Q3 2021 Reliance Steel & Aluminum Co Earnings Call
Greetings and welcome to the reliance steel and aluminum company third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode. A brief question and 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 it is now my pleasure to introduce your host Madeline Crane Investor Relations. Thank you you may begin.
Thank you operator, good morning, and thanks to all of you for joining our conference call to discuss the Alliance's third quarter 2021 financial results.
I'm joined by Jim Hoffman, CEO, Karla Lewis, President and Arthur Johnson, Vice President and CFO.
A recording of this call will be posted on the investors section of our website at Investor day, or if they see dotcom.
The press release and the information on this call may contain certain forward looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks uncertainties or other factors, including the impacts of the COVID-19, pandemic and related economic conditions on our future operations.
What you may not be under the company's control and May cause the actual results performance or achievement of the company to be materially different from the results performance or other expectations implied by these forward looking statements.
These factors include but are not limited to those factors disclosed in the company's annual report on Form 10-K for the year ended December 31, 2020 under the caption risk factors.
Disclosures in our press release, this morning, and other documents or lifestyle or furnishes 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 will now turn the call over to Jim Hoffman CEO of reliance.
Good morning, everyone and thank you for joining us today.
Our third quarter 2021 financial results.
Again with a high level.
Our third quarter performance and capital allocation priorities.
Hello.
Two our operation operating results and demand trends by end market and Arthur will conclude with a review of our third quarter 2021 financials.
I continue to be inspired by the outstanding operational performance by my colleagues throughout the reliance family will complement our resilient business model favorable metals pricing drugs and excellent execution combined to produce another quarter of record setting financial results.
Beyond the execution of our business model operational excellence includes our top priority, ensuring the health and safety of <unk>.
All of our reliance colleagues.
I'd like to extend my gratitude to each and every one of them for their unwavering commitment to operating safely. Despite the many challenges that are for.
Assistance during the ongoing pandemic.
I would especially like to recognize our teams that were directly impacted by hurricane either well tomorrow.
Ida had a minimal impact on our operations some of our colleagues were impacted personally.
Very happy that everyone is safe and that our employee funded and company match program reliance cares what's the.
Payable to support those who are impacted and in need of assistance.
Reliance cares as an inspirational example of how the reliance family of companies come together and meaningfully take care of each other.
Turning to our results the trends are strengthening metal pricing persisted through the third quarter, which featured multiple mill price increases most notably for carbon and stainless steel products.
The favorable pricing environment, along with fundamentally strong underlying demand in many of the key end markets. We serve drove record quarterly net sales of $3 $85 billion.
In addition, strict pricing discipline by our managers in the field helped us generate a strong gross profit margin of 31, 5%, which when combined with our record sales resulted in a record quarterly gross profit dollars of one point to $1 billion in the third quarter.
Oh 2021.
Despite various supply disruptions and continued increases in metals pricing that drove LIFO expenses of $262 $5 million in the third quarter a record quarterly net sales along with record gross profit dollars and our continued focus on expense control led to the <unk>.
Third consecutive quarter of record quarterly pretax income of $532 $6 million.
As a result, our earnings per diluted share of $6 and 15 says were also a record representing an increase of 21, 1% from a record EPS achieved in the prior quarter and substantially exceeded both our guidance and analysts' consensus.
Yeah.
We attribute this performance to a highly resilient business model, which is strategically designed to perform throughout changing macroeconomic circumstances first we're highly diversified by end markets products and geographies second our decentralized structure leaves the decision making.
And resources close to the end customers, we rely on our managers in the field to appropriately price the value of the products and services we provide.
Which is particularly important in times of tight metal supply and volatile pricing.
And this local laws and entrepreneurial environment, our focus on small order sizes with quick turnaround has also proven particularly effective.
Further our ability to purchase inventory in the spot market throw a long standing strong relationships with our domestic mills, coupled with our unique ability to cross sell inventory among the family of companies allows us to source the metal we need despite tight supply.
We were pleased our inventory turn rate for the third quarter came in just below our company wide goal, which indicates that our inventory is properly balance with current demand levels. As we continue to secure the raw materials, we need to meet customer demand.
Third our significant investment in organic growth and innovative technology has significantly expanded our value added processing capabilities empowering us to focus on higher quality high margin business and enabling us to increase our estimated sustainable gross profit margin range.
To expand on that last point I'd like to emphasize that the strong cash flow generation. Our model provides fuels are flexible and dynamic capital allocation strategy.
Ports concurrent investments in growth and stockholder return activities. We believe that it is a resilient business model and our execution of our capital allocation strategy that sets reliance apart.
We estimate that approximately half of our $310 million capital expenditure budget. This year will be directed towards new innovated.
Value added processing equipment, along with enhancements to existing equipment to strengthen our value proposition and overall service offerings.
As I highlighted earlier these investments helped support our increased sustainable gross profit margin range as they provide our managers in the field the ability to offer additional value to our customers.
Discussed last quarter, our 2021 capital expenditures will also be focused on opening new facilities as well as expanding upgrading and maintaining existing operations, including renewable energy investments that many of our facilities.
As our focus on growing the company is two pronged. We also remain highly focused on M&A.
On October one we completed our acquisition of Mirthless, United a leading master distributor of tubular building products in the U S. The company is based in Massachusetts and services 47 states through 12 strategically located distribution centers.
The matter of fish acquisition aligns with our strategy of acquiring and immediately accretive companies with strong management teams and significant customer product and geographical diversification.
Our fish transaction is a bit unique in the Merck fishing is not a traditional metal service center and yet the transaction is one of the larger acquisitions that we've.
Completed in our history as Murphy had approximately 600 million in annual net sales.
The 12 month period, ending September 32021.
However, <unk> broad product offerings expands reliance's exposure into copper and plastic products among others.
Which murphy sells through wholesale distribution customers in adjacent end markets in the commercial residential municipal and industrial buildings space.
We expect Merck Hirsch will help position reliance and the broader industrial distribution space as well as provide a platform for further growth in this area.
Both organically and through further acquisitions.
During the third quarter of 2021, we also returned $174 $7 million to our stockholders through the payment of $43 $7 million in dividends and the repurchase of $131 million of reliance common stock at an average cost of a.
$147 89 per share.
In the last five years reliance repurchased $11 7 million shares of our common stock at an average cost of $89 92 per share for a total of one point.
There are $5 billion.
We are extremely pleased to have the capital and the flexibility to simultaneously focus on both growth and stockholder returns and expect to maintain our dynamic approach moving forward remain prudent allocator of capital.
Before I conclude I'd like to announce that reliance will be relocating our corporate headquarters from Los Angeles, California to Scottsdale, Arizona in the first half of 2020 to Scottsdale office will serve as reliance's, New principal executive office and the company's senior corporate officers will.
Have offices there.
Reliance is a Delaware Corporation operating through approximately 300 division and subsidiary locations in 40 States and 13 countries outside the United States and the relocation of Reliance's principal executive office to Scottsdale reflects our growth and expansion is.
Well as our evaluation of post pandemic business opportunities and related operating practicality.
We will however, maintain a presence in Los Angeles with revamped and innovative office offerings that flex and complement the redefined post COVID-19 workplace and meet the needs of our corporate administrative colleagues who were ranked remain in California.
In addition, I'd like to extend a warm welcome to our two new independent Board members, David Seeger and Frank Dell'aquila.
Dave has been a strategic and valued partner to reliance for more than 30 years. There is involvement in the metals industry and Frank as the season and respected public company senior executive and Chief Financial Officer.
We look forward to benefiting from both of their unique perspectives.
Terence and expertise with the addition of Dave and Frank Reliance's Board consists of 12 members 10 of whom are independent.
In summary.
I am once again highly pleased to share our record setting third quarter financial results and commend all of my colleagues for their hard work and unwavering focus.
During the quarter. Despite the challenges of the ongoing pandemic supply change disruptions and tight labor markets and limited mental availability, we sustained our efforts to ensure that we continue to provide valued customers with the products they need often in 'twenty four.
Hours or less.
At the same time, we also continued to successfully execute our growth strategy, while generating strong earnings and returning value to our stockholders.
As we look ahead, we look forward to remaining a key contributor to the value chain through the ongoing support of our colleagues customers suppliers and communities and remain confident that America is going to need reliance to rebuild.
Thank you for your time and attention today I will now I'll turn the call over to Karla to review, our operating results and demand trends Carla.
Thanks, Jim and good morning, everyone.
I would like to begin by extending my heartfelt. Thanks to all of my colleagues within the reliance family of companies for delivering another consecutive quarter of record performance.
I'd also like to thank our suppliers for their continued support as well as our customers for their ongoing loyalty and trust and reliance through these extraordinary times.
I'll now turn to our third quarter operational performance.
Once again, we believe that underlying demand was stronger than our third quarter 2021 shipment levels reflect.
Our tencel decreased four 6% from the second quarter, which was below our guidance of down 1% to up 1%, mainly due to more typical seasonality and we had anticipated combined with various supply chain issues.
Reliant our customers and our suppliers all continue to experience supply disruptions, including limited mental availability, coupled with labor shortage is that temporarily slowed demand for metal in the third quarter and we believe reliance is well positioned to satisfy the pent up.
Demand in future periods.
While disruptive from the demand standpoint limited mental availability in the market helps support ongoing metal price escalation during the third quarter for many of the products, we sell most notably carbon and stainless steel products.
Our average selling price per ton sold in the third quarter reached another all time high of $2862, an increase of 18, 4% compared to the second quarter of 2021 and significantly in excess of our guidance about <unk>.
79%.
There is speculation at certain carbon steel products, namely flat rolled maybe at or near their peak.
I would like to remind you that only 11% of our sales are from hot rolled coil and sheet.
We continue to see strong pricing for many of the other carbon steel products.
Stainless pricing remains very strong and we are also seeing increased pricing for aluminum products.
Our product diversity reduces pricing volatility on our earnings and we expect continued strong average selling prices that reliance into 2022.
The favorable pricing environment, coupled with outstanding execution by our managers in the field contributed to record quarterly gross profit dollars.
One point to $1 billion in the third quarter of 2021, and a strong gross profit margin of 31, 5% on.
On a FIFO basis, which we believe better reflects our current operating performance we.
We achieved a record gross profit margin of 38, 3%.
<unk>, our third consecutive quarter of record FIFO gross profit margin, we applied our managers in the field for their unwavering effort relentless focus on high quality high margin business and effective implementation of price increases at the time that no announcement, which is.
Able to capture an incremental margin benefit in excess of already strong levels.
I'll now turn to a high level overview of our key end market trends on a sequential quarter basis.
Demand for nonresidential construction, which includes infrastructure and it's the largest end market. We serve remained at solid levels. Our third quarter tons sold were down slightly compared to second quarter shipments that remained near pre pandemic levels.
We continued to experience solid quoting activity for projects in the areas of distribution and fulfillment centers data processing and manufacturing facilities as well as utility infrastructure.
Due to supply constraints and increased pricing. We also continued to see an uptick in smaller projects that can be completed quickly.
Given our healthy backlog and solid quoting activity positive customer sentiment and favorable key industry indicators. We are optimistic nonresidential construction demand will continue to steadily improve through the remainder of 2021 and into 2022.
Demand for the toll processing services reliance provides to the automotive market fell slightly from second quarter levels due to normal seasonality as well as temporary shutdowns at certain automotive manufacturers due to the semiconductor chip shortage.
Recent investments, which include purchasing a new facility in Michigan and opening a new tolling facility in Indiana as well as our other Greenfield tolling expansion in Kentucky, and Texas have allowed us to perform well despite challenging market market conditions by increasing our capacity.
To support our customers' increased transportation and storage needs. We are optimistic that underlying automotive demand is solid and will recover in 2022 as the impact of global Microchip shortages.
Reduction levels and certain market subside.
Longer term, we are confident our toll processing business will remain strong given the significant level of investments we are continuing to make to support our growth and innovation in this area. We continue to see new opportunities to expand our tolling presence our automotive appliance.
Packaging and other end markets, some of which are already underway and will benefit us in 2022 and beyond.
Demand in heavy industry for both agricultural and construction equipment declined during the third quarter following exceptional growth during the second quarter from a combination of seasonal shutdowns at many customers along with broad customer supply chain challenges and labor constraints.
That said third quarter shipments remained above pre pandemic levels.
Underlying demand remained strong and we expect demand from the heavy equipment and manufacturing industry to be delayed not lost and improve in the quarters to come.
Semi conductor demand during the third quarter remained strong while our third quarter shipments were somewhat impacted by global supply chain issues. The semiconductor space remains one of our strongest end markets in 2021, and we expect this trend to continue well into 2022.
With regard to aerospace demand in commercial aerospace, which is roughly half of our aerospace exposure was impacted by normal seasonal factors in the third quarter. Looking ahead, we expect demand in commercial aerospace to slowly improve throughout 2022 as build rates increase.
<unk> and excess inventory in the supply chain continues to decline.
Demand in the military defense and space portions of our aerospace business remains solid with strong backlogs and exceeded our pre pandemic shipment levels, we anticipate strong demand in the non commercial aerospace market will continue into 2022.
Finally demand in the energy sector, which we define as mainly oil and natural gas continue to slowly improve supported by higher oil and natural gas prices.
Looking ahead, we anticipate that increasing rig counts along with customer inventory replenishment will result in a modest improvement in demand levels into 2022.
In summary, the <unk>.
First three quarters of 2021 were distinguished by consecutive quarters of record financial performance and today early in the fourth quarter of 2021, we see a positive landscape heading into 2022 with strong and improving underlying demand and most of them.
Markets, we serve continued.
Continued elevated metal pricing.
Even if certain products may begin to decline.
And the best team in the industry.
Our proven resilient and opportunistic business model, along with our diversity scale and solid long term relationships with our suppliers and our customers has set us apart and dynamic markets before and positions us once again to optimize our performance.
And deliver strong results.
I'll now turn the call over to Arthur who will review our financial results. Thank you.
Thanks, Karla good morning, everyone and thank you for joining us.
I'll start with our sales trends.
Favorable metals pricing fueled by limited availability and solid demand trends and the vast majority of key end markets. We serve resulted in record quarterly sales of $3 $85 billion.
12, 5% from the second quarter of 2021.
And up 84, 5% from the third quarter of 2020.
Strong pricing momentum contributed to the 18, 4% increase in our average selling price per ton sold or the second quarter of 2021.
In comparison to the same period of the prior year, our average selling price per ton sold was up 77, 9% due to increases in milk prices, but the vast majority of the products, we sell notably carbon and stainless steel products.
As Carlin noted the lines has limited exposure to the more volatile and lower margin hot rolled coil and sheet products that made up only about 11% of our third quarter sales.
While benchmark pricing for hot rolled coil product was up over 275% from the third quarter of 2020, Reliance's average selling price per ton sold.
Same period was up 77, 9%.
This level of broad product diversification, along with strong pricing discipline.
Significant investments in value added processing capabilities have been instrumental in our ability to maintain stable and industry, leading gross profit margins in both rising and falling price environment.
These factors collectively resulted in record quarterly gross profit.
One point to $1 billion and our strong gross profit margin of 31, 5% in the third quarter of 2021.
Site, including a significant LIFO charge.
Our non-GAAP FIFO gross profit margin of $38.
<unk> percent in the third quarter of 2021 were a record and exceeded the prior quarter by 80 basis points in the prior year periods by 650 basis points.
Please refer to our earnings release, we provide a reconciliation of <unk> to non-GAAP FIFO gross profit margin for each reporting period.
We incurred LIFO expense of 262, and a half million dollars in the third quarter of 2021.
Paired with $200 million in the second quarter of 2021.
<unk> expense in effect reflects the cost of sales at current replacement costs and removes inventory gains from our result in an environment of rising metal costs, and Conversely, Ramos inventory losses from our Red dog in times of declining metal car.
Our guidance for Q3, 2021 assumed LIFO expense of $150 million based on our 600 million dollar annual estimate.
As a result of higher than anticipated costs.
Certain carbon and stainless steel products in the third quarter of 2021.
Revised our 2021 annual LIFO expense estimate from 600 $750 million.
Accordingly, we had a true up of our third quarter 2021 likely expand.
Incurring an incremental charge of $112 $5 million, which increased our total third quarter LIFO expense of $262 $5 million.
Based on our revised annual LIFO expense estimate.
We now project LIFO expense for the fourth quarter of 2021 can be $187 $5 million.
Or $2 $20 21 per share and $750 million or $8 73 per share for the full year.
Prior year.
True up to our actual annual LIFO expense calculation.
Just on our on hand inventory cost at the end of the year.
As of today, the LIFO reserve on our balance sheet at the end of this year is expected to be $865 $6 million based on a revised.
$50 million of annual LIFO expense estimate.
This provides $865 6 million available to benefit future period operating results.
Secondly, mitigating the impact of declining metal prices on our gross profit and pre tax income.
Now turning to our expenses.
Our third quarter SG&A expense increased from $43 $5 million or seven 7% compared with second quarter of 2021, an increase of $157 $6 million.
35, 1% compared with the prior year period.
The bulk of the sequential and prior year quarter increases are attributable to higher incentive based compensation, resulting from our record gross profit and pre tax income levels.
Additionally, inflation continue to contribute to increased variable expenses.
Notably for fuel and freight.
<unk> com.
Overall, our headcount increased slightly compared to both the second quarter of 2021 in the third quarter of 2020, but.
But it is nonetheless down approximately 11% from pre pandemic levels at the end of the third quarter of 2019.
As a reminder.
Jackson at least 65% of our total SG&A costs are people related.
Our pre tax income of $532 $6 million in the third quarter of 2021.
Highest in our company's history.
Pretax income margin or 13, 8% was also a record.
Our effective income tax rate for the third quarter of 2021 was 25, 5%.
Up from 22, 6% in the third quarter of 2020, mainly due to higher profitability.
We currently anticipate an effective income tax rate of 25, 5% for the <unk>.
Full year 2021.
We generated record quarterly earnings per share of $6 15 in the third quarter of 2021.
Compared with $5 eight in the second quarter of 2021.
And dollar on 51 cents in the third quarter of 2020, it's worth emphasizing again at our third quarter 2021 results were impacted by LIFO expense of $3.06 per share.
Turning now to our balance sheet and cash flow.
Despite significantly higher working capital needs attributable to ongoing rising metal costs, our operations continue to fuel our cash flow.
Our third quarter cash flow from operation.
It was $142 $2 million after servicing over $325 million and additional working capital requirements.
As of September 32021, our total debt outstanding was $1 six 6 billion with a net debt to EBITDA multiple of six times.
We had no borrowings outstanding on our one 5 billion revolving credit facility and had $638 $4 million of cash on hand, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy, including <unk>.
Lending our acquisition of Murphy's United I'm October 1st.
Our record 2021 Capex budget.
I'll now turn to our outlook.
We remain optimistic about business conditions in the current environment with solid recovering underlying demand.
Most of the key end markets we serve.
However, we expect factors impacting shipment levels in the third quarter of 2021, such as metal supply constrained labor shortages.
And other supply chain disruptions will continue to persist in the fourth quarter of 2021.
In addition.
We anticipate demand will be impacted by normal seasonal factors, including customer holiday related shut down and fewer shipping days in the fourth quarter compared to the third quarter.
As such we estimate tons sold will be down 5% to 8% in the fourth quarter compared to the third quarter of 2021.
We expect pricing for certain stainless and aluminum products the increase in the fourth quarter.
Offsetting the impact of declining prices for certain carbon steel products.
So.
If metal prices at the beginning of the fourth quarter are higher than the average for the third quarter.
Our average selling price per tons sold for the fourth quarter of 2021 will be up five 7%.
Based on these expectations. We currently anticipate non-GAAP earnings per diluted share in the range of $5 <unk> to five.
$5 15.
But the fourth quarter of 2021.
Clothing.
We are extremely pleased with our record third quarter operational and financial performance against the backdrop of challenging market dynamics.
Despite ongoing strong pricing and healthy demand trends by.
Our record financial performance and strong cash flow neighborhoods to continue allocating capital to simultaneously invest in the growth of our business and return value to our stockholders.
Thank you again to all of our colleagues in the field for your continued outstanding execution.
That concludes our prepared remarks, thank you for your attention and at this time I'd like to open the call up to questions operator.
Thank you, we'll now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like you will be a question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please the only poll for your questions.
Our first question comes from the line of Martin Engler with Seaport Research Partners. Please proceed with your question.
Okay.
Cool.
Hello Martin.
Inventory alliances breath across products and end markets can you touch on some of the long lead time products. What are you seeing some backlogs in end markets like construction or other leading indicator product lines are you kidding.
In the prepared remarks, you provided a fair amount of commentary.
Qualitatively on maybe how things are progressing into next year, but any sense of what this looks like on an overall demand environment, whether that's closed single digits or mid single digit growth.
[laughter], Yeah, Hi, Martin Carla.
So I think it's really hard for us to tell because of the diversity.
Of the products as we've talked about the end markets.
You know and also our business, where we focus on our small order sizes with next day delivery.
We don't have that much visibility, which is typical for us, but you know certainly we are seeing certain products like carbon flat rolled is becoming a little more available than it had been but it's still you know pretty difficult. There are a lot of different issues impacting the supply chain out there.
And so metal continues to be tight and most products that we sell lead times continue to be out there extending for some products decreasing for others.
But overall, we think underlying demand continues to be really strong and we expect that to help us and others as we go into 2022.
Thanks for the color there.
The product lines, where you're seeing it.
Our long dated are extending lead times and then.
Where are you seeing some detraction.
I mean for the most part we're seeing extended lead times.
For all the products as I mentioned carbon flat rolled is the one area, where it's improved a bit recently, but still longer than what we've seen historically.
This is Jim just one other comment.
So I got onto regardless of the.
The most important thing is our customers are busy.
They're continuing to display that was lead times pricing, we don't control that.
We just listen to our customers and.
Survives.
Okay.
That's helpful. If I took one last one there within the release you did note the chip shortage inhibiting auto production and activity there.
But do you get the sense that the semiconductor shortages or do you think demand across other end markets like heavy industrial equipments yellow goods green goods that sort of thing.
Yeah. So we are certainly seeing the semiconductor chip shortage impact more than just the automotive industry. I think you know automotive has had the most.
Coverage about it and made it in the most impacted but we're also seeing and you know other end markets that we sell into it's not just the semiconductor chips, where there've been some supply shortages in various different components are hard to get these days. So we're seeing.
Impacts across a lot of different customers of ours that again, the underlying demand is strong. So we view that as positive for future periods on shipments, even though were impacted at that right now.
Okay. Thank you for all the detail there congratulations on the result guidance in navigating the supply chain headwinds.
Thank you very much.
Thank you. Our next question comes from the line of Emily Chang with Goldman Sachs. Please proceed with your question.
Good morning, Jim color and also my first question is around sort of the forward looking guidance on shipments I know, there's usually a normal seasonal factor impacting the fourth quarter and you mentioned.
Fewer numbers of shipping days during the quarter, but can you perhaps a highlight.
What the percentage impact from the various different buckets of labor metal supply and supply chain disruptions.
Could be impacting.
Impacting that number and is there a way to think about which one of those three is sort of the gating huddle heal.
Yeah, Hi, Emily So I think you.
You know as we look into the fourth quarter. So first off in the third quarter, which we just reported on.
When we gave our guidance for the third quarter at the end of the second quarter. We thought that we were going to have less seasonal shutdowns in Q3 than typical that ended up not being the case and we did see kind of the normal seasonal.
Falloff in demand in Q3 versus Q2.
Even though we thought that we wouldn't see as much because of the strong underlying demand, but we think because of all the different factors out there labor.
Fly chain logistics et cetera that we did end up with customers doing their normal shutdowns. So our volume guidance going into Q4 does reflect.
Primarily just the normal seasonal trend up going down since we saw something more normal in Q3, that's what we're guiding to in Q4, you know we typically we know we have fewer shipping days because of certain holidays, where our locations are shut down, but we never really know is what our customer.
Mers are going to do.
And you know, sometimes it'll be last minute, they decided to shut down for a week or two weeks or they only do two days.
We can't quantify really the different elements that are impacting businesses are driving our customers' decisions. So our overall guidance was for a more typical Q4.
Got it that's a that's really helpful context, and maybe just a follow up around the fish acquisition. Congratulations on completing that one now.
It's interesting to note that they do have a plastics and a little bit more of a copper exposure than what reliance has in your existing portfolio can you maybe talk about your plans to grow that or how do you view those are sort of incremental businesses that you've now acquired.
Yes Emily.
Well first and foremost, it's a really cool confident where we're going.
We're glad we.
Got to bring them to the family of companies it's a.
It's a little different.
It's still.
Distribution.
Different products they their go to market differently in the.
As you well know we don't we don't buy good companies.
Change the name and screw them up in anyway, we like we like them for a reason.
We think this is a really good company.
We have opportunities to perhaps do a acquisitions, we'll see how that all works out but there.
They they complement our company because they they.
They serve the same markets, but they but they do it differently.
As an adjacent business before.
But nobody takes that is all that's all that's all we're going to do we're going to continue to look for really fun confidence.
And this.
This happens to be one of them.
And we hope that they'll grow and they have a great management team.
The the way they go to market is a little bit different and that's okay with the products they sell.
Into similar markets.
The rest of the Air Force.
Tell them too.
The products are different so you mentioned copper in plasma. They also do conduit in a couple of other things into the.
Not only just non res, but they also do residential and those type of things. So I mean that would be my comments were Carla Brunswick, she could probably.
Add to that.
And really we're just we're excited about.
The business, but also as Jim said being able to grow and we think you know where.
Where they operate is also a very fragmented industry. So we think there's a lot of potential opportunity for growth through acquisition, but also organically.
On their own expanding into more locations more products, but also.
Getting to know our other reliance companies and seeing how they can leverage each other and create some growth opportunities there, but it's early on right.
October 1st, but we're excited too to look for more opportunities to grow them.
Great I appreciate the color and looking forward to it.
Thank you. Our next question comes from the line of cities cause Nathan with Deutsche Bank. Please proceed with your question.
Yeah, Hi, good morning, Thanks for taking my questions. My first question is on the auto tolling business.
You mentioned that the tolling volume declined slightly in third quarter. I was just wondering if you could provide a bit more color in terms of whether your garden shipping volumes match. The actual automotive production date or do you sense. Some inventory building of intermediate thoughts by the Oems before it is being assembled into a finished weak.
Yeah, Hi, so th I'm, you know I don't know that we can answer that broadly because I think each of the.
The end use customers that we sell into from our tolling businesses with a good portion of that being automotive you know, they're they've each been impacted a little differently. They have taken different approaches so.
Certainly when they have.
Cut down production that's impacted us.
Little bit, but you know what.
We're generally on the more popular.
Platforms of the different vehicles that they sell a lot of the trucks and light body Suvs and so we feel that its been a little less of an impact we will say that in the U S.
The impact has been less than what we've seen in Mexico in Mexico. Our tolling operations are servicing more of the small sedans and we've seen a bit more of an impact there from the chip shortage, but they seem to be working through it you know fairly well.
For certain of those end use customers, we have a little inventory built up others, we don't.
So it's hard to say broad base plus our our tolling companies are seeing a lot of opportunities not just in automotive, but also in our in other end markets, where there's very strong demand that they've been able to fill some of the you know.
Lost production so to speak.
From automotive with other opportunities so a minimal impact on us we think in the U S that were you know.
But the outlook is improving that we will have fewer shutdowns going forward.
Okay. Thanks for the color.
My next question is on the SG&A, which increased 8% quarter on quarter versus a 5% decline in shipments.
Is there any way you can buy for good to increase between a higher incentive base comp and our inflationary pressures.
Yeah, Hi, Felicia this is Arthur question so.
Half of that increase we said that a majority of it is the incentive based comp.
Attributable to the increase in.
Pre tax income level.
Gross profit.
And then when you look at the remainder of a lot of that is just different factors you have some.
Slight increase in head count.
Yes.
Some inflationary pressures on.
Shipping and packaging costs.
Probably.
A portion of that remainder and then perhaps you have some additional.
Extra expense from higher.
Elevation.
Benefit plans just people starting to go into one of the doctors so I.
I think overall the.
The sequential increase I think it's fair to say predominantly.
Identive com traffic and as we noted in our commentary.
Head count levels have stayed relatively flat.
Yes.
12 to 18.
18 months.
We're still about 10% to 11% below pre pandemic levels.
Okay. Thank you and congrats on a big bucket.
Thank you.
Thank you. Our next question comes from the line of Phil Gibbs with Keybanc capital markets. Please proceed with your question.
Hey, good morning.
Oh no.
I'm, a tolling side just in automotive specifically.
Are you anticipating that the fourth quarter for the auto segment in general is going to stabilize or is the fourth quarter in your mind going to be.
Kind of Alaska.
The downdraft in the supply chain.
Yeah, Hi, Phil So fourth quarter, we do expect the normal seasonal impact, whereas they'll be shut down.
I'll, let Dave.
You know, we're anticipating some continued disruption from the semiconductor chip shortage for the fourth quarter, but we believe in the U S. That's gonna start side as we go into 2022.
Mexico, we're not sure yet.
In that regard.
Yeah.
Thanks, Carla and on the new plants.
And Kentucky, and Texas, where do those where do those stand.
Construction and completion and when do you think you can start getting some.
Some earning stream from those.
Yeah. Good question. So I'm, we're pleased with both of them. The one in Kentucky is up and operational.
And doing quite well the one in Texas is coming along.
The photos.
Oh My God I.
Literally can't tell you when it's going to be up and operational but where we're on our game and so are there in front of us.
Nothing sort of cranking, we won't to Carla.
Oh I'm sure Yeah, I mean, Texas, we've been able to start to process. Some that'll down there, but certainly as you know we're on campus with one of our key suppliers.
As they ramp up.
But where we're ready and we're processing.
Small amount of volume there currently.
Okay. That's helpful and then I missed the first part of the call but.
In terms of Murphy fish.
Is there anything that you can provide us in terms of what would you expect either the you know the EBITDA or the or the earnings accretion to be from from this obviously.
In terms of revenue, but it's a it's a different business and it's obviously when do you want to get your arms around so.
Just curious in terms of thoughts on that as we try to model profit expectations.
Well I mean, we certainly expect it to be good or are we done it.
It is a bit of a different model. They are not doing the value add processing to the extent that we do and a lot of our operations but.
<unk>.
As is typical we haven't really disclosed that but.
You know it's it's.
It's very profitable.
Strong EBITDA they sell a lot of metal products that are at high price levels.
Now the same as our businesses. So we're seeing really strong earnings from them throughout this year and we expect that too to.
To continue but.
You know you grab to make unfortunately, you have to make your own assumptions right now on their.
Contribution, but still they will add to our Mojo.
Yeah.
Got to love that.
Ever have too much.
Right on.
Yeah.
Thank you once again as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Alex Hacking with Citi. Please proceed with your question.
Yeah, good morning, and thanks for the question.
And in terms of metal shortage is is that.
It's still predominantly concentrated in carbon flat rolled.
Or are you starting to see that creep into some of the other categories as well thanks.
Alex Good question and I know, it's all products.
He has got the same issues its going to be reliance because we have this model that we've been.
We have been improving for decades and literally have added two recently.
When you when you support the domestic folks like we have the support you.
Basically every product currently.
No.
Yeah, not really as we said you know carbon flat rolled is the one area, where our lead times came in just a little bit recently, but most of the other products are extended on lead times are still tight supply.
A lot going on in the aluminum world now, even if carbon starts to loosen up a little bit stainless is still very very tight and has been and on the aluminum side.
Some of the issues going on globally right now, we're expecting more tightness of price increases there as well.
Okay. Thanks, and then on the value add I mean, I think if you know.
As discussed before and I assume that's just.
Still accurate that you know the current environment, It's probably you know conducive to your customers looking for alliance to do more on the value outside you know given all the issues with labor.
Labor and everything.
Are you looking to accelerate investments in value add notes.
To meet the.
Needs of your customers. Thanks.
Yeah. Good question answers, yes or no.
But exposure this year of $310 million, we'd love to spend it all but unfortunately because of it.
Interruptions in the supply chain on equipment.
It's hard.
They know it all it all revolves around our customers asking us to do more.
They continue to ask us to do more and we're going to be there for them will obviously have a lot of.
Dry powder, if you will cash and where you are that that that's one of our buckets, where we're in where we spend money. That's a it's an internal growth.
Strategy and it's worked so far and we're going to we're going to keep on it.
Pure Carl or anything else.
Yeah, So no real world.
So far so good.
So what changes now right.
Yeah.
Yeah, Thanks, and congrats and good luck in this you know.
<unk> operating environment. Thanks.
Thank you.
Thank you. Our next question comes from the line of Timna Tanners with Wolfe Research. Please proceed with your question.
Hey, good morning, everyone hope you're well.
So I don't know did I hear from you.
How do you I haven't done it seems like some big announcements and I just wanted to delve into a little bit more for sure moving to Arizona from L. A and second I think youre changing your name to reliance steel and aluminum and plastic or maybe something shorter but.
I just wanted to get how big a deal is this is this more fish departure I mean, what's the addressable market. If you do start.
Start to think about acquisitions more broadly I ask of course, because you have the high quality problem of being relatively under Levered and just wanted a little bit more about your thought process about potential further acquisitions outside of your traditional metals universe.
Oh cool.
Great question on the first part, but it's not really a big deal.
Hmm.
Nobody's moving our way.
Society and learned a lot through the pandemic.
How do you retain and attract talent.
And we decided that being flexible is the best thing to do and we researched this and they just didn't take it lightly but a lot of work trying to figure out where to move it just seemed like the Scottsdale.
The best place to do it no Murphy.
And talk about Mercury is all I can tell you some of you know.
Our company well, we don't bet, we don't buy bad complements we bought a really good company I say, it's a cool comes whenever it goes a little bit different.
But we think it's a good platform for us to too.
To add to that and kind of do the adjacent business.
And I would just add you know timna.
Mirth this United they had been two separate companies they actually merged together through acquisitions by their prior owner in 2019, they were able to consolidate.
Philippines and gain efficiencies, while maintaining their market share.
So it was really positive for them to do that in that space. We're aware of other companies that are out there as I mentioned earlier, it's still fairly fragmented they were one of the larger companies.
I think the largest within their space after the acquisition and so similar to what we've done at reliance for many many years, where we find good companies and bring them into the family. We think there is opportunity to do that for versus United Ann.
And their space and that we will see opportunities for growth. There also organically you know we've we've got the ability to invest in them as lockdown either opened more.
Locations to get a broader geographic reach or to invest in equipment or other things that they may need to.
To fuel their growth.
So if I were to conclude that this is a signal that reliance is looking beyond like I said its traditional metals universe for you know broader industrial distribution opportunities would that be a fair conclusion.
That's part of it that's part of the plan, but we're just look a good governance. This just happens to be a really good company, but there is plenty of really fine companies and traditional.
Metals.
The distribution value routers, there's plenty of those but this one does.
Hum came up and that's a good company and they're in a distribution both awesome.
And we've made a practice of not going upstream and competing with the folks who actually make.
It will.
But oh.
Our space, we're going to keep look on this this just happens to be a good company and when you when you buy one good company in the space.
Our experience.
Experience has been you get opportunities to buy more and we'll just we'll just keep looking at a really good company.
Okay I'll leave it there thank you.
Thanks Timna.
Thank you we have reached the end of our question and answer session I would like to turn the call back over to Mr. Jim Hoffman for any closing remarks.
Yeah, Hey, thanks, everybody for your time and attention today before I wrap up I'd like to take a moment to burn all of our reliance colleagues for their continued hard work and daily dedication to promote health.
Safety and wellbeing of our company our record setting financial results literally there.
Not possible with all of you all sort of back end.
And I.
I'm just inspired by that.
Performance over the last I would like to announce we'll be participating virtually in the Goldman Sachs Global metals and mining conference on November 18th.
Love to see you face to face, but it's not gonna happen virtually but we'll look forward to seeing you on the screen and thank you very much for your support and your commitment to reliance.
Please.
That's very helpful.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
[music].