Q3 2020 Reliance Steel & Aluminum Co Earnings Call
Greetings and welcome to reliance steel and aluminum Companys third quarter 2020, <unk> earnings Conference call.
At this time all participants are in a listen only mode a quick.
I shouldn't answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad Israel.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Brenda Miyamoto. Thank you you may be you may begin.
Thank you operator, good morning, and thanks to all of you for joining our conference call to discuss our third quarter 2020 financial result.
I'm joined by Jim Hoffman, our President and CEO and Karla Lewis, our senior Executive Vice President and CFO Bill.
Bill sales executive Vice President of operations will also be available during the question and answer portion of this call.
Recording of this call will be posted on the Investor section of our website at Investor day or as they see dot 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 a future operations, which may not be under the company's can.
So which may cause the actual results performance or cheapened up the company to be materially different from the results performance.
Expectations 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 for the year ended December 31st 2019.
Updated in the company's quarterly reports on form 10-Q for the quarter ended March 31st 2020, and the Companys quarterly report on form 10-Q for the quarter ended June Thirtyth 2020 under the caption risk factors disclosed in our press release this morning, and other documents for life styles finishes.
The Securities and Exchange Commission.
Press release and the information on this call speak only as of today's date of the call.
Company disclaims any duty to update the information provided therein and herein.
I will now turn the call over to Jim Hoffman, President and CEO of your life.
Thank you Brenda good morning, everyone and thank you all for joining us today to discuss our third quarter 2020 financial performance.
We hope you're all doing well I'm staying healthy we're very pleased with our third quarter results, which once again demonstrate the strength of reliance a resilient business model, our diverse product mix and end market exposures, along with our decentralized operating structure.
Enable us to quickly respond to vary and fluid.
Market conditions, our gross profit margin expanded 200 basis points from the prior quarter to a record 32.4% significantly exceeding our estimated sustainable range of 28% to 30% on net sales of $2.09 billion.
Our increased gross profit margin combined with diligent expense control increased our non-GAAP earnings per diluted share to $1.80. So 37.5% increase from the prior quarter and generated strong cash flow from operations of two.
$296.3 million.
We'd like to thank our managers in the field for their continued efforts to increase the value we provide to our customers. During these challenging times, which meaningfully contributed to our increased earnings well.
Even more importantly, we would once again like to express our gratitude to all of our outstanding folks for their hard work and perseverance for one of the most challenging time in our company's history.
Our people are truly the key ingredient of the secret sauce. Every lives now we would not be where we are today without their unwavering commitment and support.
Our managers maintain their focus on employee health and safety, including adherence to strict procedures to prevent the spread of COVID-19 and improve our safety performance on a year to date basis compared to the same period in 2019.
We continued to support our employees and their families as well as our customers today.
Suppliers and communities in a safe positive sustainable manner.
Getting back to our third quarter financial results, our shipments for pastor expectations, increasing 5.9% over the prior quarter. Despite.
<unk> third quarter normal seasonal customer shutdowns in vacation schedules.
Improved demand in the major Metro and the majority of our end markets as the economy continues to slowly reopened following COVID-19 related shutdown and project delays in the second quarter of 2020 drove this strike.
In addition, our toll processing volumes increased materially compared to the second quarter level. That's autumn automotive production continued to ramp up.
As a reminder, since we do not take ownership of the metal our toll processing volumes are not reflected in our tons sold metric.
No pricing began to improve in the third quarter that was no price increases from many of the products. We sell were implemented with announcement for further increase further price increases continuing into the fourth quarter.
Despite these mill price increases our average selling price per ton sold in the third quarter was down 4.3% compared to the second quarter, primarily as a result of product mix change changes the karla will discuss in more detail.
The 200 basis points improvement on our gross profit margin to a record 32.4% was a major highlight our third quarter financial performance, which drove a 40.6% increase in our no non-GAAP pre tax income over the prior quarter.
The primary contributor to our record gross profit margin was a significant rebound in our tolling business, that's serving the automotive market, which generally operate at higher gross profit margin than our company whatever.
In addition shifts and our diverse product mix, along with our ability to implement price increases at the time of no announcements collectively drove incremental increases in our third quarter gross profit margin well.
Well, we expect that the impact of certain of these factors will be temporary we believe our managers will continue well continue to successfully leverage the significant investments we have made to expand our value added processing capabilities to support sustainable higher gross profit margin.
In regard to conditions in our key end market demand and nonresidential construction the largest market. We serve continue to slowly increase during the third quarter due to healthy bidding activity for new projects and the restart of projects that had previously been put on hold.
Quoting activity remains strong for projects related to transmission towers, and military school and its probably as well as large warehouses data processing centers and assisted living fulfilled.
We've also seen an increase in certain infrastructure projects, such as roads and highways and water treatment plants.
As such we remain cautiously optimistic that the man for nonresidential construction activity will continue to improve through the end of the year based on healthy backlog and positive customer sentiment.
Demand for the toll processing services, we provide to the automotive market rebounded significantly in the third quarter as automotive Oems and steel and aluminum mills continued to ramp up production. Following COVID-19 shutdowns in the second quarter we.
We simultaneously increase our processing volumes at our toll processing operations in both the U.S. in Mexico to support increased activities and we were pleased to be able to recall the majority of our furloughed employees to our tolling operation.
We remain committed to expanding our presence in toll processing in response to ongoing solid demand trends.
Earlier. This month, we commenced commenced operations at a new facility in Kentucky.
He will also soon break ground on a new Greenfield tolling facility in Texas. These.
These new facilities expand our carbon steel tolling capacity and will position us to better service, our toll processing customers, primarily metals producers and their end users and the Ohio Valley and the eastern United States as well as in the southwestern U.S. and Mexico.
Needless to say our outlook for our tolling operations remains positive.
Demand in heavy industry for both agriculture, and construction equipment remain generally consistent with the second quarter production schedules in some areas have begun to increase and we remain cautiously optimistic our businesses servicing the large industrial markets should improve from current levels through the roof.
Remainder of the year.
Semiconductor demand steadily improve from the second quarter of 2020, and the market continues to be strong.
Leading indicators for semiconductor space currently points to a more positive developments in the fourth quarter and early 2021, and we believe we're very well positioned to participate in any improvement.
Turning to aerospace I'd like to start by noting that our aerospace businesses service diverse segment.
Commercial aerospace represent about half of our aerospace exposure in the third quarter commercial aerospace demand continued to decline as reductions in travel due to COVID-19 persisted interest.
In response and response to reduce commercial airline build right now we expect to continue at low levels in the near term, we recorded impairment and restructuring charges related to facility closures workforce reduction and a negative outlook at certain of our businesses third thing the commercial Aero.
Space market.
Conversely demand remained strong in the military defense and space portions of our aerospace business, which represents the other half of our aerospace exposure, we continue to see opportunities to expand our participation in defense, which will help offset offset some of the weakness on the commercial sales.
We will continue to monitor and assess the health of each of our aerospace businesses and take appropriate cost reduction actions, if and when needed to ensure the continued long term profitability of these businesses.
Finally, the man in the energy sector, which is mainly oil and natural gas remains under significant pressure.
As I highlighted on our last call we have taken proactive cost reduction measure throughout 2020, including the consolidation of certain facilities and headcount reduction.
As a result, we believe we are well positioned to maintain our problems as a dominant player in the energy space and support any further recovery in that market.
One bright spot in particular is the renewable energy space in which we sell a significant amount of metal for solar and wind power projects.
Turning to capital allocation allocation are counter cyclical cash flow generation enables us to remain flexible and opportunistic as we allocate capital.
For both growth and stockholder return opportunities in both good times and bad.
Our capital expenditure budget for 2020 is weighted towards growth activity that supports our customers through the addition of innovative equipment and advanced technology to further expand and strengthen our value added processing capabilities we have.
We have increased our 2020 capital expenditure.
Venture budget by $80 million to a total of $270 million in response to opportunities to better service, our customers, including the toll processing expansion in Texas and to maintain and upgrade our equipment to provide our customers with the highest quality products.
And Sir.
On the M&A front, we continued to see a healthy pipeline of prospective opportunities as.
As always we evaluate potential got candidates using stringent criteria to ensure the best possible fit within our family of companies, we continue to seek well run.
Capital businesses, the possess strong management teams and superior levels of customer service with a focus on safety.
Acquisitions must also complement our product.
And end market diversification strategy and be immediately accretive to our earnings.
In regard to stockholder returns we are pleased to maintain our payment of a regularly quarterly dividend as we have for 61 consecutive years without ever suspending payment or reducing our dividend right. We.
Weve increased our dividend.
We increased our dividend 27 times since our 1994 IPO, including the most recent increase of 13.6% in the first quarter of 2012, we.
We also repurchased a small amount of our common stock during the third quarter of 2012.
Another key highlight during the quarter was our diligent inventory management, we continue to right size, our inventory to reflect current demand levels through reduced buying as well as cross selling inventory within our expansive network of service centers and we are pleased to have achieved our company wide.
Goal of 4.7 inventory turns during the third quarter.
In summary, we were very proud to have improved our financial results amid the.
The unprecedented global uncertainty that continues to materially impact the economy are.
Our decentralized structure afforded us the flexibility to immediately respond to rapidly changing demand trends and help preserve our long term profitability.
I'd like to thank all of our folks within the reliance family of companies for their dedication persistence and hard work to ensure that our entire workforce remains safe and healthy and is in a position to continue providing best in class customer service and producing profitable results.
It is through their efforts, but the unique aspects of our business model, we're able to really shine through enabling us to achieve significant growth profit margin expansion to a record 32.4%.
The consistent execution of our resilient business model. It is a testament to not only the diversity of our products end markets and geographies, but also our commitment to strong pricing discipline diligent expense control when needed inventory management and leveraging our infill.
Last month in organic growth and innovation.
We believe customers realize increased value in our model during challenging markets as they come.
Confidently rely on us to do more for them often in smaller sizes or on a more frequent basis as well.
Reliance continues to evolve as a leading diversified metal solution provider, we will leverage both the knowledge, we have acquired while navigating the pandemic and our commitment to continuous improvement and innovation to provide enhanced solutions to our customers and drive stockholder value through increased efficiency.
And profitability.
America is going to need reliance to rebuild thank you.
Thank you very much for your time today I'll now turn the call over to Karla to review, our third quarter 2020 financial results in more detail Carl Thanks, Jim and good morning, everyone and.
Our net sales of $2.09 billion for the third quarter of 2020 decreased 22.4%.
Third quarter 2019, with our tons sold down 13.1% and our average selling price down 11% compared to the second quarter of 2020 net sales increased 3.3% with our tons sold up 5.9% and our average selling price.
Right per ton sold down 4.3% our time.
Our tons sold exceeded our expectation.
<unk> to up 2% from the prior quarter as demand in many of our end markets improved with the most notable strength in non residential construction.
Although not included in our tons sold metric the significant rebound in our toll processing operations contributed meaningfully to our increased sales with toll processing volumes up 81.5% from the lows to experience in the second quarter of 2020.
Our average selling price per ton sold declined 4.3% compared to the second quarter, our lower average selling price in the third quarter was mainly due to shifts in our product mix rather than overall metal pricing trends than that.
The most significant shift with a 14.9% decrease in our aerospace tons sold in the third quarter. The majority of which was heat treated aluminum and titanium products, which represent some of the higher price products. We sell Meanwhile, our shipments at flat rolled carbon.
Steel, which are among our lowest price products increased as a percent of our total shipments, which also reduced our average selling price lastly, our alloy sales now represent a lower portion of our total tons shift due to the closure of certain of our energy businesses.
Our gross profit margin for the third quarter of 2020 was a record, 32.4% and well above our estimated sustainable range of 28% to 30%. This ties our record gross profit margin that in the fourth quarter of 2019 when we.
Reported LIFO income of $81 million compared to a LIFO income of $12.5 million in the current quarter.
On a non-GAAP basis.
Which we believe the best measure of our day to day operations. Our gross profit margin of 31.8% increased 300 basis points from 28.8% in the third quarter of 2019 and increased 160 basis points from 30.2%.
In the second quarter of 2020.
As Jim highlighted this is a direct result of the outstanding performance by our managers in the field.
Despite challenging circumstances maintain pricing discipline by focusing on higher margin orders and providing more value to our customers through our expanded value added processing capability needs.
And these actions are the key drivers behind our ability to increase and sustain our strong gross profit margin.
During the third quarter certain other factors contributed to our increased gross profit margin.
The impacts of which we believe may be more temporary first.
First the significant rebound in our toll processing volumes driven meaningful increase our gross profit margin as our tolling businesses operate at higher margins than our company wide average.
Second changes in our product mix contributed as our lower margin contractual commercial aerospace sales declined.
Shipments of lower price carbon flat rolled products increase.
Given our lower average overall selling price value added charges are a larger component of our sales.
Which has a positive impact on our gross profit margin.
Third we were able to enhance our gross profit margin for certain of our carbon steel products as mills announced price increases late in the third quarter.
We recorded LIFO income of $12.5 million or 15 cents of earnings per diluted share in the third quarter of 2020 compared to LIFO income of $40 million or 44 cents of earnings per share in the third quarter 2019, and LIFO income.
$5 million or six cents of earnings per share in the second quarter 2020.
Given our current estimate of $50 million of annual LIFO income in 2020.
We expect to record $12.5 million of LIFO income in the fourth quarter of 2020 as a reminder, we will true up to our actual LIFO adjustment at December 31st.
Our LIFO reserve was $100.1 million at September Thirtyth.
Our third quarter, non-GAAP, SGN expenses decreased $75.2 million or 14.5% compared to the third quarter of 2019.
13.1% reduction in shipments that.
The decline in ESG in expense was mainly due to reduced variable expenses, such as plant supplies and freight costs, along with lower average head count, which was down 13.8% as well as lower performance based compensation.
When compared to the second quarter of 2020, our non-GAAP SGN expenses increased only 2.6%.
5.9% increase in our tons shipped demonstrating the efficiencies gained through our state of the art processing equipment, along with our continuous improvement and innovation initiatives.
During the third quarter of 2020, we recorded impairment and restructuring charges of $14.6 million as we continue to close or merge a few of our smaller locations and wrote off certain intangibles due to our outlook for a more challenging environment in certain markets.
We recorded an additional $14.6 million nonrecurring charges comprised of settlement charges related to the termination of multiple small frozen defined benefit plan and settlement of an obligation in our survey where we.
Also recorded $1.8 million in debt restructuring charges related to our financing activities in the quarter for total nonrecurring charges of $31 million in the third quarter 2020.
We remain solidly profitable in the third quarter of 2020 with non-GAAP pre tax income of $158 million and a non-GAAP pre tax margin of 7.6%.
Our effective income tax rate for the third quarter was 22.6% down from 25% in the third quarter 2019, and up from 20.9% in the second quarter of 2020.
Lower tax rate was driven by reduced income levels and 2020 attributable to the impact of COVID-19.
At this time, we estimate our effective tax rate for the full year of 2020 will be approximately 22.5%.
Non-GAAP net income attributable to reliance for the third quarter of 2020 was $120.9 million, resulting in non-GAAP earnings per diluted share of one dollar and 87 cents.
Down from $2.39 in the third quarter of 2019, mainly due to lower pricing and demand levels.
From $1.36 in the second quarter of 2020 due to our strong gross profit margin and recovering demand on a GAAP basis, our earnings per diluted share were $1.51 cents in the third quarter 2020.
Turning to our balance sheet and cash flow, we generated strong cash flow of operation from operations of $296.3 million during the third quarter and $942.8 million during the first nine months of 2020.
Due to our continued profitable operation and effective working capital management, including a continued focus on rightsizing, our inventory levels, which resulted in achieving our inventory turn goal of 4.7 times.
During the quarter, we issued $400 million of 1.3% five year senior notes and $500 million of 2.15% 10 year senior notes through a public offering.
We used a portion of the proceeds to repay all of our outstanding debt indebtedness under our unsecured revolving credit facility and term loan and will utilize the remaining proceeds for general corporate purposes.
Additionally in early September we entered entered into an amended and restated 1.5 billion dollar five year unsecured revolving credit facility that replaced our previous credit agreement and includes an increase option for up to an additional $1 billion the facility.
Combined with the proceeds from the notes offering have significantly enhanced our liquidity position and extended our debt maturity profile.
At September Thirtyth 2020, our total debt outstanding was $1.66 billion, resulting in a net debt to total capital ratio of 17.3% our net debt to EBITDA multiple was 1.1 times as of.
As of the end of the third quarter no borrowings were outstanding on our 1.5 billion dollar revolving credit facility.
In regard to capital allocation, our increased 2020 capital expenditure budget of $270 million includes additional strategic investments to address our customers needs and drive organic growth.
We'll continue to pay our regular quarterly dividend and selectively execute attractive acquisition and share repurchase opportunities and the third.
In the third quarter of 2020, we invested $38.2 million in capital expenditures and returned $41.2 million to our stockholders through dividends and share repurchases.
Turning to our outlook.
While macroeconomic uncertainty stemming from the COVID-19 pandemic continues based.
Based on current expectations and market conditions, we anticipate that overall demand will continue to slowly improve in the fourth quarter of 2020.
We expect shipping volumes will decline in the fourth quarter due to normal seasonal factors, including customer holiday related shutdowns and fewer shipping days in the fourth quarter compared to the third quarter, but we believe the impact of seasonal factors in the fourth quarter.
There may be less significant than in prior years.
As a result, we estimate our tons sold will be down 4% to 6% in the fourth quarter of 2020 compared to the third quarter of 2020.
We anticipate metals pricing, primarily for carbon steel products will improve due to mill price increases how.
However, similar to the drivers behind our average selling price declined in the third quarter. We believe the impact of these price increases will be partially offset by our diverse product mix and declining sales in certain markets, such as aerospace, which typically involve higher priced products.
As a result, we expect our average selling price in the fourth quarter of 2020 will be flat to up 2% compared to the third quarter of 2020.
Based on these expectations. We currently anticipate non-GAAP earnings per diluted share in the range of $1.30 cents to $1.40 cents for the fourth quarter 2020.
Looking ahead, we will continue to execute our business model and remain focused on managing the elements of our business that are within our control.
In closing we are very pleased with our third quarter results and that the broader macroeconomic uncertainty the pandemic has caused our.
Our managers in the field delivered excellent execution as demand began to slowly recover throughout the quarter maintaining their strategic focus on high levels of customer service and value added processing. This combined with our emphasis on expense control and our ability.
To respond quickly to market conditions resulted in yet another quarter of solid profitability and cash flow and enabling us to support our growth and stockholder return priorities.
I'd also like to Echo Jim's sentiment and extend my thanks, and gratitude to all of our employees and the reliance family of companies for their.
For their ongoing commitment to health safety and operational excellence and this unprecedented time, we believe our people along with our proven business model are the keys to the strength and resiliency of our business.
We look forward to improved conditions in the quarters ahead, as we work with our employees customers suppliers and communities to mitigate the ongoing impact of COVID-19.
That concludes our prepared remarks, thank you for your attention and at this time, we would like to open the call up to questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Okay confirmation tellme indicate your line is in the question queue. You May Press Star two if you like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Seth Rosenfeld with Exane BNP. Please proceed with your question.
Hi, Carla and Jeff Congrats on a very strong quarter.
I had to if I can please kick off.
I can kick off with a question on the outlook for margin. Please. Thank you first of all for providing some color in your prepared remarks about drivers, particularly robust margins in Q3.
Looking forward to Q4 your guidance seems to imply a pretty sizable reduction gross margins quarter over quarter can you walk us through which of the key drivers you would be perhaps deteriorating on a quarter over quarter basis.
How we should expect that got settling out going into Twentytwenty. One as we expect demand to continue to recover in line with your guidance I'll start there. Please.
Hi, Seth Carla.
So from a Q4 perspective.
We're very very pleased with the performance we've had in the gross profit margin or been able to achieve we did build in to the comments you know.
With the rebound from a co that there is still uncertainty out there we're seeing some changes in product mix. So no. We did try to highlight some of the impacts both on average sales price and.
Gross profit margin from those and well certainly we think we will we'll solidly perform at the high end of our estimated sustainable gross profit margin range of 20% to 30% going forward.
Now we are a little cautious on achieving the record performance, we had in the third quarter, there our carbon steel price increases on certain products, including flat roll, which for pre sizable at the end of the third quarter going into the fourth quarter, which are very positive for reliance is that allows us to make.
Mark gross profit dollars and helps us, but as the metal price the metal cost increases our gross profit margin percentage that we saw from our flat rolled business in Q3 as a percentage could go down a bit so.
We're okay with higher prices as slightly lower gross profit margin and we did benefit quite a bit from our improved toll processing operations in Q3, as we've talked about that has a positive impact on our gross profit margin and that is sustainable. However, we think that.
The impact going from Q2 to Q3 was probably a little.
A little inflated just because of some of the cost saving measures. We took when we were hit hard for co that so we're a little cautious on.
Being somewhere between that high end of our sustainable range than what we saw in Q3, but again very confident maintaining a very strong gross profit margin, but recognizing we had some temporary is that in the third quarter.
That's very clear and just to confirm your last comment was you'd expect me somewhere between the high end of that sustainable range and the Q3 performance in Q4 I hear that right.
Oh, we expect to be able to say you know at the top of the sustained low range.
Okay. Thank you and the second question just on aerospace given that seems to be perhaps a growing challenge for the company can you walk us through to what.
To what extent you'd expect further sequential volume weakness here or do you think that in the numbers do you recognize in Q3, our you're already kind of recognizing that the large step down in production rates amongst those customers. Thank you.
Yes, Jeff This is bill how are you.
We think when you guys look at enrollment.
[music].
We think when you look at it from an end market perspective that will be at the bottom we're at or close to the bottom now and as we look into next year. We think we will slowly start to see some improvement our guys have done a really good job of attacking the expense side.
And really getting the inventory side.
Card so.
If you look at the outlook as we head into Q4 are there may still be a little bit of downside.
On the performance side, but we're close to the bottom and would look to see some some improvement as we move into next year and just to clarify that a little bit.
With what Bill talked about we were seeing kind of continuing decline through the third quarter. So really from where we ended the third quarter. I. Just think we were near the bottom, but you know there was a decline throughout the quarter and I think we we have done most of the heavy lifting from.
An expense and headcount reduction point of view.
But we're going to stay close to the market and see what happens and it would need to make more adjustments our guys will be ready to do that.
That's very clear thank you very much.
Thanks, Thanks so.
Our next question comes from Alex Hacking with Citi. Please proceed with your question.
Yes, good morning, Jimmy Carla and thanks, Thanks for the call.
I guess my first question was just around the auto tolling volumes well the author tolling business.
Could you quantify you know whether it's volumes are up.
As normalized levels as you exited the third quarter and then.
And then just on the new facility in Texas, it's impossible to quantify the tonnage that you would be looking out there and would it be safe to assume that's going to be co located at the new flat.
Flat rolled mills being built in Texas. Thanks.
Hey, Alex I'll take the first part of that on the auto tolling volume. So as we commented on in the script Q3 totaling overall tolling volumes, which are about 60% of that is auto related appliance would be the next biggest portion as adamant missiles.
Lainie as our Q3 volumes were up 81.5% compared to the second quarter is that I'm sure you're aware that ramp was pretty quick that was that the that started at the end of the second quarter continued into the third quarter or so for this quarter, we were probably about nine.
Nine Percentish signed a 10% below Creek.
Pre co that levels and we've continued to see a slight improvement from that coming out of the quarter. So we think we're probably at about 90% to 95% as a pre cobot levels now.
Yes, and Alex as far as the or no.
Operation in Texas, I can't really call quantify what the timing will be I hope, it's a lot [noise].
You know when they open a greenfield site like that.
Theres no it takes a while to get up and running them and.
My guess is.
Best Company as profit release, what their capacity is and they intend to run.
At a high level and.
It's true that we will to look we're looking forward to that.
Yeah and then in addition to that we also purchased remarks were that we also are in the process.
Or in the process of opening in the fourth quarter, another new Greenfield expansion for tolling in Kentucky as well.
Okay. Thanks for that and then I guess just on the on the capital structure.
Net debt now is down.
Around <unk> billion Nashwauk, one times EBITDA.
I mean, how do you how do you think about that going forward I mean, it seems relatively conservative given the margin stability that you guys have.
You know first successfully achieved through the cycle.
I mean.
I mean I get yeah. So how should we think about the capital structure going forward.
I'll, let Karl answer that before anybody who says we have a lazy balance sheet.
Kind of like we kind of like having all that cash for Carl Carl or what we do with all that yeah. I mean, I think Alex certainly we are very comfortable with where we are from a leverage standpoint, we continue to be able to execute on all of our capital allocation priorities.
As I think you know.
From knowing us for a while we tried to be very opportunistic and flexible and all those areas.
Through the pandemic. The company has performed very well, but I think being a little comfortable with our financial position has not been a bad thing as we've gone through this uncertainty, but we are very confident with the model and the way we performed we've been ready to execute.
Jim mentioned in his comments, we see a lot of M&A activity.
We continue to look at organic growth and as you saw in our notes we just increased.
Our capex for this year, we're working on our Capex for next year, but we continue to see organic growth opportunity, we pay a help.
We pay a healthy dividend and.
I want to continue to periodically increase that as we've done for many years and also jump in to repurchase shares so were.
We are anxious for good opportunities to put our balance sheet to work a little harder.
Perfect. Thank you.
Hi, Phil.
Our next question is from Chris Terry with Deutsche Bank. Please proceed with your question.
[noise] well done on a on a solid quarter just wanted as Doug My first question on the guidance for Fourq you, specifically I think you basically saying that your gross profit margin will be on the high end of the 28% to 30% sustainable range in terms of the volume.
And I think when we looked at it seasonally he would not normally get taught to 7% and you're saying maybe seasonally might be so bad but you saw.
But you still at 4% to 6% down is a potentially conservative when you consider the claimant recovery is probably a lot stronger than normal seasonal impact.
Yes, Chris It is conservative, but that's kind of what we do or yeah. We control that we manage the things we can control and we can't control the demand or the price. So we look at the things that.
That will provide the most value to our shareholders and execute as we've done year after year after year.
Yes. It is.
Covert situation I think we've done a really really good job coming through.
In September we saw.
We saw things coming back a little quicker than we thought and.
October right now, it's kind of flattish to that if you will but so we're still.
Looking at those kind of numbers, so yes, as a conservative sure it's conservative, but we want to be able to do that.
Do the best we do the best job, we can in predicting the future, but we.
We hope to be able to do.
To get there and beyond as we have in the past and Chris just as a reminder, last year, our fourth quarter volumes were down just under 7% from the third quarter. So this guide is a little better than that but as Jim said you know.
On a conservative side, there's still a lot of uncertainty out there and the other thing Chris remember too just because reliance is an essential business doesn't mean all of our customers are that way. So we don't we're not really sure what we're going to see them, perhaps there's some customers that will be coming out of college.
Oh lets stronger, but some may not there may be a shift in the products that are making remember our customer base 125000 strong or there's a lot of smaller.
Oh.
Customers out there.
To continue.
Continuing continue to need to realize more and more because of our value added flooding and depending on if it's a.
It's a job shop, the common job Shaw for a reason they go from job to job, they're not really sure what they're going to do the next next month or next quarter. So all of those things are really out of our.
Out of our Oh can.
Control, but we kind of look out through a lens.
Okay that works for us.
At the guesswork involved and things like that so.
But we're just conservative by nature, and we'll try to.
Try to manage through it.
Thanks, Thanks, John call that all makes sense just a follow up question on the Capex, So to 70 million in 2020.
I appreciate it's probably too early to fully talked about 2021, but.
Just trying to get a guide you the total project or the investment in Texas and also Kentucky is there an amount of that that carries forward into 2021 that we can think about on top of the normal sustaining level.
2021, capex might shape up thanks.
Yes, so Chris the way, we do our Capex budget.
The full amount of the spin is far above the Kentucky, and Texas expansions are in the updated $270 million or 2020 budget. It's possible some of that cash could trail in to be paid during 2000.
During 2021 that we've got the full amount of that loaded as I mentioned, we're working on our 2021 budget now we don't have that final number yet we do see continued opportunities throughout all of our companies servicing all the different markets that we work with Chris Weve.
Carlo said, we're kind of in the middle of that right now we anticipate another robust.
Capex spend where our customers continue to ask.
Ask us to do different different and more things and.
No reason to think they're not they're not going to contain or asked to do that and.
I can tell you what we had before so it should be another good spend for us in 2021.
Okay. That's great. Thanks, that's all for me.
Thanks, Chris extra.
Our next question comes from Timna Tanners with Bank of America. Please proceed with your question Megan.
Hey, good morning, guys.
Okay.
I drill down again on that gross margin number because I know your guidance is 20% to 30%.
But we haven't even been in that range now for a while I guess since Q2 of last year and I'm. Just wondering I mean, if you look at Q3, yes, there was a bit of LIFO, but despite the fires and despite the uncertainty. Despite all the things that may or may not have affected.
It's it's pretty phenomenal.
<unk> basis I'm just wondering.
Is it time to start thinking about a higher guidance because it makes a big difference in forecasting what would it take to see dips actually below that 30% going forward and just.
Whatever you can provide would be helpful.
Well then it is time to start thinking about it but you know when we think about it all the time its system and you and you do a key point of your question was the word uncertainty.
Once we're certain that we can get there and.
We can sustain that what we'll say this it does Goldman thing.
This common thing was a was.
It was a son of forgot and where we were able to respond and typical reliance fashion because of our model, but again I really it's just tough going into this fourth quarter.
Two sales and but we have to believe that before we said so will we hear you and were within one <unk>. When we said you can count on.
Count on the fact that it will be sustainable so.
Yeah, that's best answer I can give you right now I wish I could.
So everything I'm thinking rule sets and just to clarify timna, so that 20% to 30% is on a LIFO basis and LIFO does help lessen some of the volatility there so just to point that out and.
And as Jim said and we've been asked by many of you about right.
About raising that and we are very proud of the results. We've had in that we said consistently at the top end for a little while back.
Things like the <unk> and it was to the positive side, our product mix impact on our margin in the third quarter that could potentially go the other way a little bit too. So that's some of that uncertainty.
Things are changing as we recover from the cobot hit so we're.
So we're watching that and hopefully.
Hopefully I mean, I think we're confident and I did say earlier in my remarks, we think at least through Q4, we can stay at the high end. We do think there are a lot of really good things that have happened that have driven our sustainable margin to the high end.
And we'll continue to monitor that and as you all know Gen. The mix has a lot to do with it.
The flat roll business as that starts going up this is at a lower margin than some of the other things that might be going the other direction.
Another thing just anticipating the next question from maybe not use somebody's going to ask about the fact, we won from a traditional 40% of our of our product. They haven't added value to it to 51% and we really haven't reported where that number is now and when that does go up.
There's there's not a direct correlation between those two as part of our strategy to get to that to get that going north but you'd have some.
You'd have to really drill down to find out what kind of value added things we're doing there.
There's value add to that that we can charge more of it's not as high value added to other type things. We can do so just the type of value added that we are able to.
Yes.
This quarter. It was that was nice so we know some of this technology out there that's available to us.
From a equipment standpoint.
It's it's pretty fascinating really and we're able to offer our customers a new and different things in their own them pay for it and never ceases to surprise me, what they what they come up but because of that they deal with this co one thing differently and when they come out they have different needs and they have different desires.
And we're we're a solution provider so we listen to what they need and we partner up with some of the equipment manufacturers and come up with a solution for them. So.
We hope that number continues to drive up.
Better and I don't know I don't know, how it's going to bear how high it can be but there's a lot of there's a lot of.
Things that go into those numbers too and just because we're not ready to increase that range. It doesn't mean, you can't put something higher in your model [laughter] Nice new car [laughter] nice alright.
I want to try to drill down into and granted you just said, there's a lot of components and it's complicated, but if I could.
Aerospace piece of business, you know, obviously under some pressure and could be for a while energy as well, but on this auto tolling opportunity.
Just last quarter and with the growth is that enough to offset those lost conceptually is that enough to balance out maybe that the lost opportunity and you know the dormant opportunity maybe in energy and aerospace or how do you think about that.
You know I think from a.
From a profit standpoint, when we're fully ramped up which is not going to be for a while yet.
I mean, I can certainly have a meaningful offset if you.
If you assume aerospace and energy stay where they are currently but we're hopeful we'll see some improvements in those markets too and by the time, we get fully ramped on our auto tolling businesses right and Tim. This is bill you know in addition.
In addition to the two new Greenfield, we've got some new opportunities to grow our market share through our existing tolling operation. So.
Our plan is we're going to see that continue to have a positive impact obvious and aerospace defense end of the aerospace in the space and of the aerospace that's good business.
Well, there's a lot of opportunities for us in that and we anticipate participating in and that just by design as does.
Hi value added activity and we and we see some opportunities there too. So that's a that's kind of a bright spot we do definitely.
Great guys. Thanks again.
Thanks.
Our next question comes from Chris Olin with Tier four research. Please proceed with your question.
Well Carl I should probably ask Sanjay came we also put our estimate higher than the guidance.
[laughter] eight year.
[laughter].
Yes.
Got price target higher [laughter], alright fair enough.
Hi, Eric.
I know you're getting a lot of aerospace questions, but I just want to make sure I understand the numbers and.
And you slide in front me, but I used to ask.
I used to ask Andy It was.
Always like 8% to 10% of total revenues and I just want to.
I want to make sure I understand how you talk about it now half of that was commercial aerospace halfway there aerospace now commercial what tickets can enhance your business is about.
And then 2% at which the rest is stable is that how I think about it.
[noise] yeah. So.
So so we're [laughter].
[noise] back in about 2014, our AEROSURF phase.
For the last two years has been about 12, 10% to 12% of our revenue dollars.
So that that's come down a bit. So you know were a little under the bottom end of that 10.
Oh that 10% range and it is about half and half a maybe.
Maybe.
Split between commercial and then defense space et cetera, making up the other half and.
And then most of commercial would be aluminum related products taking into account when we moved that much in terms of total body.
Yes, mostly alone.
There is some.
Aerospace steel and.
Titanium products, but when you look at that the commercial side, it's for US it's a much bigger player.
Yeah, it's definitely a nice heat treat plate and.
So and we did talk about with our average sales price fluctuation and things I mean.
The 10% to 12% is based on sales dollars and again these are our higher priced products. So I'm the tons would be.
The tons would be a smaller percent of our total time, but because of the high priced product.
Do we need to think about contract rollovers for 2021. It helps me asset yet and I remember it being in a a nice boost last year is that reverse going forward.
Yes on the on the defense side definitely see the JSF contract that has.
I've been extended so that's a that's a big problem for us.
[noise] [noise] pricing on commercial aerospace is that step down now in relation to the demand numbers here, yes, so far pricing has been pretty.
Pretty stable on the commercial aerospace side.
So, yes I think.
Even with the drop in demand.
The mills have been very disciplined in their pricing approach there and so pricing is obviously a stage.
Great. Thank you.
Thanks, Chris.
Our next question comes from Phil Gibbs with Keybanc capital markets. Please proceed with your question.
Hey, good morning.
Hey, good morning, Chris.
First is just on the non res side and and I know excuse me I have a little.
So my throat.
Just in terms of where what you are seeing regionally.
<unk> out there and in the different markets that you serve because obviously you've got to have a view of of the of the country and and some cases, even Canada. So what.
What.
What should we take away regionally.
Yes. Good question. So the good news for US, it's kind of widespread fish oil.
North East this is kind of been chugging along at a.
Good pace for several quarters now the south east with unfortunately with the web.
The weather issues that business has really picked up and unfortunately for people who live there probably won't subside for a war for a while so we've seen oh.
Nice pickup in equipment going into <unk>.
Read on roads, and bridges and water treatment.
Plans and those type of things electrical grid out west.
It's been strong and continues to be so based on the the larger big box warehouse campuses for.
Electric motor.
Motors are wide spread far.
ER widespread as far as 60.
Assisted living facilities that stuff.
You know there's elderly people live everywhere so its a good business for us.
And like so we've seen some wins I believe I said in my comments or grow it on but we've seen some infrastructure spend that you know that.
It was related to the southeast and then down in the text.
Texas.
Oklahoma as this is a pretty good Arizona.
Dawn going pretty good others like I mentioned, they renewable energy.
Businesses are a nice spot for us we anticipate that to continue to grow the good loan pattern. So.
Just across the.
Anything widespread for US is a good thing so that's that's what we're seeing and I.
I've said this comment for a long long time since 2009 now this slow burn off continues and we seem to be in the.
In the right.
And the right spot for that in itself continues to do that.
We anticipate fourth quarter to people.
Keep going.
[noise] [noise] are you seeing.
Any constraints and trucking.
Availability.
Right now in the U.S. I know you have some of your own but.
Any any constraints that you're either seeing or you are noticing out there or.
And then some part.
Are you starting to see increased pressure on freight right.
No no we're not we but we're in that we were in that business. So we were we can ramp up and we believe we have a lot of our own trucks for that reason, we like we the end there are our employees, we consider our truck drivers and folks who do that as a as a team members who are actually sales.
People as well because they are out there.
With that I will find the colors and they care about the service our customers because her as part of our model. So if we did see a problem. We were just we would go away.
Well the way to get more trucks on so so we have not seen that or a lot of our product that's moved around from from mills into our into our operations go by rail and that seems to be going well. So we've got a good doesn't go to our finger on that fall off pretty well. We are we can ramp up.
Well, if there's an issue there was a time I don't remember how many quarters ago, where there was a driver shortage that that we.
We saw it come in so we adjusted for that so I.
I don't I haven't heard of anything that were that were worried about in data.
And last question just for Bill.
Phil if there.
If there is a change in administration and there there is a change in defense spending policy, how long does that based on your history take two to influence what's already out there because I know that a lot of these things are so.
Seriously well funded by the Senate.
And takes takes there.
Takes their blessing.
So any thoughts maybe you could give around that because I mean, I would think people are starting to.
Starting to at least part or the possibility that if there is a change.
You know, what's what's still good and how long is it good for.
Yes, good question [laughter].
It sounds like.
That regardless of who wins that defense spending is still going to be a priority and.
And as you say a lot of what we're seeing is already.
Play and so it will take some time if there is a change but when you look at the major programs that we're on.
We're not we're not seeing or believing that theres going to be a significant change there over the long haul. So oh, we still are very positive on the.
Positive on the outlook from a defense standpoint, and isn't there bill a lot about that also goes to some already said buyers, yes, even a you know you've probably seen a lot of the legacy fighter programs that are going to other countries now and we're a big supporter of those programs.
So that side of the business has been very positive for us all.
For US also we think that will continue.
Thanks, everyone talks you.
Okay. Thanks, though.
Our next question is from Tyler Kenyon with Cowen and company. Please proceed with your question.
Hi, Jim Carlin, Bill Hope, you're all doing well yes.
Uh huh.
Question is just on the volume guidance that the down 4% to 6% sequentially wondering if you could maybe break that out between the various product categories carbon aluminum stainless and alloy.
Maybe just provide us a sense to how to think about each one of these categories. I think it would just help in light of some of the recent ships.
[music].
Yeah, Thanks, Tyler as we said earlier.
Earlier, you know we are hopeful that on the conservative end, but you know there is the normal seasonality with everything that's happened with with Cove. It. This year I think there are different schools of thought and our customers may react differently, you know schools of thought being its going to be stronger in Q4 because people are.
Catching up.
Slowdowns in Q2 had been coming out of that and the other for school of thought as you know it's been at least some of our customers as Jim said our artist such on are still struggling may shutdown for even longer over the holiday period. So you know that's a bit of the announcement that keeps us on that.
No more cautious side towards what we've seen is a normal seasonal downturn that the 46% is a little better as we didn't comment you know we've got good backlogs and quoting activity and thought raz and infrastructure. So I'm more probably more positive that's more of your carbon type product.
We talk about aerospace being weak that's more of your aluminum price.
Product.
Our our stainless especially on the flat rolled side, it's held in better than the other products. So that's been in doing pretty well for us Oh.
Oh, well lately commented our sales there are lighter because of some of the energy closures in that industry. We expect to remain under pressure. So you know that's kind of at a high level guidance and only thing on a.
We put a lot of effort into our inventory management.
If you noticed we don't we call it as needed inventory versus just in time I'm not sure Justin talking.
As needed is that's when the customers need it. So we have a basket of a lot of companies and certain companies. Their first quarter is their best quarter. Some companies their second quarter and third and fourth so we look at all those companies differently, and we flex up and flex down and make sure that they are.
No were you were spending our inventory dollars properly and.
No if you're if your slowest quarters, the fourth quarter than you know new inventory in the third quarter Thats true for that so there is a lot of analysis that goes into that so it's really difficult to go product by product. So.
Hi, Carlos.
You know Oh, we were very aware of.
Oh, what our history has told us and if you look at it really without the scope of things you would probably get rewarded because we're projecting a better fourth quarter than we have.
Because again we've done.
We've done so well during the third or Pandora against the expectations are somewhat different I guess I understand when we when you continue to well performance and you got to Brazilian model.
We expect to perform but we may also.
Our conservative and we understand.
Our history so.
Hi, Mike.
Thanks for all that context.
Yeah, maybe correlate wonder if you could help us just kind of think about their trajectory. The best June a moving into the fourth quarter I know you've called some folks back as activity levels have improved and should we expect that.
Dollars to kind of follow the volume trend from third quarter to fourth quarter or should we expect more of a flattish trend as some of the costs come back.
Yes. Thank you know Tyler probably looking I think Q3 kind of percentage of sales, it's probably a decent way to look at it.
Overall the.
Even though its lighter shipping volume and part of that's because where we have fewer shipping days, which affects our volumes, but most of those are holidays. When we're still paying wages. So I wouldn't necessarily break it down in line with with OEM sales.
So I think it was pretty consistently with Q3 dollars.
It's probably the best guide that we can give you.
Great. Thanks for that and then just just one last one if I if I could just.
Just wanted to just take your temperature on kind of what you're seeing in the competitive landscape out there. What are you seeing amongst some of your customer or excuse me your competitors and maybe if you could just provide us an update on what you're seeing in the M&A environment.
Yeah.
So I you know I don't know our competitors what are your views where our competitors are now those so we don't think they're going whatever theyre going and.
Well from a host overall works helpful ill say I'll have to stay healthy sales, but I don't know nothing's really I don't think it has really changed on the horizon, but Ah okay.
Again, we don't spend a lot of time wondering what their dorm or kind of wonder ordered on.
As far as the M&A I had mentioned, it's a it's a target.
Target rich environment, we away, we've got a lot of activity I mean, there's not a I mean, sometimes its daily sometimes it's got tons a day, sometimes it will skip a week. We were we've looked at a lot of companies and.
And the problem is is we've got a problem. Its just what we choose to do the criteria very stringent we we don't we haven't changed that at all.
There's just a lot of mobile things that go into.
We're very selective on who we'd like to join our family of companies because it's important.
They said, yeah, and I mentioned, a few that the.
Criteria and those haven't changed now.
Good news is there are some out there, but a lot of what we're looking at it seems like there's some.
There's some theres some things that will eliminate you.
Pretty quickly here.
The small that's really nothing we can we really want to sink our teeth and because there's a lot of effort that goes into that if it's a if it's a company that's for sale that forces us to compete with our customers we back out there.
That's a good bye bye.
A potential acquisition that forces us to compete with our suppliers. We don't do that we're where we want to be we want to be everybody's best customer not just the biggest cost for so we'll eliminate some of those types of things.
But.
And then there's there's a there's a there's companies that just kind of or fire sailing because they didn't do very well, they're going to cope with the more we don't were not we don't do fix or offers and again.
Again, it all kind of rolls into the fact that we've got a good problem. We have we have cash and wears different ways to use your cash and Carl ahead, there was always a wonderful job explaining on them.
Finding what we do with our cash and M&A is still one of them. It's just a matter of what pops up and.
And what our appetite is that our Oh I can talk part hasn't changed and we've got plenty of money to persist participate when the right ones come along and enrolled that's not going to that is not going to change. So suffice to say if a good ones come along and we work things out whole will jump in.
Yes, Tyler this bill just jumping back to the competition I mean, we do have obviously competitors out there, but as we've said in this kind of market where customers are generally looking at smaller orders faster delivery time, and needing more value added processing that really fits our model well.
So kind of kind of plays right into our hand in this kind of environment.
Thanks again.
Hi, Thanks.
Ladies and gentlemen, we have reached the end of the question answer session. At this time I'd like to turn the call back over to Jim Hoffman, President and CEO for concluding remarks.
Thanks again to all of you on the call for your time and attention today before I conclude I'd like to remind you all that in November we plan to present at the Goldman Sachs metals, and mining conference and the city of basic materials conference, which will be held virtually and webcast live over the internet.
Thanks again for your continued support and commitment to reliance and stay healthy.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.