Q1 2020 Earnings Call
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Reliance steel and aluminum.
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Greetings and welcome to reliance steel and aluminum company's first quarter 2020, <unk> earnings conference call. At this time all participants are they listen only mode. A brief question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded and it's now my pleasure to introduce your host Brenda Miyamoto. Please go ahead. Thank you operator, good morning, and thanks to all of you for joining the conference call to discuss our first quarter 2000.
Many financial results I'm joined by Jim Hoffman, our President and CEO and causally, our senior executive Vice President and CFO.
No sales our executive Vice President operations will also be available during the question answer portion of this call.
According to this call will be posted on the Investor section of our website at Investor Day, Our S AC dotcom.
The press release and the information on this call may contain certain forward looking statements, which are based on a number with assumptions that are subject to change and involve known and unknown risks uncertainties or other factors, including the impact of Cobiz 19 unrelated economic conditions on our future operation, which may not be under the company's control.
Which may cause actual results performance or achievement of the company to be materially different from the results woman or other expectation implied by these forward looking statements.
These factors include but are not limited to those doctors disclosed in the Companys annual report on form 10-K to the year ended December 31st 2019 under the caption risk doctors disclosure in our press release. This morning, and other reports filed with the Securities and Exchange Commission.
The press release any 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'll now turn the call over to Jim Hoffman, President and CEO was in line.
Good morning, everyone and thank you for joining us to discuss our first quarter 2020 resolves and our response to the cope with my team and.
We had a strong start to the year following several financial performance records in 2019.
Overall demand levels were healthy through most of the first quarter of 2020.
Our strong non-GAAP gross profit margin of 31.9% was above our estimated sustainably range of 20% to 30% and produce non-GAAP gross profit dollar so $820.5 million on net sales.
$2.57 billion and non-GAAP pre tax income of $220.6 million or non-GAAP earnings per diluted share of $2.45 significantly exceeded our first quarter guidance.
I will provide additional details on our Q1 performance drivers animal, but first I'd like to address the Corona virus fan, Doug and how we expected to impact our business and actions reliance is taking to address or this extraordinary situation.
First and foremost our thoughts and prayers go out to everyone around the world fighting this bar expressively, though on the front lawn, hoping the people who are directly impact.
Most of our locations continue to all operate albeit at reduced levels of the central businesses under the United States Department of Homeland Security Cyber security infrastructure Security agency sees the guidance.
We continue to work closely with our suppliers in are grateful for their ongoing support and partnership to withstand these challenging circumstances.
We are engaged with and listening to our customers and adapting to address them support their needs through this uncertain and difficult car.
We have taken difficult actions, including workforce reduction to rightsize, our operations to sustainable levels that we believe will enable us to emerge from this current crisis intact prepare and position to face new business realities, including the ability to quicker.
Really ramp up with our customers and suppliers into recall laid off employees when the time call.
Importantly, many of our businesses are supporting customers on mission critical projects to aid in the Cobot 19 response around the country to name a few we're pleased to be supplying processed aluminum necessary for ventilator production metal doors for Haas.
A little walls and facilities being converted for patient care and metal for construction of decontamination systems to sanitized and 95 mouse.
We are proud of to support these and many other opportunities did improve our service and contribution to the community in which we live and work to that in many of our businesses have been donating personal protective equipment, such as masks and safety glasses to support first responders.
And health care providers on the front line.
Oh, the fight against covert 90.
As I have stated time and time again, the health safety and well being of our employees is our most important core value at reliance.
As such we took immediate action to lower the risk to our employees by promoting remote work routine cancelling employee travel and group events and restricting visitors to our facilities.
We implemented social distancing and improved sanitation measures in the workforce to comply with heightened safety standards.
We provided temporary aid in the form of paid time away from work to support our employees impacted by cobot 19, whether due to exposure to bars or needed care for their families.
We've expanded our employee emergency assistance fun reliance cares to provide grants through our employees impacted by cobot 19.
I want to take a minute to thank each and every one of our employees for their unwavering commitment and dedication to health and safety every lives and our communities at large.
Finally, I would like to reinforce that our operating model is designed to support that.
Company through both good times and bad.
As we have demonstrated throughout our 80 year history.
Although the current situation. Unlike any thing we have experience. We believe the resilience of our business model will help us manage should this particularly challenging time just as it has in the past.
For instance, during the great recession, when our 2009 shipments fell 32% and our average selling price declined 18.4% from 2000, Hey.
We took immediate action.
Including reducing our workforce by 21%.
And lowering inventory by over $1 billion in a nine month period from September 2008 through June of 2009.
These actions allowed us to remain profitable for the 2009 year.
Well, we're doing what we need to do to ensure reliance stay safe and healthy.
Concurrently focused on maintaining our solid financial position.
We have a very strong balance sheet with an investment grade credit rating.
$831.5 million available for borrowing on our $1.5 billion revolving credit facility as of March 31st.
Our business model promotes counter cyclical cash flow generation, which we couldn't combined with effective working capital management.
Enhances liquidity.
In addition, our highly variable cost structure provides financial flexibility.
With approximately 65% ever SGN a expense being people related.
As I mentioned earlier, we made the difficult decision to reduce our workforce through layoffs and reductions in force.
Since March 4th first we have reduced our workforce by approximately 1600 people.
Or 11% of our workforce, including reductions at the three energy businesses, we have closed permanently.
These decisions were made on the location by location basis, which provides us the flexibility to continue to make changes.
As warranted going for further.
Either first or with further cuts if business continues to slow or by quickly bringing back employees to support stronger demand.
Recognizing that you need nature of this downturn, we extended health care benefits for a transitionary period to support impacted employees and their families.
Which is something we have never done in the past.
We continue to actively monitor daily an hourly development of this unprecedented emergency situation, including federal state.
And local orders as well as recommendations of public health authorities.
I would like to thank each of my reliance colleagues for sharing the commitment to promote a healthy and safe workplace by practicing social distancing and heightened sanitation procedures in the workforce and working from home if practical.
Perhaps most importantly, I am grateful to see that consistent application a practical commonsense good judgment as we all work together to protect each other in these extraordinary and and unprecedented times.
I'll now shift gears to a more detailed discussion of our first quarter performance drivers.
Our shipments were generally in line with our expectations supported by a relatively healthy demand environment, while overall metals pricing softened compared to the prior quarter.
Despite pricing pressure, our non-GAAP fivefold gross profit margin of 31.1% remained at strong levels as a direct result of our management disciplined approach to pricing and focus on high quality high margin business.
Turning to Mark and condition.
In our key end markets.
Demand for non residential construction the largest end market we serve.
Remain solid for the majority of the first quarter.
Supported by strength in shipment volumes of carbon steel structural been tubing products.
Well, we're beginning to see some second quarter projects being differ we're cautiously optimistic the demand trends in the non residential construction market will recover once construction activities picks up after the covert 19 related shelter in place orders are lifted.
Demand for the toll processing services, we provide to the automotive market started the year off strong supported by ongoing demand strength for aluminum content and vehicles.
However, the sudden closure of many of these automotive Oems and steel and aluminum mills in mid March due to covert 19 sharply reduced.
The man.
Focusing us to drastically.
Cut production at our toll processing operations in both the U.S. and Mexico.
We took decisive immediate action, reducing the workforce at our toll processing operation by almost 50% by the end of the first quarter.
While the duration of the shutdown remains highly uncertain at this time, we believe we are well positioned to support increased production level as the automotive market recovers due to our proactive investments in facilities and value added processing equipment.
Any expectations that we will be able to quickly bring back our highly skilled employees.
On a more positive note our toll processing volumes for the can beverage and appliance end market remained fairly steady throughout the first quarter.
Aerospace demand was relatively steady during the quarter as we continue to ship again strong backlog logs and orders already in progress with our first quarter of 2020 aerospace tons down only 3.2% compared to the first quarter of 2019.
And our average selling price holding relatively flat.
Going forward, we are expecting activity for commercial aerospace to decline beginning in the second quarter as a direct result of covert 19.
We will continue to monitor the evolving situation regarding air traffic and our aerospace businesses supporting these end market given the uncertain long term impact.
Conversely defense related aerospace demand has remained strong with stable trends continuing into April.
Demand in heavy industry for both agriculture, and construction equipment was steady throughout January and February however reductions in spending significantly decline in both of these markets in March and April, leaving our outlook highly uncertain at this point in time.
Demand for energy, which is mainly oil and natural gas remains at low levels given changes in drilling technology and increased global oil production that led to significantly lower oil prices in the first quarter of 2020, we've made the decision to permanently close.
Three of our businesses supporting the energy end market.
We also assessed our remaining energy business.
Given that our long term outlook for energy market is significantly reduce reduced from prior cycles with an unclear path to recovery, which resulted in impairment charges of those businesses as well as the clothes business.
As a result, we recognized impairment and restructuring charges of $137.5 million in the first quarter of 2020, which Carla will elaborate on shortly.
The semiconductor market was a bright spot for the quarter with demand continuing its steady improvement from 2019.
Overall, our semiconductor production operations in Asia were negatively impacted by Coven 19 in the earlier part of the core as compared to our North American operations.
In the first two and a half weeks of April our tons sold per day were down 20% compared to the same period in March excluding our toll processing times.
While our outlook for nearly all of our end markets remains challenging and unclear today.
I'd like to highlight that we anticipate that our intentional diversification of end markets products and geography as well as our decentralized operating model works. So will serve us well the recovery that will follow these difficult and uncertain times.
Turning to capital allocation, our overall philosophy on this subject.
Has not changed even in challenging times like these were executing the same strategy to a balanced focus on growth and ship stockholder returns.
Because we sell into cyclical market.
Dr exercised by pricing and demand volatility we believe it is critically important to maintain a flexible and opportunistic capital allocation strategy.
Our operations continue to generate cash as a result of the counter cyclical cash flow generation built into our business model, even during the first quarter, which is typically a period in which our working capital needs or higher.
Further consistent with our ongoing philosophy, we're continuing to rightsize our inventory to reflect current.
Demand levels, which helps free up cash during a downturn.
Although we remain comfortable with our current liquidity position, we have reduced our 2020 capital expenditure budget from 250 million to 190 million.
We will deploy cash fund essential needs and certain strategic projects to support our customers through the additional innovative equipment and advanced technology in an effort to further strengthen our value added processing capabilities.
We will differ non essential capex until we determine that is prudent invest in these opportunities.
As it relates to M&A, we're not surprised to see a reduction in the number of potential acquisition opportunities in the market given the current environment.
Meanwhile, the integration of Fry Steel company, which we acquired on December 30, Onest remains on track.
As you recall priced deals a general on long bar distributor in Santa Fe Springs, California, with a strong brand rep reputation driven by a superior customer service diverse product offerings and next day delivery commitments.
In regard to stockholder returns, we're pleased to continue delivering value to our stockholders through the payment of a record of a regular quarterly dividends as we have done for 61 consecutive years.
Since our IPO in 1994, we've increased the dividend 27 times, including our most recent increase of 13.6% in the first quarter 2020.
We also repurchased $300 million of our common stock in the first quarter.
Oh, we expect to remain opportunistic in our approach to repurchases, we must concurrently consider our near term focus on cash preservation as our markets recover from the impact of cold and 19.
In summary, marketing conditions were generally favorable in the first quarter and we delivered solid results. Despite extraordinarily difficult circumstances, resulting from the Corona virus pandemic that directly impacted our business beginning in mid March.
I would like to once again, thank each and every employee in the reliance family of companies for their ongoing hard work and flexibility as well as their unwavering commitment to operating in a safe environment.
Their collective efforts in power us to support our customers any central businesses as we manage through this unprecedented crisis.
As a result, we will challenge ourselves to drive continuous improvement in all aspects of our business. However, as we make decisions moving forward I want to emphasize that the health and safety of our employees.
Customers suppliers and communities will always reign Supreme.
As we look forward, we believe our diversification strategy and our model of focusing on higher margin businesses and value added processing will help support us through the recovery that will follow this crisis, our decentralized operating model enables us to evaluate each.
Of our business is on its own barrels into ramp up individual operations quickly.
Our strong balance sheet and cash flow enables us to continue operating our business today to revert reserved jobs for the majority of our employees help support future demand from our customers and strategically partner with our key suppliers once the situation stabilizes.
We believe that we are well position to emerge from this situation as a stronger and more innovative company and we look forward to bringing back those dedicated employees who are currently laid off.
Thank you for your time and attention today I will now I'll turn the call over to Carla to review, our first quarter 2020 financial results in more detail.
Thanks, Jim and good morning, everyone.
Net sales of $2.57 billion for the first quarter 2020 decreased 13% from the first quarter of 2019, mainly due to lower metal prices with our average selling price down 11%.
Demand was healthy with only a slight 2.2% reduction in shipment levels.
Compared to the fourth quarter of 2019, net sales increased 5.1% driven by 6.8% increase in tons sold which was consistent with our guidance of up 6% to 8%.
Our average selling price per ton sold declined 1.2% compared to the fourth quarter at 2019 and was below our guidance of up 1% to 2% mainly as a result, a downward pricing pressure due to their credit virus pandemic.
Our gross profit margin on a GAAP basis for the first quarter 2020 was strong at 30.3% and was slightly above our estimated sustainable range of 28% to 30%.
Our strong non-GAAP gross profit margin at 31.9% included $20 million of LIFO income and excluded charges related to the closure at certain of our energy businesses that resulted in a $39.8 million charge to inventory and cost.
Yeah.
Non-GAAP Siso basis, which is the best measure of our day to day operations. Our gross profit margin, that's 31.1% increased 200 basis points from 29.1% and the fourth quarter 2019.
This is a direct result of the outstanding performance by our managers in this field to despite the challenging circumstances continue to maintain pricing discipline by focusing on higher margin workers and increasing the level of value added processing services provided to our customers.
We are very proud of and grateful for their efforts.
As I mentioned, we recorded LIFO income of $20 million or 23 cents earnings per diluted share and the first quarter 2020, compared to LIFO income of $12.5 million or 14 cents of earnings per share in the first quarter 2019.
And LIFO income of $81 million or 89 cents earnings per share in the fourth quarter. After 2019.
As a result, a downward pressure on metal pricing and significant uncertainty in the current environment. We have updated our estimated annual a LIFO adjustment to $80 million LIFO income from our prior estimate of $20 million annual of LIFO expense.
Similar to what we experienced in 2019 should metal pricing continued to decline and actually right size, our inventory quantities to reflect lower demand levels, we expect to generate LIFO income, which will positively benefit our gross profit margin and earnings.
At March 31st our life that reserve, there's $117.6 million.
And we believe that the LIFO method helps reduce the volatility of our earnings.
Our first quarter same store S., Gina expenses decreased $15.3 million or 2.9% compared to the first quarter of 2019 on a 2.2% reduction in shipments with our average headcount down 3.7%.
And the 2021st quarter compared to the 2019 first quarter.
Our performance based compensation structure also contributed to lower expenses.
I'll discuss our expense drivers in more detail shortly when I discuss the cost reduction actions, we are in the process of implementing.
As Jim noted our overall outlook for certain of our energy businesses has deteriorated significantly.
Although we have consistently reacted to declines in this market over the years, we made the decision during the first quarter to close three of our businesses and to assess future outlets for our remaining businesses servicing the energy market.
As a result, we recorded pre tax charges of $137.5 million or one dollar and 53 cents earnings per share, including a 97.7 million dollar impairment charge.
And $39.8 million at inventory write downs included in cost of sales and the first quarter 2020.
Our non-GAAP pre tax income was $220.6 million with a pre tax margin at 8.6% for the first quarter of 2020, consistent with our pretax margin in the first quarter of 2019, and we're very proud at these results.
Our effective income tax rate for the first quarter was 24.3% down slightly from 25% in the first quarter 2019.
At this time, we estimate our effective tax rate for the full year of 2020 will be approximately 24.3%.
Non-GAAP net income attributable to rely on for the first quarter of 2020 was $164.8 million, resulting in non-GAAP earnings per diluted share of $2.45.
If you were to back out the change in our LIFO estimate.
$20 million of income from $5 million of expense.
Our first quarter 2020, non-GAAP earnings per share would've been approximately $2.17, which would have exceeded our guidance range of $2 to due to $2 in 10 cents.
Our earnings per diluted share or 92 cents in the first quarter of 2020.
John from $2, an 80 cents in the first quarter 2019, mainly due to best lower metal pricing and the impairment and restructuring charges.
Turning to our balance sheet and cash flow, we generated cash flow from operations of $170.8 million during the first quarter 2020.
We invested $55.5 million and capital expenditures.
Paid dividends at $41.9 million to our stockholders.
And repurchased approximately 3.3 million shares of our common stock at an average cost of $90 a nine cents for a total of $300 million.
As Jim mentioned with the significant uncertainty that currently exist we have adjusted our capital allocation priorities to focus on cash preservation, including Rightsizing, our inventory and pausing nonessential capital expenditures.
Nevertheless, we remain committed to concurrently making investment that support the long term growth and sustainability of our company as well as continuing to provide returns to our stockholders.
At March 31st 2020, our total debt outstanding was $1.84 billion, resulting in a net debt to total capital ratio of 25.4% our net debt to EBITDA multiple was 1.4 times.
Our leverage ratio support our investment grade credit rating are well below our financial covenants.
As of the ended the first quarter, we had $831.5 million available on our 1.5 billion dollar revolving credit facility and we believe we have ample liquidity to continue operating through this challenging environment I remain confident.
That we could raise additional capital and the credit markets if needed.
Due to the macroeconomic uncertainty stemming from the crown a virus pandemic and overall lack of visibility into future demand trends metal pricing and market conditions and the end markets in which we operate we will not provide guidance for the second quarter of 2020 at this time.
However, we will provide general guidance as to overall market conditions and the actions, we expect to take to help us manage through this downturn.
We anticipate that shipment levels in the near term could decline even further than the April levels previously discussed.
And the metal pricing will remain under pressure and could fall further from current levels.
And this type of environment, we expect competition to increase which could lead to some erosion of are currently strong gross profit margin.
To offset lower shipment levels, we have reduced our workforce.
I, approximately 11%, which is expected to reduce our SGN expenses beginning in the second quarter of 2020 net of any related severance and extended benefit coverage cod.
We expect further workforce reduction if our shipment levels continue to decline.
In addition, lower profitability levels will result in reduced performance based compensation expense.
We're also focused on Rightsizing, our inventory to meet current shipment levels. We have worked with our mill partners to cancel and push out certain orders and expect to reduce our no purchases in the near term we.
We will look to leverage reliance's companywide inventory and purchased from each other in smaller quantities to bring down our overall inventory levels.
However, with lower shipment levels, there will be a lag to rightsizing our inventory.
But we never take these actions lately given the impact to our employees and their families and also to our suppliers. We believe these are the necessary and appropriate steps to maintain our operating efficiencies and to help preserve liquidity and long term profitability.
In closing, we produced strong first quarter results, despite a softer pricing environment than we had anticipated.
Excellent execution by our managers in the field along with our strategic focus on high levels of customer service and value added processing resulted in yet another quarter of strong non-GAAP earnings.
Thank you again to all of our employees and the reliance family of companies for your ongoing commitment to health safety and operational excellence, while we faced difficult times ahead as we all work together to slow the spread its cobot 19, I'd like to Echo Jim.
Treatment that we believe our proven business model strategy and their proactive measures for taking today will help us emerge from this downturn even stronger than before.
Our thoughts or with our impacted employees and their families and lever. We look forward to improved business activity levels. So that we can safely bring our employees back to work we wish good health to all.
That concludes our prepared remarks. Thank you for your attention at this time, we would like to open the call up two questions operator.
Thank you we will now be conducting a question that answer session. If he would like to ask your question. Please press star one on your telephone keypad a confirmation total indicate your line is another question Q. You May proceed start to if you would like to remove your question from the kill for participants using speaker equipment. It may be necessary to pick up your head.
So before pressing the star kids.
Our first question comes from Seth Rosenfeld with exam BNP. Please go ahead.
Good morning, Thank you much for taking my questions today.
So just like to get a better if you think it let's take a better send please the impact of the sharp decline in the auto market on your toll processing outbreaks and you commented earlier and I believe headcounts been reduced by roughly 50% and that's part of your business is that representative the scale and volume decline you've witnessed or.
Have you seen perhaps at a sharper quite and then that figure and when we think about the outlook for gross margins going into Q2, obviously, the Q1 performance, particularly robust I believe that you commented earlier in the prepared remarks, you should expect to see some compression margin figure on how should we think about that in terms of the risk.
Perhaps a fixed cost under absorption inventory holding losses or just much lower contribution from toll processing, how should we think about the moving parts ended up until scale gross margin compression into Q2.
Thank you very much.
Okay. So there's a couple of questions in there let me talk about a little bit about the automotive first and now we've built sales who is not in the room, but I'm going to.
Bill to jump in on the auto part the 50% reduction that's it that's kind of reflective of what the business drop we saw.
I'll remind you that we've been through this before 2009 was is a good example of what happens when the when a certain market goes down.
We.
We are having him.
Nice start.
And fulfilling our obligations to our partners.
I'll remind you that our customers are not the automotive companies themselves, but the suppliers of metal.
We were doing going well and they started announcing.
Closures on the on them steel and aluminum.
Aluminum market and in response to the automotive shutdowns.
Good part about that is we have a schedule as to when they're coming up we'll see those are estimates on their part. So again, we simply react to what our customers are telling us we don't speculate.
But it's a strong market for us we've invested a lot of money and we continue to see that as a great market going forward.
And I'm going ask Bill if you don't mind Bill given the some more color.
To address assess question on the automotive yes, Jim.
Yes, the 50% reduction was really tied to those auto plant closures and so as Jim said, we've got a schedule it looks like a majority of those.
Plants are going to be re opening in early may.
We've got a structure in place in terms of how we structure delay off where those highly skilled employees. We can bring back as those plant start to ramp back up. So I think that was a snapshot in time based on the closures as things reopened and they start to ramp back up we'll we'll.
React to that and be able to meet the requirements.
In South to this is carla to comment on.
Some of your questions around.
Costs in gross profit outlook, certainly a you know with volumes down we do see a decline there, but we can also with our variable cost structure. You know the majority 65% our SGN expenses are people related so as we unfortunately.
I had to do that at precision strictly to it takes and take workforce reduction very quickly, but we hope to Ebola not has come back up to ramp that up again very quickly, but while were down you know that takes a big chunk of our cost out at this system. There are lot of other variable costs that go along with that so we are.
Scaling you know, we can't take out necessarily one for one, but we're certainly bringing our expenses down with the lower lower volumes that were experiencing there and it was most drastic because in the second stop in auto, but we've done that across other of our businesses as they are impacted depending on which.
Our customers can continue to operate is essential businesses that we've been focused on that we'll continue to focus on that you asked about inventory losses, because it prices coming down.
That's one of the reason is with our LIFO inventory costing method that it's somewhat gives you a buffer so to speak from taking those inventory losses, because at the life of reserve that we have and helps reduce the volatility in our earnings. So we're not anticipating taking inventory losses.
And remember.
So as we said is the hardest hit end market.
Certainly hit that we sell into we don't Ellen the inventory there said there aren't any inventory losses gains anything related to that part of the business and you know I did comment in the prepared remarks that just when when things are more competitive you know when there is less demand and they're still play out.
There and people are holding higher cost inventory, often we can see things happened in the marketplace by competitors and others.
That can you know erode margins a bit we weathered through this before we still had.
We had extremely strong gross profit margins in the first quarter and a lot of that because of the value add processing. We're doing our next day delivery. Our small order side, we don't think those get impacted as much as the general market, but we're just being cautious and you know trying to explain the landscape.
Out there and that there could be you know some downward pressure and sense just one more.
Our comments silver lining the automotive companies do not hold.
Inventory at their plant so when they do ramp up they look to us is too.
Okay right back in as quickly as possible, which we can do very quickly to start supplying.
Arch to them.
Thank you very much if I can just press with one quick follow up on the recently revised guidance range of 28, 30% gross margin.
Obviously, you're now expecting a greater lifestyle tailwind into Q2 at the are you still confident that the at least the bottom into that range can be met going into Q2.
I think were confident about that as we are about anything right. Now I mean Q2 were currently anticipating that that would be the hardest hit a time period as we work through this cobot 19 crisis you know it's extend.
And we'll see but.
Could we bumped down I think we.
Finally, I'd say its sustainable on an annual basis. We certainly we think we should be in there, but as we said depending on on how things unfold because this I'm sure you've all seen.
James change every day.
But currently.
We should stay within that range like a basis.
That's great. Thank you very much.
Thanks.
Our next question comes from team that Tanners with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, everyone Hope, you're all hockey and while I'm, thanks for asking him.
So I was just hoping to clarify I think that that last questions, where I'm pretty all encompassing so I just wanted to drill down a little bit and I understand I think the key thing we want to understand how much you can rightsize operations, because you've done a lot, but I just wanted to ask them. The framework for your overhead if its two thirds of that as labor and the other one third.
I think is it fair to assume that two thirds. This is flexible and then one third is less variable or can you provide us a little bit more framework on how to think about that.
Thanks, Good luck.
You kind of new do.
Factor in the how unusual this years.
We don't know I mean that we used the word uncertainty and challenging quite a bit more we're talking about however, our running our facilities.
There's a certain.
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Level of.
People you need to make you need to keep.
To fill orders were filling orders as we aren't right now.
As these businesses ramp up.
We'll be able to ramp up quickly.
But we that's why we we lay people off and remind them that they could be called back fairly quickly also because we are a major part of our customers business. They continue to ask us to do more and more we anticipate where I anticipate a dish.
Non value added when they when they do come back.
So with a choppy kind of market the way we are now.
We we think we have the right level of employment, Alright announced further headcount and with some really good people that we don't want to.
We don't want to.
Go elsewhere as would keep them given laid off and try to take care of investment can so we we are when done this before Kevin as you all know.
We're good at it and.
This is unusual but.
We'll continue to make good decisions when it comes to Rightsizing, our SGN a.
Cost yen said and intend to you know I can't give you a formula to plug into our model on this one because this is different than downturns that we've been through in the path as I mentioned earlier, we think it's fairly short man. So our approach has been a little different because of that.
Sure. This if we come back into the right you differently than we came back from nine where it was a very long slow improvement.
We expect to bring a lot of those employees back so even the way we've approached our workforce reduction has been different during this downturn so our than it did.
Previously in 2009.
2008, and nine over a nine month period, we took out 23% of our workforce we kick out.
Over half of our inventory, which is over $1 billion at the time, but again that was over a nine month period that was more wherever you are actually letting people go.
Separating employment as opposed to putting them on a temporary layoff structure. So we have to see how the seat. All this we don't have a model for exactly how far we can go in a lot of art, we do have a lot of variable cost, but a lot of our in our businesses are structured differently. So it's not cookie cutter.
To give you a percent fixed versus variable so as Jim said I mean, we are we think we're taking the right actions to reduce but.
You know there is uncertainty out there.
Of course and hit and it and it helps at our model is such a diverse when it comes through product geography.
Markets.
No we have a sound model and good times and bad.
Model.
It remains.
Easier to to manage because we look we can look at it operation by operation depending on what that particular location is.
With or what their order count so.
So I guess just summarize they can if we look at the.
Q3, Oh wait till Q3 Q2 on nine you had you know depressed gross profit margins for four corners, and well, but you're saying. This this time you're thinking it could be more contains short lived situation and that's why you're talking about you know full year gross margins, maybe being within the range or if that's what I understood.
James I just wanted to clarify that and then just to understand you know how how's that working when you go to the mills and can can you delay and and extend I mean, how are those negotiations going are they just understanding that you will recoup those volumes when demand is back I'm, just trying to little more color because that's unusual as well.
Yes, some notes in the first part of your question Yeah, you're right. We are our actions are a little different this time with the way we're reacting because like we said we think the nature of that is more short term based on what we know today. So I think that's the positive that we're taking appropriate actions that we're taking.
In anticipation of coming out of that fairly quickly and being able to be there to support the increased business activity at whatever level that is and you know with our model with our high value add with our.
Quick deliveries, we anticipate maintaining.
The value that we provide our customers and being able to get those gross profit margins that we that we have risen to over the last few years and as far as the the mills. Obviously, we don't we don't like to do what we're doing however, we've got long standing relationships with these folks we've supported them year end you're out for us.
Long period of downward domestic for domestic buyer.
Or remind you that less than 5% of our spend even in normal times has been domestic I know they appreciate that they appreciate reliance and we do.
We do everything we can to begin a good partner with them and were.
Communication with them is is almost on a daily basis, and we're here to support them as in these situations theyre going to support us and were but when are both going to need each other in the supply chain. When this when this does ramp up so they're going according to plan, so and just to clarify.
95% domestic 5% import.
Right Yeah, good point.
Alright, thanks, guys.
Thanks, Ken.
Next question comes from a Chris Terry with Deutsche Bank. Please go ahead.
Hi, Jim and any color. Thanks for taking my questions I'd I'd Fabio growing Okay. First question, just just on working capital expectations and just just wanted to get a bit more sense on the ground are you getting.
Are you getting any issues with cash collection from for many of you customers are there any seems to think about there just in terms of the collecting accounts receivable or E generally thinking that you'll be able to.
Get get more opportunities in working capital and it'll be beneficial throughout the year. Thanks.
Yes, hi, Chris so from a a customer payment standpoint, we've been monitoring that you know just to be on top of it and we have not seen a fall off yet.
So we're that's very positive that our customers are continuing to pay us a in normal pattern.
We do think there could be a little slowing in the next quarter, but we haven't seen anything yet and we do look at working capital is really being a source of liquidity during.
This year because as.
With the expectation that metal pricing could come down and shipment like coming down that reduces our accounts receivable, Eric you know more quickly than the inventory as we talked about we're looking to bring inventory down both of those factors.
Lower metal pricing.
Matching bringing inventory down to match our lever shipment levels also throws off cash so we do anticipate.
I'm good contributions to a cash flow from working capital reductions this year.
Okay. Thank you and then you talked recently about the orderly market I just wanted to dish.
Thank you if I heard correctly, you said, 20% declining in April in shipments. So just wondering if you could talk about the aerospace market in particular, what you're saying there and maybe just as this business, there's a bit more granularity on that on that 20% decline and.
That's that's excluding tolling our shame. So just just if you could talk about aerospace in the context.
The different markets splits.
Hey, Bill one should take that one okay, Hey, Chris.
Much like auto I mean, the aerospace business, obviously has been impacted.
Negatively from this.
We've always said, we track build rates backlogs and mill lead times to give us an indication of the health of that business.
[noise] Airbus has announced that they are build rates are going to be down by about a third.
The picture of Boeing is not quite as clear, but we know build rates are coming down there.
Backlogs are shrinking they're seeing order cancellations, we think the backlog could could shrink as much as 50%.
But thats still brings us to a backlog that is probably in that three to four year timeframe that if you go back and look over time.
Historically, that's kind of where the backlog used to be before this.
The Super cycle that we've been Dan.
And what we're doing much like auto was we're monitoring the situation.
On a program by pro program basis, and we're adjusting inventory and staffing based on what we see there. So that that picture is still a little bit cloudy in terms of it's it's a the commercial aerospace businesses driven by passenger miles and as we come out of this.
I think we need to its we'll just have to wait and see how quickly people go back to two flying again so.
Well keep a close watch on that but.
We will adjust accordingly based on what we see happening.
Yeah, Chris Chris on fell just address primarily the commercial market. We also got some good exposure on the defense side and as we've talked about the last few quarters. That's been strong we see that continuing at strong levels. So far through April defenses held up and we actually just.
Extended our joint strike Fighter program, we announced that about four years ago. When we initially thought that program. The big program for US and we are just award is a five year extension on at about $660 million over that timeframe.
Yes that program will take us out through 2026.
And then the other thing to remember about our aerospace business is.
We are less than 50% probably around 40% commercial aerospace and then the balance of that would be a non commercial aerospace.
With defense being a big part of that.
Okay.
Thank you and just one more for my the energy the three businesses you talked about supporting the energy market in your in your release just to put that in context, maybe as a percentage of your title energy exposure just to see how big does your still let me John can you give any color on that.
Yeah, Chris So those three businesses that we shut down.
In total annual revenue.
[laughter] currently that run rate is about 100 million. So we were we used to be around 10% of our total revenue dollars within energy coming out of the last downturn, we were down about 4% to 5%. So now it's about 3% to 4%. So you know not a huge portion we still got.
Yes, relatively consistent energy exposure, but I think what remains our be Uh huh.
In the better part of our energy exposure, we're going to continue to service delegate market for us on that we hope to see improvements there in the future, but we felt it was we had a couple of businesses that have been struggling and we didn't see that really recovering at the levels. We needed. So we made a decision.
[laughter].
In my prepared comments, Chris on my.
These those decisions have been under consideration for quite some time technology in drilling has just changed so if you look at it from a metals consumption in that market is it has shrunk and the pie is smaller and we have ever intention to be strong.
Player in a smaller.
Piece in the far above which we are we still have some very fine energy related companies in the oil patch and we'll continue to support them.
And b that be that leading player in that market.
Okay. Thanks, and good luck. Thank you.
Hi.
Next question comes from Alex Hacking with Citi. Please go ahead.
Oh, what's your line is lives.
I I apologize I was on mute a good morning, Jim a Carla I Hope you guys are staying safe just to follow up on the on the last question I guess after the closures of those energy facilities, what kind of utilization rate would your.
Residual energy business be operating at a thanks.
I'm going to can you give you a number that it's that's a too soon to tell but that the customers that we have service through those companies that we decided to permanently shut.
We are able to us absorb than our other energy business I can't say what percent, but that is the antenna.
So I don't know with utilization won't be in the new operation.
Suffice it to so it'll be.
It'll be a better than it was I just don't know what the what percent would be.
Our some of the the remaining energy businesses are the reason that remaining as because some of them or not 100% energy and other parts of the business too. So im giving you up here utilization rate would be difficult.
You know we've over the last few years as we've seen decline all of those different businesses rightside as appropriate so.
I think utilization might be a little less companywide average during normal times, we usually operated about two thirds capacity. So the energy businesses are probably a little below that but not significantly or a you know we would have looked at a different medical markets pretty much in shock right now.
With what's going on what the prices.
Price of oil so.
Hello, we'll let you know when they when they when that when the when the phone players.
Okay. Thanks.
And then I guess within the context of your shipments being down around 20% in early April.
How it is construction fit into that I would assume that construction is holding up a little better than the average is that fair.
It is that's fair petzner up until that point were up.
So call after call was the Carlos a nice slow burn up and that continued through the majority of the first quarter.
You know and all the sudden these jobs that are there that are already in the books they have been deferred.
We don't know how long.
But they haven't cancel that you can't cancel in order for a big project midstream. So we anticipate that business to come back.
Most likely sooner than some of the others and more of a participant in there and there's always a.
I hope I guess, even though we don't think hopes to strategy.
The.
There will be an industry.
Infrastructure spend perhaps on the horizon and one that happens stuff will be good for that.
Market as well, but we're a that's a good business frozen and.
It's just that just kind of hit a had a slow drag right now based on the end user the way they see their business and their cash flow. So we're up.
See monitoring that on a daily basis, and I'll remind you that we've spent a lot of money over the years on the value added and of that business and we anticipate that they actually increased when the.
In the history when when when you go through is going to.
Sudden recessions.
Our customers ask us to do a lot more when they do come back and we're positioned to do that and we have spend money again this year to put an innovative.
That allow us to meet and exceed our customers' needs.
Okay. Thanks, and then just one more quick one if I may.
I apologize I should already know this but I know about one third of your shipments or into the transportation sector roughly what's the split that between aerospace autos and others. Thanks.
Yes, Hi, Alex So yeah, we think about a third is transportation what we can identify within that is aerospace, which you know it's probably averages around 12%. This is based on total revenue dollars.
Outside of that it's very little metal sold into auto.
Breakout the toll processing with where the majority is auto is about 4% of our total revenues and then you just got you know truck trailer our ship building a railcar various other things in that category.
Okay. Thanks, Thank you very much.
Thank you.
As a reminder, if he would like to ask a question. Please press star one on your telephone keypad. Our next question comes from Phil Gibbs with Keybanc capital markets. Please go ahead.
Hey, good morning.
Yes.
Jim Hope in prayer should always be part of the strategy I just want to tell you that so all right.
And what [laughter].
Vojo absolutely.
Some of that you got to create.
The some of the essential growth Capex.
And that you're keeping for this year and anything that we should be thinking specifically in terms of.
The projects.
You could do it didn't look in general I get again, we're talking about our Capex. Our Capex is 300 line items the ones that we've decided to keep our orders or projects that were already placed.
And we need to come going forward Thats basically equipment.
Replacement equipment maintenance number we've a piece of our Capex every year that we call maintenance is another piece with this growth this new innovative type equipment, we've kept that.
Probably easier to focus on what we've decided to hold up on and.
We have home and hold up on things like lease buyouts.
Oh.
Resurfacing, a parking lots and different redecorating offices, and all those types of things that theyre just not mandatory there are things that we can we can we can differ.
To a next year, if we need to do that but so we went through it.
Fine tooth comb and realizing that like I mentioned before the.
During these recessions when it when we come out of the on the other end our customers ask us do a lot more so we've kept the we've kept the innovative equipment.
That allows us to do more and the equipment maintenance equipment that allows us to be more efficient we've kept the gone. So we're we're going to we're still going to their participant in the.
Capex spend enough not to the degree that we had originally thought.
That makes sense Jim one.
We think about the here and now I know a lot of people are base, you're basing their decisions on survival in cash preservation.
But as you look out over the next several years.
Our your customers being more adamant in saying, we need to diversify ours diversify our supply chain away from China, We need you to make these components, we need to start moving more of these specialized value added steps away from them.
Because clearly what happened in the last two or three months shouldn't be acceptable to anyone.
I heard I have both below gross.
We've seen that.
Hey return for her reassuring my guess is will be more of that.
Our strategy our model is model to do more of that and we anticipate.
More of that coming back that certainly would be good for.
For us in North America.
And we'll see how that goes I mean, if I if I was running one of those companies not see what's going on in the World. We talk about now not only how do we operate now but how are we going to operate in the future and we look to see how how the business is going to change and we want to be out in front of that and certainly that will be one of our.
For one of our considerations.
And it should be as far as I'm concerned as an American the more the more domestic.
Manufacturing that does come back will be good for the cup good for the country and certainly a good for reliance and our.
Domestic suppliers and so we can't say that this has been broad based at this point, but certainly with all that trade issues over the past few years, we have seen some of our customers taking actions to do that and you know now we've talked about the fact that overall shipment levels are down.
Within that you know we have picked up from new pieces of business and and seeing some opportunities where you know some customers and further downstream are adjusting and and have to look for new partners to help them on you know produced there fraud.
[noise] buckets I appreciate that if I could sneak in one more for Bill and then I'll hop off.
But just on the semiconductor market.
[music].
Bill what do you what are you seeing there in terms of momentum and.
But sure what your customers are telling you just in terms of readiness. Thanks, Yes sure Phil.
The semiconductor market is as Jim said earlier.
Has kind of been a bright spot and we did see a little impact early in the first quarter in Asia, primarily China.
From the coded virus.
But that's rebounded and our customers are still optimistic in still talking about.
Good demand through the balance of the year.
I will tell you we're keeping a close watch on that as you know that market Ken.
Ken can stop on Adom. So we're watching it very closely but so far all the indications are it should continue to be very good through the balance of the year.
Great. Thanks.
Yeah.
Next question comes from John Tumazos with very independent research. Please go ahead.
Thank you.
Could you elaborate a little more on the outlook for acquisitions it would seem like there could be.
Some smaller operations here and there is it.
It was last forever less volume should be a lot more willing to sell because they have done.
And maybe even chances to buy things.
Hello tangible book value.
Since inventory values have fallen so much.
Yeah, John this is Jim.
Yeah that they're out there when we look of our M&A strategy hasn't changed.
We don't buy fixer uppers, they have to be immediately accretive.
We've bought small companies, we bought large companies. So there's there's a significant amount of work involved regardless of how larger how small the acquisition as I can just tell you, though what will be what we've seen has been on the extremely small side nothing nothing that meets our.
Our requirements for profitability or.
Our interest, but we'll we remain open for business, where was a period of time, well, it's been pretty fast and furious. So last couple of years of companies we look at that.
And I'm sure you realize we've only pulled the trigger on one and that was in December of 2019, and we got our we bought a really nice company there, but so far this year.
Theres fewer of them and what we see it doesn't.
Doesn't tickle, our fancy as they say.
The accounts receivable category.
You stop about 150 million its cash in the March quarter.
Is there a seasonal explanation disaster or do you have some customers are paying a little bit slower.
Yeah, I know that's the typical seasonality jimena, along with our sales on because of that the holidays and customer closures around that during Q4 I know when our shipment levels are down you know we receivables go down and then with the seasonality comes back up in Q1 are.
We monitor day sales outstanding and that stayed pretty consistent.
Quarter over quarter kind of normally around 42 inch days.
So we've seen that so far I stayed pretty consistent.
Thank you.
Yes. Thank you.
Thank you there are no further questions I would like to turn the floor over to Jim for closing comments.
Okay. Thank you very much for taking the time and attention today.
And I'd like to reiterate that the health safety of our employees their families. Our suppliers our customers in our communities has always been our top priority and I'd like to sincerely. Thank the first responders, especially the healthcare workers serving on the front lines to care for those needs our thoughts and prayers are or.
With all of you through this difficult time.
Before I conclude I'd like to remind everybody that in May we plan to participate in the DNA.
Airlines global metals, and mining steel conference as well as the Keybanc basic materials conference both of which will be held virtually so I'd like to thank you all for your continued support and commitment to reliance and hope you all stay.
Safe and healthy thank you very much.
This concludes today's teleconference. You may disconnect. Your lines at this time is thank you for your participation.
[noise] [noise].