Q2 2023 Reliance Steel & Aluminum Co Earnings Call
Greetings and welcome to reliance steel and aluminum company second quarter 2023 earnings call.
At this time all participants are in a listen only mode.
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 Idaho Investor Relations. Thank you you may begin.
Operator.
And thanks to all of you for joining our conference call to discuss our alliances second quarter 2023 financial results.
I am joined by Karla Lewis, President and Chief Executive Officer, Steve.
He'd Cook Executive Vice President and Chief operating Officer and.
Arthur Johnson, Senior Vice President and Chief Financial Officer.
Recording of this call will be posted on the investors section of our website at Investor <unk> R. S AC dotcom.
Please read the forward looking statement disclosures included in our earnings release issued this morning and note that it applies to all statements made during this teleconference.
A reconciliation of the adjusted numbers are included in the non-GAAP reconciliation of our earnings release.
I will now turn the call over to Karla Lewis President and CEO of reliance.
Good morning, everyone and thank you for joining us today to discuss our second quarter 2023 financial results.
Reliance is business model is designed to provide resilient performance throughout economic cycles, including both pricing and end market demand fluctuations present in the metals industry unique facets of our business model.
I did by diversification.
The order sizes with delivery and increased value added processing combined with strong execution by our former alliance and support our ability to deliver consistent profitable results.
Overall activity at reliance has remained healthy as evidenced by solid volume growth year over year. We are excited by the continued onshoring and infrastructure spend activities that are creating new opportunities for us.
Turning to our results our second quarter net sales of $3 $88 billion declined by two 1% from the first quarter of 2023 with our tons sold down slightly more than anticipated and relatively flat selling prices that remain elevated.
Good by historical standards.
Overall customer activity and most of the end markets, we serve remain healthy with solid underlying demand and customer activity levels driven in part by our investments in organic growth. We continue to focus on growing the business organically and through acquisition.
While maintaining our pricing and margin discipline as a result, we delivered diluted earnings per share of $6.49, which is within our expected range.
Our strong profitability along with effective working capital management produced significant operating cash flow of $295 $1 million in the second quarter.
Investing for growth remains our top capital allocation priority with approximately $154 $3 million invested in both capital expenditures and M&A in the second quarter.
We increased our capital expenditure budget for the full year 2023 from $500 million to a record $520 million approximately two thirds of our Capex budget is focused on growth projects, including investments in advanced value added processing.
<unk> facility.
It upgrades to enhance safety inefficiencies and expansion into new markets.
Expected total cash outlay for capital expenditures in 2023 is approximately $425 million to $475 million.
We completed the acquisition of <unk>.
Other than steel supply L. L C.
They first increasing the total number of businesses, we have acquired since our 1994 ICL to 72.
Southern steel is a highly regarded 60 plus year old metal service Center in Memphis, Tennessee.
Expanding our geographic reach and the southern U S and extends our value added processing services.
Our M&A pipeline remains healthy and we continue to evaluate various prospective opportunities are.
Our strong balance sheet and cash generation positions us well to pursue acquisitions that meet our disciplined criteria for high quality growth.
Our cash flow also continues to fuel our strategy of returning capital to our stockholders during the second quarter, we returned $132 $5 million to our stockholders through dividends and share repurchases.
Since 2018, we have invested nearly $2 $2 billion in organic growth and acquisitions and returned $2 $9 billion to our stockholders through dividends and share repurchases.
In summary, we are very pleased with the continued strong operating performance of our entire reliance team to execute reliance's, consistent and resilient strategy on a day to day basis operating safely and producing profitable results are all operating.
Environment.
Importantly, we remain in a position of strength to continue investing in and profitably growing our company, including new opportunities and include spending from the infrastructure Bill the chips that inflation reduction act and onshoring activities.
Thank you all for your time today I'll now turn the call over to Steve who will review, our second quarter demand and pricing trends.
Thank you Carla and good morning, everyone. I'd also like to thank the entire <unk> team for their outstanding individual and collective efforts and unwavering commitment to safety I'll now turn to our second quarter demand and pricing trends.
Our tons sold decreased two 4% compared to the first quarter of 2023 predominantly due to lower carbon flat rolled shipments following the first quarter demand pull forward impact from rising prices.
Despite a sequential decline in volume or Q2 tons sold were up one 9% from the prior year and up four 5% from 2022 on a year to date basis.
This reflects solid underlying demand in key markets, including nonresidential construction.
Space and certain general manufacturing sectors.
With contribution from our organic growth activities, enabling outperformance a broader service center shipment levels across the majority of our products are.
Our second quarter average selling price per ton sold up 2000, and $626 was relatively flat compared to the first quarter of 2023 and in line with our expected range of flat to up 2% as anticipated carbon flat rolled product price increases were offset by downturn in stainless and aluminum come on.
Product prices.
I'll now turn to a high level overview of the trends we saw within our products in key end markets.
Our three largest product groups carbon steel tubing.
<unk> instructions represented about one third of our second quarter sales in all of these products experienced stable or improved shipments compared to the first quarter of 2023 due to strengthen in nonresidential construction market we.
We continue to believe new public infrastructure projects under the infrastructure Bill and various other federal and state programs run continued support for nonresidential construction.
The structure of demand in the medium to long term.
A little bit on the stainless products and also represented just over 30% of our total second quarter sales the aluminum stainless aerospace products comprising approximately 9%.
Common alloy aluminum and stainless shipments and pricing fell in the second quarter aerospace product demand and pricing remains robust.
We primarily service the automotive market through our toll processing operations, which as a reminder are not reflected in our console.
Our tolling business in the second quarter of 2023 improved both year over year and sequentially on increased processing demand from the automotive market within the general manufacturing market. We saw a diverse set of products to a diverse group of sectors shipment.
Shipments fell sequentially, partly due to the carbon flat rolled demand pull forward impact in the first quarter of 2023, but nevertheless, we're up from the second quarter of 2022, while sales to the semiconductor industry declined both sequentially and year over year or long term outlook for this market remains positive as a result of the chipset and active re shoring.
We continue to make investments to increase <unk> capacity in the semiconductor space to support this anticipated growth.
Please refer to our earnings release for additional commentary on our end market and product diversification overall expected end market demand will remain healthy in the third quarter of 2023.
I will now turn the call over to Arthur to review, our financial results and outlook. Thanks.
Thanks, Steven good morning, everyone.
Sales of $2 $88 billion in the second quarter declined by a modest 2.1% from the first quarter and relatively flat pricing.
Wow carbon flat rolled products drove the vast majority of the quarterly volume decline or impact on sales dollars as relatively neutral as higher selling prices for carbon flat rolled products offset the impact of volume declines on our revenues.
Declines in stainless and common alloy aluminum product sales in the second quarter drove a two 1% sequential decline in revenues.
Our FIFO gross profit margins.
If you exclude the effects of our LIFO inventory valuation method remained relatively flat at 38% in the second quarter compared with 35% in the first quarter.
Over the entry point into the second quarter was higher than the exit point.
Temporary pressure on margins from declining stainless and aluminum product selling prices.
The higher than anticipated decline in nonferrous product prices contributed to a revision of our annual LIFO estimate from $60 million of income $220 million of zinc.
As a result, we recorded LIFO income of $45 million in the second quarter to reflect our revised annual estimate.
Our first quarter 2023 results included LIFO income of $15 million, bringing our six month total to $60 million of income or half of our current $120 million annual LIFO income estimate our reported gross profit margins, which are in the LIFO.
<unk> came in at 31, 5% for the second quarter up from 39% in the first quarter.
As of June 32023, 683, $8 million of LIFO reserve on our balance sheet remains a favorable and mitigate the impact of possible further declines in metal prices and benefit future period operating results.
Moving onto expenses.
Our second quarter same store non-GAAP , SG&A expenses modestly declined by $6 $7 million or 1% compared to the first quarter and lower variable costs associated with lower tons shipped on.
On a year over year basis, our expenses were relatively consistent as incremental variable cost associated with higher township and inflationary wage adjustment were mostly offset by lower incentive based compensation, resulting from lower FIFO profitability.
Overall, our second quarter pretax income of $510 $9 million and pre tax income margin of 13, 2% were consistent with our first quarter results and our diluted earnings per share of $6.49 for the second quarter were in line.
But our guidance of $6 40.
$6.60 per share.
Turning to our balance sheet and cash flow.
We generated cash flow from operations of $295 $1 million.
Down from $384 $6 million for the first quarter, mainly due to timing of estimated income tax payments.
The six months period ended June 32023, our operating cash flow.
<unk> hundred $79 $7 million was consistent with the same six month period. In 2022 is the impact of lower profitability was offset by lower working capital investments in 2023.
Our inventory turn rate based on tons improved to four eight times.
For two and a half months on hand in 2023, compared with 4.4 times in the same six month period in 2022.
Overall operating cash flow generation remained strong working capital management.
Management metrics are at healthy levels.
Our operating cash flow for the six month period in 2023, and cash on hand funded $257.2 million of growth initiatives and a form of capital expenditures and acquisitions.
The return of 233 from $4 million to our stockholders in the form of $126 million of cash dividend and $112 $8 million of share repurchases and the repayment of $500 million of senior notes for approximately 500.
$68 million remained available under our 1 billion share repurchase authorization as of June 32023, I'll now turn to our third quarter outlook, while we anticipate underlying demand will remain healthy in the third quarter of 2023, we expect our tons sold will be down too.
Two 4% compared to the second quarter and the normal seasonal seasonal cat, including a decline in shifting buying resulting from planned customer shutdowns and vacation schedule, along with one less shipping day.
However, compared to the third quarter of 2022 this guidance implies growth in tons sold.
One five points.
5%.
In addition, we expect our average selling price per ton sold for the third quarter to be down 2%.
<unk>, 4% compared to the second quarter.
Driven by declining prices for flat rolled products across our major commodity.
Long with carbon steel tubing products, which collectively represent about 35% of our sale.
We also anticipate temporary downward pressure on our gross profit margin from these it's fun and even tried to change based on these expectations. We anticipate non-GAAP earnings per diluted share in the range of $4 90 to $5.10 for the third quarter of 2023.
Thank you and we'll now open the call up to questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May 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 would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of catcher Johnson with BMO capital markets. Please proceed with your question.
Hi, Thank you for taking my question.
Car a lot in your prepared remarks, I think you mentioned that some of your growth Capex is dedicated to expanding into new markets can you elaborate on that.
Yeah I cannot yet.
Reliance you know I think we've talked about many times before where we've been very active in growing our businesses across our whole portfolio companies are so a lot of times, we're adding processing capabilities or expanding existing locations are part of the.
The growth in new markets that can be a new geographic market. It can be you know like I said, adding processing equipment et cetera, you know a couple of things we have going on in particular and he talked about this fourth quarter is we're currently experiencing the ramp up of our of our flat rolled operation.
<unk> that we have put on campus with some of the mills as they ramp we're seeing some good growth there.
We had acquired some facilities.
And the Michigan area for one of our toll processing company. Its a few years ago, but now we're in the process of installing some new lines in there too. In addition to their storage services there'll be generating revenue off of their their processing capabilities there like they do in their other locations.
Geographically, we've opened up a you know a small facility in Iowa recently.
Where we've got some expansions going on in the Atlanta area of Houston area, we expanded some facilities. So yeah, there's a little going on everywhere one of our bigger Capex projects. Currently in the works that we've talked about before is our one company that focuses on the semi conductor industry.
With all of the build going on to expand capacity in the U S. A we are building a new facility in Texas. So that companies can support the many different new chip manufacturing facilities being constructed in the U S. So you know we've got a.
Very specialty type company participating in that but we also have some of our more nonresidential construction type businesses that are benefiting from the more foundational you know traditional build of those facilities. So you know a lot of different activity.
Going on throughout the company.
And can you just remind us when is the semiconductor facilities do you expect it to be completed.
So we actually have two new facilities going up in Texas. The smaller of the two is operational now and it's you know it's early it's just ramping up the larger facility should.
It should be operational Q2 of 'twenty 'twenty four that's currently are in the build phase.
Okay, and maybe just last one on the M&A you have very strong balance sheet.
Can you talk about what how the pipeline looks like right now and what size deal.
Yeah.
Essentially yeah. So we yeah, yeah sure it got to be we do continue for the last couple of years, it's been a pretty steady stream of opportunities. So we have a lot of different teasers and opportunities to look at you know there are and we we we really focus on what opportunity.
Is in front of us and do we think that meets our criteria and really fits within the reliance family.
You know what we buy many different size companies are we still will buy smaller companies. Although certainly we would rather put our efforts behind some larger efforts that would contribute more to the company and there are some large opportunities out there.
But you know we generally wait for the sellers to be ready, it's it's friendly acquisitions, it's when they're making a decision to exit the business typically we do maintain relationships. So that we have an opportunity.
To to see those those opportunities we think we're in a good position for that we've seen a lot of smaller more fabrication type opportunities you know on the teasers, we've seen some smaller service centers, but over the last year to year and a half we've seen some you know more media.
<unk> size to larger a more traditional type service center companies as we've talked about on prior calls you know for a period of time. There was a disconnect people trying to sell off the peak and so.
There were some value differences, but we're seeing that you know start to come more in line. So we're still excited about the opportunities that are out there and I think at the same time you know we haven't been quite as active on completing acquisitions, although we're still evaluating quite a few.
We've also stepped up from historical standards, our organic growth. So I think we're kind of hit or hitting it and supplementing growth a little on a little more balanced approach currently.
Okay. Thank you.
And I think he's got Ya.
Our next question comes from the line of Phil Gibbs with Keybanc. Please proceed with your question.
Yeah.
Hey, good morning.
Morning.
Just regarding some of the public and federal infrastructure projects that are likely to.
Hit the books are later this year in 'twenty four 'twenty five.
Do you have any visibility.
So those projects happening within some of the things that you're working on and when you.
The fabricated certain things for beams and plate.
And maybe even tubular do you know what specific projects, it's going into just curious if you have that level of visibility or anything you could share would be helpful.
He fell so you know I would say at at a high level I'm just kind of you know from a corporate view, we don't have a significant amount of visibility, but certainly our our companies out in the field who are servicing their customers on these projects.
You know they have a much better feel and as we've talked about in the past you know.
Alliance.
No. We're we're not usually the largest I'm the largest projects with the largest tons, but were involved in a lot of projects.
Some as the primary and then some as kind of fill in and and certain product and processing services. So our folks in the field generally no where where the products going but it's really hard for us to keep track of it and in part of the beauty when we talk to our people.
And the field is were involved in so many different types of projects, it's really hard to kind of roll it out to just something to talk about but I think Steve can give you a little more visibility on that yeah. I just wanted to the channel checks, there's a lot of our companies that service the non res and infrastructure.
Throughout the United States. This thing a lot of activity in the bridge space rail ports lot of airports Ah projects going on and an ongoing project has been the onshore infrastructure to support the planned offshore.
The farms that are going up and down the east coast.
Thank you and then as it relates to M&A.
I know you are you you recently got back into the market in the second quarter was southern steel.
But if I kind of look ahead in the next call it 234 quarters.
You could find yourself in a.
Net cash position, even with the Capex that you're spending pretty aggressively in the back half and maybe into next year or so is there any thought to.
To doing more and more larger scale acquisitions or do you feel like your internal pipeline is robust enough to cover some of the high IRR projects Youre looking at right now.
Yeah. So.
We're always ready to do larger scale acquisitions, if it's the right company and and and we can make it work so that hasn't changed as I mentioned earlier I mean, we look at opportunities of all sizes. It just depends what's actionable at the time so that appetite.
Has not changed even before we were in the cash position I had cash on our balance sheet as we do right now.
So we are continuing to actively consider them and look at any of those opportunities, we see and and certainly if we find the right company, we would love to execute on that at the same time you know we you know we have.
Boys sit in a growth company as I mentioned earlier, where we're a little more aggressive on on the organic growth side and for the last several years. We also I think has been a little more active on a more consistent basis on on shareholder return activities. So we expect.
To continue to deploy our capital wisely in all those areas and.
At the same time, we don't think it's the worst thing in the world to have a strong balance sheet and you know be prepared for whatever may come.
Yeah.
Thank you.
Thanks, Phil.
Our next question comes from the line of Martin Engler with Seaport Research Partners. Please proceed with your question.
Hello, Good morning, everyone.
Good morning morning.
Looking beyond the construction of facilities related to onshore in <unk>.
One of the customers discussing with you.
Regarding their future models.
<unk>.
These facilities are wrapped in future years here.
Discussions around that just yet.
Yeah, you know Mark I don't know that we're certainly I think some of our companies who are very.
Focus on certain of those industries and end markets. If you take semiconductor chips for for instance.
Are people running our businesses selling into those markets are very engaged.
With their customers, they're talking about both the build but then you know future capacity I think again, we serve so many different markets.
There are discussions are I think for us. The fact that different mills are ramping up domestic mills are ramping up capacity will allow us to better serve the increased volumes that our customers will need in the future and.
You know that's our spot in the supply chain, we continue to have customers asking us to do more for them on a value added processing standpoint, and really partnering with our customers. So there are many different discussions going on but again, you know our business well well, we and our.
Tumors do look at the long term you know, we're really servicing on a day to day basis, and I think we've done a good job of being a leader in investing in increased capabilities for our customers and that's something that we'll incrementally continue to do so.
Port that that future increased demand.
Thank you for that appreciate it.
Hum.
Leave you called out common alloy sheet.
As a point of weakness in the press release.
Is there any color that you could offer there as to what's happening in the market.
Well I think you know from a common alloy standpoint, I think our comments, where you know we're kind of focused on just some pricing erosion that you've seen you know that that product follows a D. L. N me a bit and we've just seen a little downward pricing pressure on this product and ample supply in the <unk>.
Hi Chi.
Uh huh.
Okay. So really from a price perspective, it's more of a function of the surcharge as opposed to like a base price erosion or something along those lines.
Yeah.
Okay excellent alright, I appreciate your time, thank you very much.
Sure.
Our next question comes from the line of Alex Hacking with Citi. Please proceed with your question.
Yeah morning, Colorant Green Thanks for the call. So I guess the first question I'm not sure if you've disclosed this but how many tons are you co locating at the new mill in Texas.
Well. It's we you are correct, we have not disclosed that.
Oh yeah.
Yeah, and we you know it's both of those operations mm. We're supporting you know our customers, but also partnering with the the mills.
Doing both toll processing on some of the volume as they request and then also direct sales of the metal.
So you know we're ramping as the mills ramp and you know it's nothing.
You know specific committed but we certainly will benefit as the mills continue to ramp and produce more tons are we certainly expect our volumes there to grow with that.
Okay. Thanks, and then just following up on that are you I mean are you specifically targeting Mexico as an end market there.
As the mills are on I know the mills of commentary.
You know Mexico has been very strong recently right with what I'm seeing out I don't know if that kind of flows into what youre doing on that thanks.
Yeah. So we.
Well, we tried to sell metal to.
Two people wherever they are if they want and that also if theres more demand for metal in Mexico, We certainly want to service those markets and you know we acquired a company back in 2008 that had some you know very strong toll processing capabilities, our three locations in Mexico.
We've added a fourth in expanded all of those over the years. We're in process of doing further expansions down there because we see you know growth in that market. We also have some of our U S companies are selling more metal down into Mexico.
One of our on campus opportunities I think that mill has directed more metal there so in support of them.
We're pushing some more tons down there and you know we continue to look at opportunities to meet our customers' needs both existing and new customers as we see opportunities grow down there. So certainly look at it as a potential favorable market for growth right now.
Okay. Thanks, and then just one final one if I may.
You know I think you previously you have mentioned you know skilled labor shortage is a challenge for you and your customers.
The company has continued to report that obviously gets a lot less acute or less acute now than it was you know could you maybe discuss are you being constrained by.
Lack of skilled labor or it's it's manageable now thank you.
Yeah, So I think youre right its not as acute as most of our operations now Alex I think we've been you know more successful in Prague.
Probably having more people available I think where we've done a really good job is retaining our existing employees. We appreciate those employees are being with us some of them have had to work a little harder a little longer hours than them, maybe they had historically because of some of those issues. We've all.
So I think had to you know.
And I think with newer employees. Most people are seeing higher turnover levels. So more of an investment in training, especially from a safety perspective, so I'm a little more effort being put there, but there are still some constraints I think you know for us but we.
Seen more at certain of our customers are which does impact some of the you know shipment flow in end demand is still there, but how fast can you fill that so I think still a factor I'm not as much as it was but that also has been an opportunity for reliance where you know.
Our customers may struggle with being able to get the skilled labor, they're asking us to support them more which has given US you know the opportunity to do more value added processing for them and you know, we try to kind of boil down to service them well.
So that we make it easy for them and they want to continue to retain that business with us and we've certainly seen success in that area over the past few years.
Okay. Thank you very much I appreciate the time.
Absolutely Thanks, Alex.
There are no further questions in queue I would like to hand, the call back to management for closing remarks.
Thank you and thanks again to all of you if your time and attention and joining our call today and for your continued support of reliance and we look forward to speaking with you again on our third quarter call in October . Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Okay.