Q1 2023 Reliance Steel & Aluminum Co Earnings Call
Greetings and welcome to the reliance steel and aluminium company first quarter 2023 earnings 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 Kim Orlando with idle Investor Relations. Please go ahead.
Thank you operator, good morning, and thanks to all of you for joining our conference call to discuss Reliance's first quarter 2023 financial results I am joined by Karla Lewis, President and Chief Executive Officer.
<unk> Cook Executive Vice President and Chief operating Officer, and Arthur Xiaomi, and senior Vice President Chief Financial Officer.
A recording of this call will be posted on the investors section of our website at Investor Day, Our S E C 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 inflation geopolitics and the COVID-19 pandemic and related.
Conditions on our future operations, which may not be under the company's control and may cause the actual results performance or achievement of the company to be materially different from the results performance or other expectations implied by these forward looking statements.
These factors include but are not limited to those factors disclosed in the company's annual report on Form 10-K for the year ended December 31, 2022 under the caption risk factors disclosure in our press release this morning, and other humans reliance files or furnishes with the secure.
<unk> and Exchange Commission.
The press release and the information on this call speak only as of today's date and the company disclaims any duty to update the information provided therein inherent I will now turn the call over to Karla Lewis President and CEO of reliance.
Good morning, everyone and thank you all for joining us today to discuss our first quarter 2023 financial results I'll begin with an overview of our performance and capital allocation strategy.
Dave will then speak to our operating results and demand trends by end market and Arthur will conclude with a review of our financial results and outlook for the second quarter of 2023.
Beginning with our first quarter performance, we started the year off strong as our highly diversified business model continued to yield favorable results in an uncertain business environment, our first quarter net sales of $3 $97 billion increased approximately 10% from the fourth.
Quarter of 2022.
Our sales benefited from solid demand and the vast majority of our end markets with our tons sold up 17, 7% from the fourth quarter of 2022, which were partially offset by a lower average selling price. This.
This was the highest sequential increase from the fourth quarter, we've seen in our tons sold in the last decade.
Our strong volumes.
Which benefited from our investments in organic growth.
Our robust gross profit margin of 39%.
And disciplined expense control helped drive pre tax income of $508 $5 million and diluted earnings per share of $6.43 well ahead of our expectations, our strong profitability along with effective working capital management enabled.
To generate significant first quarter operating cash flow of $384 $6 million.
Turning to capital allocation, our consistent cash generation continues to fuel our strategy of investing in growth activities and returning capital to our stockholders.
Our capital expenditure budget for the full year 2023 remains a record $500 million.
With spend of $102 $9 million in the first quarter, and then expected total cash outlay of approximately $400 million to $450 million this year.
We expect approximately two thirds of this budget will be invested in growth projects.
Up from roughly 50% historically as we continue to invest in various facility upgrades efficiencies and expansion into new markets our.
Our investments include new cutting edge equipment to expand our value added processing capabilities to further bolster our market position and margin profile as well as investments to provide safer working environment for our employees.
While we did not complete any acquisitions during the first quarter. The pipeline remains healthy we continue to evaluate a wide variety of prospective opportunities and remain well positioned to pursue those that meet our disciplined criteria for high quality growth.
Concurrent with our growth initiatives, we returned $109 million to our stockholders in the first quarter through a combination of dividends and share repurchases.
Since 2018, we've allocated over $2 billion of capital towards organic growth and acquisitions and nearly $2 $8 billion towards stockholder returns in the form of dividends and share repurchases.
In summary, we are very pleased with our first quarter performance, both operationally and financially we continued to execute our strategy in a dynamic environment with metal pricing volatility ongoing inflationary headwinds recessionary concerns supply chain disruptions and <unk>.
Labor shortages Nevertheless, our managers in the field continued to do an excellent job upholding our superior levels of service and providing increasing levels of value to our customers.
We maintain our belief that reliance remains very well positioned to capitalize on opportunities, resulting from the infrastructure Bill the chipset and the inflation reduction act in an environment with relatively higher metal pricing versus historical levels.
Thank you to our extraordinary team at reliance for your commitment to working safely and successfully executing our model.
You all for your time today I'll now turn the call over to Steve who will review, our first quarter operating results and demand trends.
Thanks, Carla and good morning, everyone. I'd also like to express my gratitude toward dedicated team at reliance for their outstanding operational execution and ongoing commitment to safety.
Now turn to our first quarter demand and pricing trends.
Our tons sold increased 17, 7% compared to the fourth quarter of 2022 for passing our expectations of up 11% to 13%.
Lastly, exceeding the typical seasonal recovery compared to the prior year period, our tons sold were up seven 2% higher than the service center industry increase of five 5% as reported by the MSCI.
<unk> was supported by our organic growth activities, we've invested in over the course of the past several years, along with our end market.
Diversification broad value added processing capabilities and ability to service quick turnaround orders Jamie.
Strength in the nonresidential construction general manufacturing and aerospace end markets further contributed to our strong shipment levels in the quarter. Additionally.
Rising metal cost trends standbys, many customers to reenter the market ahead of further price increases, which led to strengthened demand for our carbon steel flat rolled products.
Shipments for the other carbon steel products, we sell also increased both sequentially and year over year.
Our first quarter average selling price per ton.
Out of 2000, and $623 declined six 3% compared to the fourth quarter of 2022 exceeding our expected decrease of 3% to 5% largely due to shifts in product mix.
Relative to the fourth quarter, the increase in carbon steel product shipments, which have lower average selling price in stainless steel and aluminum products contribute to a shift in our product mix, resulting in a lower realized sales price per ton sold.
Well, our overall quarterly average selling price per ton sold decreased.
For most products, we sell stabilize during the first quarter.
It's also important to note that announced carbon steel flat rolled price increases were only partially realized during the first quarter with more to come in the second quarter Arthur will cover our second quarter of 2023 outlook in more detail.
On a non-GAAP FIFO basis, which is how we monitor our day to day operating performance. Our gross profit margin increased by 190 basis points to 35% compared to the prior quarter due to the due to better alignment of inventory costs on hand with replacement costs.
I'll now turn to a high level overview of the trends we saw within our key end markets.
<unk> shipments improved both year over year and quarter over quarter and nearly every end market with continued strength in non res construction.
General manufacturing.
Auto through our tolling operations aerospace and energy.
Sales to the semiconductor industry decline sequentially and remained at an elevated levels compared to the first quarter of 2022.
Our long term outlook for this market remains positive and we will continue to make investments to increase reliance's capacity and semiconductor space to support the significant expansion of semiconductor fabrication underway in the United States.
Separately, we will also continue to make investments in our businesses that sell into infrastructure and clean energy to support anticipated higher activity in these areas. Please refer to our earnings release for additional commentary on our end markets.
<unk>, we remain confident underlying demand will remain healthy across the majority of the end markets. We serve in the second quarter of 2023.
I'll now turn the call over to Arthur to review, our financial results and outlook.
Thanks, Steve Good morning, everyone and thank you for joining us today.
It's Carla highlighted ongoing strong demand contributed to non-GAAP earnings per share of $6 37.
Well ahead of our guidance of $5 40 to $5 60 per share.
The stronger than anticipated 17, 7% sequential increase in our tons sold also exceeded our guidance and accounted for the majority of the earnings per share outperformance.
While our overall quarterly average selling price per ton declined from the previous quarter due to the entry point into Q1 being lower than the prior quarter average and a shift in our product mix.
Selling prices remained relatively stable throughout the first quarter.
In an environment of relatively flat pricing for the vast majority of the products we sell.
We improved our transactional or a FIFO gross profit margins, that's without the impact of LIFO adjustments from the fourth quarter of 2022, as our inventory turn rates accelerated and costs on hand continue to better align with lower replacement costs.
Shortly we will realize a significant amount of operating leverage on the incremental tons. We shipped these.
These factors collectively contributed to the better than expected results for the first quarter.
We recorded LIFO income of $15 million in the first quarter of 2023 compared to $99 $1 million of LIFO income in the fourth quarter of 2022, and LIFO expense of 37, and a half million dollars in the first quarter of 2022.
Our current estimate of $60 million of LIFO income for fiscal 2023 remains unchanged from our previous outlook.
As a result, we currently expect to record $15 million of LIFO income in the second quarter of 2023.
Consistent with historical practice.
We will update our expectations quarterly to account for actual inventory cost and metal pricing trends.
As of March 31, 2023, the LIFO reserve on our balance sheet was about $729 million.
Which will generate LIFO income and benefit future period operating results to mitigate the impact of potential declines in metal prices.
Moving onto expenses.
Our first quarter, non-GAAP , SG&A expenses increased $43 2 million or 7%.
Compared to the fourth quarter of 2022, due primarily to higher incentive compensation associated with higher profitability as well as higher variable warehousing and delivery expenses associated with higher tons shipped.
On a year over year basis.
non-GAAP SG&A expenses increased $43 3 million or seven 1%, primarily due to incremental variable cost associated with higher tons shipped and inflationary wage adjustments, which were partially offset by lower incentive based compensation.
Hosting from lower FIFO profitability.
<unk> cash flow.
Despite about $100 million of working capital investments in the first quarter, we generated cash flow from operations of $384 6 million supported by our strong earnings.
Our inventory turn rate based on tons improved in the first quarter of 2023 to four nine times.
Or two four months on hand up from four four times or two seven months on hand for all of 2022 and exceeding our companywide current goal of four seven times.
Our days sales outstanding was approximately 40 days in line, where our sort of historical range of 39 to 43 days.
Our operating cash flow funded $102 $9 million of record quarterly capital expenditures and the return of $109 million to our stockholders in the form of $62 million of cash dividends and $38 $9 million of share repurchases.
As of March 31, 2023, approximately $641 8 million remained available on our $1 billion share repurchase authorization.
I'll now turn to our second quarter outlook.
While we expect underlying demand will remain healthy in the second quarter of 2023 weeks.
We expect our tons sold will be flat to down 2% in the second quarter of 2023 compared to the first quarter of 2023 due.
Due to one less shipping day in the second quarter of 2003, and the absence of the demand pull forward experienced in the first quarter of 2023.
We anticipate overall pricing to remain fairly stable with slight upside from recently announced carbon steel price increases.
Accordingly, we estimate our average selling price per ton sold in the second quarter of 2023 will be flat to up 2% compared to the first quarter of 2023.
Just on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $6 40 to $6 60.
For the second quarter of 2023.
Closing, we're very pleased with our solid start to the year with strong shipment levels earnings and cash flow. Despite continued macroeconomic uncertainty.
This concludes our prepared remarks, thank you for your attention.
At this time, we'd like to open the call up to questions operator.
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Sure.
Our first question comes from Emily Chang with Goldman Sachs. Please go ahead.
Good morning call author and Steve. Thanks for taking my question I wanted to ask around the shipment levels in <unk> and then the outlook for two Q. So I know you mentioned that there was some demand pull forward in the fourth quarter, Bob could you give us a sense as to if there wasn't this pull forward what would shipments have been and then as you look.
Into the second quarter, if there's no demand pull forward that are you getting a sense that that's a sign that there's any indications of pops demand being pushed out given the macro uncertainty.
Hi, Emily Thanks for joining the call today, so on the demand side.
We're very pleasantly surprised a bit with the strength of the demand pull forward or sorry of our shipments during the first quarter. It was higher than our typical seasonality bounce back part of that you know we mentioned that.
Related to some of our organic growth activities. So we had a couple of our newer plants that are on campus with some of our good mill.
The mill partners and with their their ramp ups. We also benefited from a more.
More shipments out of those locations that contributed but even without that and the pull forward, we had guided to a slightly stronger than normal seasonal bounce back.
Really because our customers continue to be busy there.
There is still struggling to find the labor they need which extends some of the strength and in their businesses for continued.
Shipments so.
We're pleased with what we see Q2 guidance really we've got one less shipping day.
So that's the majority of the guide where typically our Q1 and Q2 are generally pretty flat historically and we had good strong shipments in Q1, and we're looking for something similar to that in Q2 minus the one day and a little bit.
Of.
Demand pull forward, we had with the dynamics on the carbon steel flat rolled pricing in the quarter.
Great that's very clear.
A second question just around the end markets then have there been any has there been anything that has been impacted by some of the credit tightening that we're seeing.
And have there been any signs of project delays or cancellations. It's been good to see some inflow from the infrastructure side, but curious if there's anything that youre seeing a little weakness there.
Yes.
Certainly understand that people have concerns and there's speculation that we're seeing that we haven't seen it yet.
Not saying that we might not see some of it later in the year, but going into Q2, our customers have strong backlogs and projects are continuing.
Thank you.
Thanks Emily.
Next question comes from Timna Tanners with Wolfe Research. Please go ahead.
Yeah, Hey, good morning, guys.
Hey, Tim.
I wanted to ask.
And last question, we've heard from some of the smaller service centers that theyre struggling with higher interest rates. So.
Could you be perhaps gaining share if some of your competitors are having a harder time accessing capital and because it doesn't sound like that's an issue for you. So just wondering about that competitive dynamic.
Yeah. So.
So we.
Are not aware of that we have heard him you know.
Some comments by people that some of the service centers.
<unk> struggling.
For us that is an environment, where it is typically favorable for us and where our customers still seem healthy as well, but if they're trying to manage their credit limits.
More tightly that's usually favorable for us because of our smaller we're able to service smaller order sizes on AR.
Frequent basis. So it does create a favorable environment for us and we do pick up some market share sometimes in and those types of environments.
Okay. That's helpful. Alongside your mix, you mentioned that higher sheet prices and.
There's also been some big Plaid increases I know your decent in plate, but on the flip side for long products on the carbon side you know it was scrapped retreating a bit here that could be an offset I mean is there anything I'm missing in terms of the moving parts because I have flat to up 2% pricing number.
It seems to temper some of that enthusiasm we've seen on the fire outside so any any other color on that the components of that pricing guidance would be great.
Hey, Tim Thanks, Steve I'd have to say, there's not really much to report there.
Our long product business has been steady prices have been steady.
<unk> has been.
Strong and we've not seen a pullback in demand or pricing.
And our mix to Tim can can also impact that semi conductor.
We're seeing a little weakness there right now.
Our pricing on those products is pretty high compared to a lot of the other products, including like carbon flat rolled or plate and so the product mix can make a bit of a difference as well.
So that would be offsetting some of that sharp increases in flat rolled second quarter over first quarter is what you're saying.
Yes.
We saw some of it in the first quarter and would expect that to continue in the second quarter yeah.
Okay. Thanks, and then for my final question I'm going to take a stab at life out here I I was kind of surprised with the lack of change in 60 million annual guidance.
Given the stronger price environment at least of late.
Can you walk us through I mean is that really a function of year over year lower prices does that reflect any thoughts on inventory year over year. If you could just.
Talk us through why that didn't change despite some of the more positive dynamics, you've laid out and because I would've expected that could've converted to LIFO expense.
Yes sure Timna this is Arthur.
So from our perspective, I mean, you have to look at our product mix as well.
No.
Karla I just alluded to that earlier carbon flat rolled combined.
As a percentage of sales in the first quarter less than 20%.
<unk>.
You have certainly some prices on the carbon side.
Plate and flat rolled that have come up but theres some headwinds on the nonferrous side. So all in all there wasn't anything sort of story changing so to speak from an annual cost forecast perspective, and also when you step back and you look at 60 million LIFO.
Nearly $3 billion worth of inventories and that's this FIFO basis, it's a relatively small number so essentially what we're saying is kind of relative relatively flat pricing for the year.
At least for costs on hand from the beginning of the year.
End of the year.
Okay. That's helpful. I appreciate it thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Phil Gibbs Keybanc capital markets. Please go ahead.
Thanks, so much good morning.
Good morning, Joe.
Hey, guys hear me okay.
Yes, yes.
Alright perfect.
It was pretty strong comments on aerospace.
The release.
Can you give us some color in terms of what you all are thinking for the balance of the year because of the rebound in Q1.
Rounded.
Long.
Yeah, Hi, Phil so.
We've been seeing continued improvement in our aerospace business.
2022, and and then coming into the first quarter of this year.
Commercial aerospace build rates have been improving and so we've benefited from that that's probably commercial's, probably about half of our aerospace exposure and then you know space private jet.
Defense have continued at strong levels. So overall, we've been really pleased with what we've seen and our customers continue to be busy and we expect that to continue throughout the year.
And then I may have missed it because I did miss a portion of the script, but.
Your capex expectations for the year on a cash basis, I think Q1, you did a little over $100 million, but what's.
The expectation for the for the full year there.
Yeah, Hey, Phil So we do still have some catch up.
From our spend over the last year or two because of extended lead times a lot of the equipment manufacturers and just constructing new buildings and things. So we estimate that we'll spend cash of about $400 million to $450 million in 2023.
Three we did have one.
Hundreds of million dollars as you mentioned spend in the first quarter. We are seeing some of those lead times start to come in a little bit. So we're anticipating some.
Some improvement in that area as we progress through the year.
Thank you and then just lastly.
Timna asked the question on share gains I think you did intimated that there were some of that.
In your first quarter in your in your release.
Maybe maybe talk a little bit about that.
More.
And is it something that could be meaningful to you all this year in the sense that.
Is it.
Couple of hundred basis points more than that as a loss will not.
But anything that you could provide there would be helpful. Thanks a lot.
Yes.
We mentioned that we do have a couple of.
New facilities some of our organic growth that had been ramping and so we're seeing some higher shipments.
Based on that activity.
Our tons shipped were higher than the MSCI industry average.
So that would imply that we are taking a little share.
Got.
We've got great people out there throughout our organization, who are hungry and they like to sell metal and.
We may be taking some share we don't have a specific plan, we haven't quantified anything but we've got the capability to two.
To ship more tons if.
If we get reasonable profits on it.
Thanks, So much have a great day.
Thanks, Phil.
Next question comes from Martin Engler Seaport Research. Please go ahead.
Good morning, everyone.
Good morning or anymore.
Wanted to get your thoughts on you spoke about underlying demand looking into Q2 here 18 path.
Do you have any thoughts or expectations in the back half of the.
Yeah.
And maybe how that compares to <unk>.
Prior year any color commentary maybe from.
Our customer base.
Yes.
Yeah, Hi, Martin.
Our customers I don't know, if we look that far out 40% of our orders the customer calls today, we ship tomorrow.
Sentiment from our customers that they continue to be busy.
They're not getting.
All as much labor that their workforces are down a bit so they still have orders that they're working to to fulfill beyond Q2.
We're not sure there are a lot of uncertainties out there, we do think though and we mentioned in our comments.
You've got the combination of of re shoring of manufacturing business, you've got the infrastructure Bill which.
Sounds like a lot of the mills are starting to see some activity from that we typically trail the mills a bit but we think that's a positive indicator for us along with activity on the inflation reduction Act and the chip Zac.
We're expanding some of our capacity to be able to meet.
Meet that demand as we just commented aerospace has been strong our tool processing for the automotive business has been strong.
So no quantified.
Outlook for the second half, but we feel good about 2023.
Okay.
And I guess kind of along the same lines and you did touch on this.
From <unk>.
Thanks, Bob.
Your line, if you want to hear.
Any other color on home buying activity among your customer base, when you think across different models products.
Is today versus how it transpired in Q.
Any differences or divergent trends why do you think about that activity carbon versus other models.
Yeah.
Yes Martin.
There was the pricing dynamic for carbon flat rolled during Q1 with the price increases there were quite.
Quite a few increases are pretty significant.
As mentioned there have been some fleet increases. So we think some customers may have bought ahead a bit.
So we commented on on that as a factor in Q1.
But it seems like prices are stabilizing a bit now and we expect kind of a normal buying patterns in the second quarter.
Any indication.
Uh-huh from.
Restock to a destocking across the supply chain or right.
I guess, what you're saying.
On.
No.
That is more so yes.
Some pre buying in maybe some restocking, but just kind of stabilize that Brian .
Yeah.
Martin we don't really talk.
Don't run our business to restock or destock, we run our business to focus on our customers.
Needs and as I mentioned, a few minutes ago, a lot of our businesses next day type delivery. So.
Our inventories are in very good shape.
And we think throughout the industry inventories are in pretty good shape. So we don't anticipate any big changes in buying patterns as we move into the next quarter for us or for our customers or competitors.
Yeah.
Thanks.
One more any.
Additional color on the semiconductor weakness machine yeah.
Yes, I think we're seeing a bit shipments are still strong levels were still higher than year ago levels.
The industry had been at record levels and Theres been a little bit of a pullback. We think there was maybe a little bit of a glut us from customers, maybe had more inventory than they needed for the.
Slowdown that has been seen and that's really for us.
Related to selling metal into the equipment manufacturers feeding into the semiconductor industry from a semiconductor kind of infrastructure so to speak which is the other part of our semiconductor business with all the spending that's been announced in the U S. We see.
That business continuing to be steady to stronger. So we think it's just a temporary situation long term both from the expansion of the chip making capabilities in the U S and just the the demand for chips, we think is going to be very strong.
On a long term basis.
Okay. Appreciate all the detail and congratulations on results.
Thanks Martin.
It seems there are no further questions I would like to turn the floor back over to Karla Lewis for closing comments.
Thank you and thanks again to all of you for your time and attention today before we close out the call I'd like to remind everyone that we'll be in Boston in late may attending the Keybanc industrials and basic materials conference in Chicago in mid June presenting at the Wells Fargo Industrials Conference.
We hope to see many of you there and thank you again to our team at reliance for your continued strong performance. So far in 2023 and thank you to all of you for your continued support.
Of and commitment to reliance thank you.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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Okay.
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