiar, we don't have perfect end market visibility, but based on our best estimates, and the products that we sell into those end markets, non res construction and heavy equipment, along with our defense, military and space markets, we did call out we're above pre pandemic levels. That means that the other end markets we sell into are not yet above pre pandemic levels. And as you know, you're aware and we call it out commercial aerospace certainly was hit the hardest of our end markets by the pandemic, still recovering, although we are seeing some improvement there. Same with the energy market. And we expect to see some continued improvement in both of those markets. I will say generally, all of our other end markets we feel are at good healthy levels, strong in some cases, we expect that that underlying demand to continue to be strong and to get back to pre pandemic levels in a lot of those other markets. Commercial aerospace lagging the others, but good, really good demands seen by our customers, especially with the way we service these markets, the customers that we sell to are seeing really strong demand. SathishKasinathan: Okay, thank you. That's helpful color. My next question is a clarification on CapEx. I think Arthur mentioned that the previous CapEx of $245 million, there was also some carryover cash from that needs to be paid, which would imply that the overall cash on CapEx was about $300 million. How does it compare to the new guidance of $310 million? KarlaLewis: Yes, so Satish with those numbers that you refer to that was what we approved for spending, beginning in 2021. So earlier this year, we announced our 2021 CapEx budget of $245 million. We did just announce that that $245 million is now $310 million. So that's what we have approved as new projects to begin in 2021, we will not spend all of that money because of long lead times on equipment building, et cetera that has been approved, some of that cash will be spent in 2022. And at the same time, what Arthur mentioned is that those same long lead times we have some carryover from our CapEx projects that were approved in 2020, where we're expanding cash in 2021. And Arthur, did you give an estimate on? ArthurAjemyan: Yes, Satish, it's a good point. And we said we're estimating cash spend for the year to be perhaps $300 million, but as the year progresses, we continue to run into lead times, and it's just difficult to spend the money. So but we'll keep kind of revising that estimate at the moment. I think the $300 million cash spend is probably as good an estimate as it was last quarter. And we will update you next quarter. KarlaLewis: Yes, but the full year 2020 CapEx budget and the $310 million in '21 includes a lot of growth projects, we see a lot of opportunity, and we will spend those funds, it just may lag into a future year. Operator: And our next question is from Emily Chieng with Goldman Sachs. EmilyChieng: Good morning, Jim, Karla, Arthur. And thanks for the update today. My first question is just around what you're seeing in terms of demand, clearly, demand is very strong there. But when you speak to your customers, are there any signs of double booking or push back against current price levels? And are there any end markets where you could see some early signs of demand instructional or project deferrals? One that comes to mind would be sort of renewable energies, we're seeing some headlines there, but curious as to what you're seeing from your customer base. JimHoffman: Sure, hi, Emily. This is Jim. No, it's - feels good. Most of the markets we are selling into are doing quite well. As far as double booking, I'm not sure if we would ever know that. I don't think we have that. I mean, metal so hard to get right now, my guess is that our customers are busy, and they're glad to get it. And they're glad to pay us for it. And they're really happy to ask us to do more and more value added. So I'm not - this - I don't think that's one of the - this is one of those markets where people are just double booking, thinking that the price is going to continue to go higher and higher and higher, I think people have come to the realization that this is what we need to deal with right now. And they're busy. So they're relying on Reliance to do more. Karla, you may have some additional insight to what you're seeing out there. KarlaLewis: Yes, hi, Emily. I would say that our customers, as I just mentioned are very busy. But people out there are looking for metal, there is limited supply. And we are hearing from some customers that maybe don't normally buy from us who are looking for the metal. But we, with our strong domestic supplier relationships, we've been able to meet the needs of our key customers that we've worked with for a long time and get them in the metal that they need. We have seen, I would say a nonresidential construction, I mentioned that the types of business, the customers we work with there continue to be extremely busy. We have heard of some potential project delays for larger projects. But with the, a lot of the fabricators we work with they're servicing some of the smaller projects, which is normal for us. And that because they're - it's a shorter time period for them to complete the project, they have more certainty on pricing. But in general our customers are busy, they're looking for metal, and we're able to get it for them. JimHoffman: Yes, you might ask that question to the producing metals, they could probably give you an idea double booking, but my guess would be that they're not seeing it. They're running their mills in the 90% capacity range right now. So they're making what they can make and taking care of us and taking care of the supply chain, the best I can. But that might be a good question to ask them. EmilyChieng: Great, that's really helpful and an exciting place to be in. Maybe one follow up is just around the various capital allocation buckets that you've got out there. You've clearly outlined some growth spend today, you recently upped the buyback authorization program. And I think you still think about M&A as one of the problems there. Are you keeping some balance sheet capacity for acquisitive growth? Or how should we think about Reliance repurchasing shares in the case transactions are not executed? Is there some kind of cadence we should expect through the course of the year or is it perhaps more opportunistic in nature? JimHoffman: We said as we have a really good problem. We have a lot of cash; we generate a lot of cash so we can pretty much do anything we want in any one of those buckets. So it's just a matter of remaining flexible and making the right decision at the right time. Arthur? ArthurAjemyan: Yes, sure. A good question, Emily. And I think consistent with our practice we don't necessarily comment about the timing or the amount of share buybacks that we anticipate. But as you may have noticed, we disclose it since 2018, we've purchased over $900 million of our stock back. So it's something we'll continue to monitor and be flexible with our capital allocation. And with our balance sheet today, we have the ability to execute on all prongs of our capital allocation strategy. And we could do the M&A, we can do the record CapEx levels, and along with that provide healthy levels of stockholder returns so. ArthurAjemyan: And saying all that we think the buying Reliance stocks, really good investment, seems to be a good stock, right. Operator: Our next question is from Phil Gibbs with KeyBanc Capital Markets. PhilGibbs: Good morning. What's the outlook for net working capital for the rest of the year? ArthurAjemyan: Yes, so this is Arthur. I think I would say majority of it is behind us. With the - I mean, if we said that in Q2, and then prices increased, much higher than we had anticipated. But I think at this point, Q2 probably was the highest quarter in terms of working capital build. Q3 should be below those levels. And it depends on what happens with pricing, but we had some tax payments that we caught up with, for the six month period, so we shouldn't have that impacting Q3, we had about $174 million of estimated tax payments, and Q3 should have about half of that. And price based on our guidance, with prices going up, 7% to 9%. The working capital build should be less than what we had in Q2, hope that answers your question. KarlaLewis: Yes. Phil, I'd add, also adds on to that, and I should have commented on this earlier in some of the demand questions. Also in our guidance, as you know, typically at Reliance, we're building working capital in the first two quarters of the year, the first half of the year, and then we release some working capital in the back half, mainly because of demand trends and number of shipping days, because of the normal seasonal decline. And in our demand, our tons sold guidance for Q3 down 1% to up 1%. We just wanted to call out that we think that is a very positive guidance signal, because typically, the seasonal trend is for Q3 to be down. I think industry wide, it's usually down about 5% to 7%, Q3 versus Q2, for us with our product mix, it's usually a little less than that, in a quote, normal demand environment, we would have probably guided down anywhere from 3% to 5%. And so we just wanted to highlight that. We hope you guys recognize that the positive thing pretty much flat. Q3 with Q2, we think is very positive indicator for demand strength. PhilGibbs: Thank you. And so the net working capital builds for the third quarter. So you're still anticipating a build, but just less so than Q2. Is that right, Arthur? ArthurAjemyan: That's correct, Phil. PhilGibbs: Okay. And then you gave some color on your gross margin range in terms of what you all think is sustainable 29% to 31%. And I know that sometimes we can get mixed up with LIFO and FIFO. Is that a number for reported gross margins that you're citing there? Meaning FIFO. ArthurAjemyan: That would be on LIFO basis. And that's an annual range. PhilGibbs: Okay. And tax rate over the balance of the year. Did you say about 25%? ArthurAjemyan: 25.5%. PhilGibbs: Okay. Is Bill on the call? BillSales: I am here. JimHoffman: Make it more Bill. PhilGibbs: Congrats, Bill on all of your achievements with the company and just wanted to thank you for all your wisdom over the years and wish you all the best. Thanks. BillSales: Thanks a lot, Phil. Appreciate that greatly. Operator: And our next question is from John Tumazos with Very Independent Research. JohnTumazos: Congratulations on all the great results. I see that 8% midpoint of the price per ton guidance for the third quarter, which is swelling a little bit from the 19% gain sequentially in June. The publish quotations look like sheets and plates should be good that should we infer from the 8% guidance to tubes and long products and stainless and aluminum are going to be pretty flat, or any products gone down? KarlaLewis: Hey, John, it's Karla, I'll give initial response. And then any of my colleagues here can join in if they'd like. But our guidance and what we tried to point towards is that during the second quarter, obviously, with a 20% increase, prices were increasing consistently for many of the products throughout the second quarter. So we ended Q3 with a higher rate than our Q2 average. So our guide of 7% to 9% is really getting us up to the pricing levels where we ended the quarter basically, the current pricing levels, including a couple of announcements we've seen recently on certain products. So we, it's an overall pricing guidance, we do see strength continuing in stainless, common alloy, pretty much most of the products that we sell, we're not saying that the same rate that we saw, price increases on some of those products earlier in 2021, but we see prices holding, not any individual items that we're thinking we're going to see certainly any material decline in prices. JimHoffman: John, you know the drill, I mean, if you think flat rolls and plates going to go up, and tubes going to follow that. And then when you see the mills running at 90% capacity, you can pretty much anticipate some kind of maintenance shutdown. And if we get the chip situation squared away, you're going to see automotive guys crank back up. So all those things in my mind, I don't see a price decrease. And anything I just mentioned there. Will there be additional price increases? Probably. JohnTumazos: If I can ask one more, thank you. Thinking about how tough it is to get steel. Do you think that you could see Reliance being a little more outside the box and maybe buying a slab from a mill that has a little extra mill and taking it to another mill to get to a that might have a little extra rolling and trying to squeeze a little bit more supply out of the system when everything is stretched out like this? JimHoffman: I hear you. I don't think we would do that. Now, I might not be in one day. And somebody might think that's a good idea. But the way it looks, I mean, the way we've done this, John, as you well know for decades, we have this model, that we're very proud of the fact that we've been a domestic supporter for so many years, and the relationships that we have, they pay off all the time. And certainly in times like this, they pay off. So we don't, I can't tell you, we're getting everything we want. We're getting what we need. And there's really no reason for us to muscle up and try to force people to do things that might not be good for their business because we care. We care about the domestic producers. We want them to do well. We want them to reinvest in their companies, which they are doing. And I don't, I just don't see a need for us to go out and do anything out of the box like that with the - JohnTumazos: I wasn't thinking of an imported slab. I was thinking that there might be domestic slab availability out there. Familiar, maybe don't have a good rolling - as big a rolling mill as they wished. JimHoffman: Yes, you know what; those guys are really good at that kind of stuff. We're not. We're going to stick to what we're good at and let them do that kind of stuff. But I see where you're going. And I would say that at Reliance won't be doing things like that. Operator: And we have reached the end of our question-and-answer session. At this point, I will return it, hand it over to Jim Hoffman, President and CEO for closing remarks. Jim Hoffman: Okay, thank you all for taking the time and give us your attention today. Our record financial results would not have been possible without the strong operational execution demonstrated by the entire Reliance team including the hard work and resilient commitment to health, safety and wellbeing of our colleagues in the fields. We thank you and we are inspired by your performance every day. Lastly, we will participate virtually at the Raymond James Diversified Industrial Conference on August the 25th. We hope to see a lot of you there. Bill, we're going to miss you, buddy. Bill Sales: I am going to miss you too. Jim Hoffman: Thank you very much. Operator: This concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.RS Ratings Summary
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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.
