Q3 2023 Reliance Steel & Aluminum Co Earnings Call
Greetings and welcome to the reliance steel and aluminum Corp come third quarter 'twenty 'twenty earnings call.
At this time all participants are in a listen only mode.
A 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 you to your host Kim Orlando with auto Investor Relations. Thank you Kim you may begin.
Yeah.
Thank you operator, good morning, and thanks to all of you for joining our conference call to discuss your Alliance's third quarter 2023 financial results.
I'm joined by Karla Lewis, President and Chief Executive Officer, Steve Cook, Executive Vice President and Chief operating Officer and.
Arthur Johnson, Senior Vice President and Chief Financial Officer.
A recording of this call will be posted on the investors section of our website at Investor Day, Our F 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. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release I.
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 third quarter 2023 results.
Reliance's business model is designed to provide resilient performance throughout economic cycles, including both pricing and end market demand fluctuations present in the metals industry.
The unique facets of our business model highlighted by strong pricing and inventory management discipline.
Highly diversified product mix. It is sold in the various end markets and geographies small order sizes quick delivery van.
You added processing and increasing collaboration across our family of companies collectively support our ability to deliver consistent profitable results and generate cash flow I'd like to commend the entire reliance team for successfully executing our strategy drink.
Challenging times and delivering another quarter of solid financial performance.
Our overall financial performance in the third quarter was in line with our expectations.
Our tons sold were down slightly more than anticipated, we outperformed broader service center industry trends and delivered year over year growth.
As expected our average selling price declined throughout the quarter across virtually all of our major commodity products, but our pricing discipline and industry, leading value added processing capabilities provided us with gross margin stability and lessen the impact of falling prices on our gross profit margin.
As a result, we delivered non-GAAP earnings per share of $5 in line with our guidance.
Our profitability, coupled with effective working capital management generated strong operating cash flow of $466 million for the quarter investing in growth remains our top capital allocation priority with approximately $125 $5 million okay.
Expenditures.
Our capital expenditure budget for the full year 2023 remains unchanged at a record $520 million with approximately two thirds directed towards growth projects to advance our value added processing capabilities upgrade facilities and expand into new.
New markets, our total 'twenty to 'twenty three capex cash outlay is expected to be in the range of $450 million to $475 million.
Well, we did not complete any acquisitions during the third quarter the pipeline remains robust we.
We will pursue opportunities that meet our disciplined criteria well managed companies that would be complementary to our diversification strategy and immediately accretive to earnings our acquisition strategy is supported by our strong balance sheet and consistent ability to generate cash throughout.
Industry cycles.
Along with growth returning value to our stockholders remains a core element of our capital allocation strategy.
During the third quarter, we returned $185 $1 million to our stockholders through a combination of dividends and share repurchases and we continue to opportunistically repurchase shares in the fourth quarter.
Since 2018, we have invested over $2 $3 billion in organic growth and acquisitions and returned nearly $3 $1 billion to our stockholders through dividends and share repurchases far surpassing our metal service center peers.
In summary, we are very pleased with and thankful for the ongoing efforts of our entire reliance team.
All of whom expertly execute reliance's strategy on a day to day basis operates safely and produce industry leading results through all operating environments.
We will continue to leverage our strong balance sheet and significant liquidity to fund profitable growth and return value to our stockholders. We're excited about the many growth activities underway and that we anticipate arising under the infrastructure Bill the chipset and the inflation reduction act as well as the <unk>.
Onshoring and near shoring activities in the markets we serve.
Do you all for your time today I'll now turn the call over to Steve who will review, our third quarter demand and pricing trends. Thanks, Carlos and good morning, everyone I'd like to Echo cartilage Congress I think in their lives team for delivering another quarter of profitable results for the continued focus and effort to ensure the safety of our workforce.
I'm pleased to report that the third quarter was our strongest safety quarter and all of 2023, I will now turn to our third quarter demand in pricing trends.
Our tons sold were up one 1% from the third quarter of 2022.
Up 3.4% on a year to date basis, reflecting solid underlying demand in key markets, including non res construction aerospace as well as contributions from our organic growth activities.
Our year to date, three 4% increase in tons sold all pieces of the 1% increase across the broader service center industry.
Compared to the second quarter of 2023, our tons sold decreased four 3% predominantly due to lower carbon flat rolled shipments I think.
The declining pricing environment led to more cautious customer buying activity normal seasonality and one less shipping day.
Our average selling price per ton sold $2552 was down two 8% from the second quarter of 2023, but in line with our expected range of down 2% to 4%.
I will now turn to a high level overview of the trends we saw within our products in key end markets.
Carbon steel tubing plate and structural our three largest product groups represented about one third of our third quarter sales all of these products experienced higher shipments compared to the third quarter of 2022 and stable or only slight declines in daily shipments compared to the second quarter of 2023.
Yeah.
We continue to believe new public infrastructure projects under various federal and state programs. In addition to industrial reassuring efforts will continue to support non res construction and infrastructure demand in the medium to long term.
Aluminum and stainless products represented 31% of our total third quarter sales.
With aluminum stainless aerospace products comprising approximately 9%.
Although common alloy aluminum and stainless shipments and pricing declined slightly in the third quarter aerospace product demand and pricing remains strong with shipments up significantly year over year.
We primarily service the automotive market through our toll processing operations, which as a reminder are not reflected in our tons sold.
Our tolling business in the third quarter of 2023 was consistent with the second quarter at approximately 4% of our total sales and improved year over year on increased processing demand from the automotive market.
We did not experience any material impact, resulting from the UAW strike during the third quarter, we saw a wide range of products diverse sectors of the general manufacturing market shipments declined both sequentially and year over year due in part to both seasonality and a pullback in carbon flat rolled demand as prices declined.
Sales to the semiconductor industry declined both sequentially and year over year. However, our long term outlook for this market remains positive due to the chipset and active reassurance, we continue to make investments to increase reliance's capacity and semiconductor space support active and anticipated opportunities.
Please refer to our earnings release for additional commentary on our end markets and product diversification.
I'll now turn the call over to Arthur to review, our financial results and outlook.
Thanks, Steven good morning, everyone.
It has delivered solid performance across all financial metrics. This quarter. Our net sales were in line with our expectations down six 6% from the second quarter, mainly due to seasonally lower volumes and lower selling prices.
Pricing pressure across our major commodity product in particular carbon flat rolled.
We begin to lower than anticipated tons sold.
Despite pricing declines in various macro headwinds, we produced year over year growth in tons sold and gained market share.
Well the pricing declines for most of our product resulted in temporary pressure on our margins is there a cost on hand exceeded replacement costs. We nonetheless maintained a solid gross profit margin of 29.7% supported by our value added processing capabilities and generated earnings.
For share of $4.99 for the quarter.
Higher than anticipated declines in carbon steel product prices contributed to a revision of our annual LIFO estimate from $128 million of income $240 million of income.
As a result, we recorded LIFO income of $45 million in the third quarter.
Year to date, our lifestyle income totaled $105 million.
Based on our newly updated estimate we expect $35 million of LIFO income in the fourth quarter.
As of the end of this quarter LIFO reserve of approximately $639 million on our balance sheet remains available to mitigate the impact of possible further declines in metal prices.
Benefits future periods operating results.
Moving onto expenses.
Our third quarter same store non-GAAP SG&A expenses declined by $25.3 million or three 9% compared to the second quarter due to reduced compensation costs associated with lower FIFO profitability, along with lower variable costs associated with fewer tons sold.
On a year over year basis, our same store non-GAAP SG&A expenses were down 651 million or 1%.
Due to the lower incentive based compensation, resulting from lower FIFO profitability, partially offset by higher compensation expenses associated with increased head count and wage inflation.
Yeah.
Our third quarter pretax income and margin is $388 million in Tampa 10, 7% decline from $510 $9 million and 13, 2% in the second quarter as a result of the aforementioned pricing pressures and their impact on our volumes English.
Operator: Greetings and welcome to the Reliance Steel & Aluminum Corp. 3rd quarter, 2022 earnings call. At this time, all participants are in a listen only mode.
Operator: 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.
But margin Nevertheless, our EPS of $4.99 or $5 on a non-GAAP basis was within our guidance.
Turning to our balance sheet and cash flow.
The 2023 nine months period, our operating cash flow was $1.15 billion compared to $1.31 billion in the same nine month period. In 2022 is the impact of lower profitability was partially offset by lower working capital needs in 2023.
Kimberly Orlando: It is now my pleasure to introduce you to your host, Kim Orlando, with Addo Investor Relations. Thank you, Kim. You may begin. Thank you operator.
Kimberly Orlando: Good morning and thanks to all of you for joining our conference call to discuss reliance's third quarter, 2023 financial results. I am joined by Karla Lewis, President and Chief Executive Officer, Steve Koch, Executive Vice President and Chief Operating Officer, and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investor's section of our website at investor.rsace.com.
Our inventory turn rate based on time came in at four seven times or two six months on hand for the first nine months of 2023 matching our companywide goal of four seven times and it compared with $4 three times in the comparable period in 2022.
Our healthy inventory turn rate not only contributed to strong cash flow generation, but also helped soften the impact of declining prices on our gross profit margin.
Kimberly Orlando: Please read the forward-looking statement disclosures included in our earnings release issue this morning and note that it applies to all statements made during this teleconference. The reconciliation of the adjusted numbers are included in the non-gap reconciliation part of our earnings release.
Yeah.
As announced in our earnings release.
Our board of Directors approved an amendment to our share repurchase plan replenishing, our repurchase authorization to $1 $5 billion.
Karla Lewis: 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 third quarter, 2023 results. Reliance's business model is designed to provide resilient performance throughout economic cycles, including both pricing and end market demand fluctuations present in the metals industry. The unique facets of our business model highlighted by strong pricing and inventory management discipline, a highly diversified product mix that is sold into various and markets and geographies, small order sizes, quick delivery, value added processing, and increasing collaboration across our family of companies collectively support our ability to deliver consistent profitable results and generate cash flow.
Our share repurchases in the month of October where 140 $617 million, bringing the total purchases under our July 2022, $1 billion share repurchase authorization to $705 million.
I'll now turn to our fourth quarter outlook.
Overall.
We expected underlying end market demand will remain relatively healthy in the fourth quarter of 2023.
We expect three and a half to five 5% growth in our tons sold compared to the fourth quarter of 2022, whereas the sequential decline of 4% to 6% consistent with seasonal trends.
Although reliance believe pricing for many products will be in your trough levels in the current cycle at some point in the fourth quarter with certain products leveling off or increasing modestly we expect our average selling price per ton sold for the fourth quarter could be down 4% to 6% compared to the third quarter.
Karla Lewis: I'd like to commend the entire Reliance team for successfully executing our strategy during challenging times and delivering another quarter of solid financial performance. Our overall financial performance in the third quarter was in line with our expectations. While our tons sold were down slightly more than anticipated, we outperformed broader service center industry trends and delivered year-over-year growth. As expected, our average selling price declines throughout the quarter across virtually all of our major commodity products, but our pricing discipline and industry leading value added processing capabilities provided us with gross margin stability and less than the impact of falling prices on our gross profit margin.
We also anticipate continued modest temporary downward pressure on our gross profit margin from these declining metal pricing trends.
Based on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $3 70 to $3.90 for the fourth quarter of 2023.
In closing, we believe we have an industry, leading and a proven business model designed to navigate economic cycles and challenges and a strong balance sheet that collectively give us the confidence to continue pursuing profitable growth and fueling our strong cash flow and capital return activities that can.
Karla Lewis: As a result, we delivered non-gap earnings per share of $5 in line with our guidance. Our profitability, coupled with effective working capital management, generated strong operating cash flow of $466 million for the quarter. Investing in growth remains our top capital allocation priority, with approximately $125.5 million of capital expenditures. Our capital expenditure budget for the full year 2023 remains unchanged at a rate $520 million, with approximately two-thirds directed towards growth projects to advance our value-added processing capabilities, upgrade facilities, and expand into new markets.
Our comments. Thank you for your attention we will now open the call up for questions operator.
Thank you we will now be conducting a question and answer session. If you 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.
You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Okay.
Yeah.
Thank you. Our first question is from Martin Engelhart with Seaport Research. Please proceed with your question.
Karla Lewis: Our total 2023 CAPEX cash outlay is expected to be in the range of $450 to $475 million. While we did not complete any acquisitions during the third quarter, the pipeline remains robust. We will pursue opportunities that meet our discipline criteria of well-managed companies that would be complementary to our diversification strategy and immediately accretive to earnings. Our acquisition strategy is supported by our strong balance sheet and consistent ability to generate cash throughout industry cycles.
Hello, Good morning, everyone.
Right.
I wanted to first touch on SG&A.
And you did comment on it in the remarks.
227 million for the quarter down from 651, I believe sequentially.
Could you briefly touch on your thoughts around SG&A for fourth quarter should we expect you know another step down sequentially here, but kind of still remaining above that 690 Mark.
Yeah Martin Good question. It should be you know consistent with seasonal patterns. So yeah. I mean, what's your time, so there should be a little bit of a downpour downward trend, but no.
Karla Lewis: Along with growth, returning value to our stockholders remains a core element of our capital allocation strategy. During the third quarter, we returned $185.1 million to our stockholders through a combination of dividends and share repurchases, and we continue to opportunistically repurchase shares in the fourth quarter. Since 2018, we have invested over $2.3 billion in organic growth in acquisitions and returned nearly $3.1 billion to our stockholders through dividends and share repurchases, far surpassing our Metal Service Center peers.
And we're not necessarily putting out a specific guidance on SG&A, though.
Yeah.
Thank you for that.
Looking across the different metals product lines here.
Comment more broadly within the guidance on.
Modest gross margin pressure.
Quarter on quarter here are there any particular products, where do you see all of this.
Here's where you see that majority I E.
Pricing pressure.
The crusher rather.
Karla Lewis: In summary, we are very pleased with and thankful for the ongoing efforts of our entire Reliance team, all of whom expertly execute Reliance's strategy on a day-to-day basis, operate safely, and produce industry-leading results through all operating environments. We will continue to leverage our strong balance sheet and significant liquidity to fund profitable growth and return value to our stockholders. We are excited about the many growth activities underway and that we anticipate arising under the Infrastructure Bill, the Chips Act, and the Inflation Reduction Act, as well as on-shoring and near-soring activities in the markets we serve.
Yeah, Hi, Martin, It's Carla you know that's going to vary.
A watch based on you know each of the different products are the markets, we're selling into the amount of value added processing that we're doing so generally at a higher overall level you know when mills are announcing price increases, we're typically able to get a temp.
Larry margin expansion on those products, but when prices are declining and we're selling off our higher cost inventory. That's on hand, you can see a little compression. So they're most products had been declining really for about the last seven months.
Karla Lewis: Thank you all for your time today.
<unk> seen some consistent pricing pressure so we've been dealing with that for several months and I think our team's done a great job of being able to manage through that and maintain a very strong.
Stephen Koch: I'll now turn the call over to Steve, who will review our third quarter of demand in pricing trends. Thanks, Carla. Good morning, everyone. I'd like to echo Carla's comments by thanking the Reliance team for delivering another quarter of profitable results and for the continued focus and effort to ensure the safety of our workforce. I'm pleased to report that the third quarter was our strongest safety quarter in all of 2023. I would now turn to our third quarter demand in pricing.
Profit margin, although not at some of the peak levels. We had seen recently and you know with the current outlook. Although there are price increases on certain products announced and we anticipate there could be more than on some additional products overall, we're anticipating.
Stephen Koch: Trans. Our tonsouled were up 1.1% from the third quarter of 2022 and are up 3.4% on a year-to-date basis reflecting solid underlying demand and key markets, including non-res construction, aerospace as well as contributions from our organic growth activities. Our year-to-date 3.4% increase in tonsouled outpaces the 1% increase across the broader service center industry. When our tonsouled decreased 4.3%, predominantly due to lower carbon-flot-rolled shipments and to the declining pricing environment led to more cautious customer buying activity, normal seasonality, and one less shipping day.
Downward pressure.
Pressure at least compared to the average from Q3 into Q4, but we do think in a lot of our products, we will see some leveling off but overall expect some continued pressure.
Okay understood I appreciate all the color.
If I could one last quick one and again you touched on this a little bit in the prepared remarks and no material impact in the tolling business from the UAW strike.
That's something.
Just a bit of a delayed impact or based on what you're seeing.
Stephen Koch: Our average selling price for tonsouled of $2,552 was down 2.8% from the second quarter of 2023, but align with our expected range of down 2 to 4%. At an alternatively high-level overview of the trends we saw within our products and key end markets. Carbons feel tubing, plate and structural, our three largest product groups represented about one-third of our third quarter sales. All of these products experienced higher shipments compared to the third quarter of 2022 and stable or only slight declines in daily shipments compared to the second quarter of 2023.
Well today.
Similar.
And it's kind of a negligible implications on for Keith.
Yeah, Martin so in in our tolling business about 60% to 65% of our totally is automotive related and then you know a portion of that is related to the big three where the strike activity is occurring and we've seen very limited impact so far.
Or however, you know each time the scope of this strike expands we could see them you know more impacts. So there is some impact based on there being you know more locations on strike are you know in particular, the the Ford plant in Kentucky.
Stephen Koch: We continue to believe new public infrastructure projects under various federal state programs in addition to industrial reshoring efforts will continue to support non-res construction and infrastructure demand in the medium to long-term. A low-income and stainless products represented 31% of our total third quarter sales, with a low-income and stainless aerospace products comprising approximately 9%. Although common alloy low-income and stainless shipments and pricing declined slightly in a third quarter, aerospace product demand and pricing remained strong, with shipments up significantly year-over-year.
We will see a bit more impact we anticipate in Q4, but we're very hopeful that the strike will be resolved soon and everyone will be back at work and we'll be back to normal levels, but even at.
There's a broad expansion it will not be.
Material to reliance as a whole in the fourth quarter.
Stephen Koch: We primarily service the automotive market through our co-processing operations, which as a reminder are not reflected in our console. Our totaling business in a third quarter of 2023 was consistent with the second quarter at approximately 4% of our total sales, and improved year-over-year on increased processing demand from the automotive market. We did not experience a material impact resulted in the UAW strike during the third quarter. We saw a wide range of products diverse sectors of the general manufacturing market.
Okay.
I appreciate that nice job navigating the dawn market. Thank you.
Right I think.
Yeah.
Thank you.
As a reminder, plus press star one to ask a question at this time.
Our next question comes from Phil Gibbs with key Banc capital markets. Please proceed with your question.
Stephen Koch: Shipments declined both sequentially and year-over-year, doing part of those seasonality and a pullback in carbonyl demand as prices declined. Sales to the semiconductor industry declined both sequentially and year-over-year. However, our long-term outlook for this market remains positive due to the chipset and active reshoring. We continue to make investments to increase reliance capacity and semiconductor space support active and anticipated opportunities. Please refer to our earnings release for additional commentary on our end markets and product diversification.
Hey, good morning.
Running and when they fail that's all.
So firstly I wanted a clarification on the buyback I haven't read it as you had about one and a half billion on a fresh authorization and then Arthur I think you made some comment about almost a 150 million purchased in October is that.
Part of that one and a half billion new.
Our buyback authorization or as what it was that does this this new one after that that one I'm trying to understand so the comments.
Arthur Ajemyan: I will now turn the call over to Arthur to review our financial results and outlook. Thanks, Steven. Good morning, everyone. The line has delivered solid performance across all financial metrics this quarter. Our net sales were in line with our expectations down 6.6% from the second quarter, mainly due to seasonally lower volumes and lower selling prices. Pricing pressure across our major commodity products in particular carbon flat road. Contributed to lower than anticipated tons sold.
Good question. So now the 150 in October it goes against the previous authorization. The one 5 billion starts.
It starts a fresh that.
The clock on that starts now.
Okay.
Perfect.
And secondly.
Leased in my model I had 425 million of cash Capex for this year I think at the mid point, you said about $4 65.
Arthur Ajemyan: Despite pricing the clients in various macro headwinds, we produced year-over-year growth in tons sold and gained market share. While the pricing declines for most of our products resulted in temporary pressure on our margins, as our costs on-hand exceeded replacement costs, we nonetheless maintain the solid gross profit margin of 29.7%. Supported by our value-edit processing capabilities and generated earnings per share of $4.99 for the quarter. Higher than anticipated declines in carbon steel product prices contributed to revision of our annual LIFO estimate from $120 million of income to $140 million of income.
Did some capex get pulled into 'twenty three from 24 or are you.
Adding new growth in our capability.
Projects.
Yeah, Phil So we do an annual budget you know that we approve many many projects for you know our our many different companies and that 2023 budget has remained consistent at $520 million, however, timing of some of those.
Projects can slip the cash outlay can slip into a different year. We know some of those 520 million dollar projects will extend and some of the cash will go out into 2024, and what do you know the extended lead times, we've experienced for equipment construction etcetera.
Arthur Ajemyan: As a result, we recorded LIFO income of $45 million in the third quarter. Year-to-date our LIFO income totals $105 million. Based on our newly updated estimate, we expect $35 million of LIFO income in the fourth quarter. As at the end of this quarter, LIFO Reserve will approximately $639 million in our balance sheet remains available to mitigate the impact of possible further declines in metal prices and benefit future periods operating results.
Over the last couple of years it has been more pronounced than historically, we've tried to give you guys a better idea of the cash outlay. So yeah earlier in the year I think we may be said 400 to 450 million, we thought would be the cash outlay. This year, we've seen some lead times come in a bit.
For some of the equipment some of the projects accelerate a bit and with that we upped our cash outlay. This year to $4 50 to 475 again, it's timing and you know, we're giving you our best estimate added at different points in time on the cash outlay.
Arthur Ajemyan: Moving on to expenses. Our third quarter, same-store non-GAPS-GNA expenses declined by $25.3 million, or $3.9% compared to the second quarter, due to reduced compensation costs associated with lower LIFO profitability, along with lower variable costs associated with fewer tons sold. On a year-over-year basis, our same-store non-GAPS-GNA expenses were down $6.1 million, or 1% due to lower incentive based compensation resulting from lower LIFO profitability, partially offset by higher compensation expenses associated with increased headcount and wage inflation.
Thank you.
Yep, you're welcome thanks.
Yeah.
Thank you art.
Our next question comes from Koch, our journey with BMO capital markets. Please proceed with your question.
Hi, Thank you for taking my questions.
First can you talk about what percent of orders right now includes value added processing.
Okay.
Hi, Katja this is Arthur.
We have we don't normally update that disclosure throughout the year, but I mean last time, we provided updates we said it was a little over 50% and you know we expect to kind of be in that range, but we don't normally put out quarterly updates on that.
Arthur Ajemyan: Our third quarter pre-tax income in margin of $388 million in 10.7%, declined from $510.9 million in 13.2% in the second quarter, as a result of the aforementioned pricing pressures and their impact on our volumes in gross profit margin. Nevertheless, our EPS of $4.99 or $5 on a non-GAP basis was within our guidance, turning for our balance sheet and cash flow.
Okay and is there expectation that you know what do you continuously investing in value added processing equipment that that could grow over the next few years.
I Gotcha, Yeah, we certainly do anticipate with the investments, we're making that you know that will grow.
You know we've been a little over 50% I think for the last couple of years, but with certain acquisitions I'm, including an acquisition we made in late 2021.
Arthur Ajemyan: For the 2023 nine-month period, our operating cash flow was $1.15 billion compared to $1.31 billion in the same nine-month period in 2022, as the impact of lower profitability was partially offset by lower working capital needs in 2023. Our inventory turnaround based on tons came in at 4.7 times, or 2.6 months on hand, for the first nine months of 2023. Matching our company-wide goal of 4.7 million. Times and it compared it 4.3 times in the comparable period in 2022. Our healthy inventory turn rate not only contributed to strong cash flow generation but also health soften the impact of declining prices on our growth profit margin.
That's more of a wholesale distribution model that does not perform value added processing that maybe slowed a bit the incremental.
Growth in in orders with value added processing, but we certainly anticipate that we will continue to grow you know we continue to see good opportunity from our customers and and even from our suppliers.
On opportunities to do more and more for them and expand our value added processing capabilities and we're very happy to invest in those opportunities to help better support our customers in and cut yes. The only thing I would add to that is you know our value added processing capability.
Arthur Ajemyan: As announced in our earnings release, our Board of Directors approved an amendment to our share repurchase plan. Replanishing our repurchase authorization to $1.5 billion. Our share repurchases in the month of October were $146.7 million, bringing the total purchases under our July 2022 $1 billion share repurchase authorization to $705 million.
These provide a.
Tremendous amount of stability to our gross profit margin and especially at times like this when you.
Consecutive months of declining prices and when you're providing service yet orders with value added processing. Those are you know you tend to do much better on those than honest straight distribution orders.
Just wanted to highlight that.
Arthur Ajemyan: I'll now turn to our fourth quarter album. Overall, we expect that underlying end market demand will remain relatively healthy in the fourth quarter of 2023. We expect 3.5 to 5.5 percent growth in our tonn sold, compared to the fourth quarter of 2022, whereas sequential decline of 4 to 6 percent consistent with seasonal trends.
Thank you and then is it fair to assume that Capex spending will stay elevated over the next few years given that there is a desire to continuously invest.
And growth.
Yeah, Katya, where actually in process on our 'twenty 'twenty four capex budget now and you know, we'll be giving that number in February on our call, but as I just kind of alluded to we do see continued opportunity.
Arthur Ajemyan: Although Reliance believes pricing for many products will be in your trust levels in the current cycle at some point in the fourth quarter, with certain product leveling off or increasing modestly, we expect our average selling price for tonn sold for the fourth quarter to be down 4 to 6 percent compared to the third quarter. We also anticipate continued modest temporary downward pressure on our growth profit margin from these declining metal pricing trends.
<unk> from our customers, especially with a lot of the you know really positive things in the market right now with the different government stimulus and the activity. We expect there as some of the suppliers expand capacity, we're able to to work with them to get some opportunities there that.
Arthur Ajemyan: Based on these expectations, we anticipate non-gap earnings for diluted share in the range of $3.70 to $3.90 for the fourth quarter of 2023.
You know re shoring near shoring is real and that all provides increased opportunity for us and you know we're fortunate to have our folks execute the way that they do that we have this strong cash flow and the balance sheet to be able to support our customers and continue to invest.
Arthur Ajemyan: In closing, we believe we have an industry leading to an improvement business model designed to navigate economic cycles and challenges and a strong balance sheet that collectively give us the confidence to continue pursuing profitable growth and fueling our strong cash flow and capital return activities.
So we don't have a number yet, but we do anticipate a healthy budget.
Budget next year because of the opportunity we see.
Okay. If I may one more caller you mentioned the acquisition pipeline is solid.
Arthur Ajemyan: That concludes our comment.
Arthur Ajemyan: Thank you for your attention.
Can you talk a bit more is there an increasing willingness of these companies to sell what are the valuations you're seeing.
Operator: We'll now open the call up to question operator. Thank you.
Operator: We will now be conducting a question and answer session. If you 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Operator: Thank you.
Yeah.
We've seen a slow I think it's probably.
Increased a bit more with the the more traditional types of service center companies over the last nine months or so there were some opportunities that came to market in our peak periods.
That it appears deals did not get completed so we're seeing a few of those come back around so we're expecting a more reasonable expectations in our view on valuation you know at reliance we we're very consistent on how we value companies.
Martin Englert: Our first question is from Martin Engelhurt with Seaport Research. Please proceed with your question.
Martin Englert: Hello, good morning, everyone. Good morning. I think one of the first touch on SGNA and you did comment a bit on it in the prepared remarks 627 million for the quarter down from Could you briefly touch on your thoughts around a DNA for fourth quarter? Should we expect to, you know, another step down sequentially here, but kind of still remaining above that 600 million mark? Yeah, Martin, good question. It should be, you know, consistent with seasonal patterns.
Looking at a normalized.
Pretax income number for the long term going forward and we value from that we continue to do that and do believe that we should be closer than expectations are with some of those sellers, but not not all sellers are expecting to be.
Paid off of the peak them you know the good companies that we acquire have been in this business for a long time. They understand that there are different cycles. We go through and you know look at and understand our approach to the valuations that we expect to you know continue to be able to acquire more goods.
Martin Englert: So, you know, I mean, with fewer times told, there should be a little bit of a downward trend, but we're not necessarily putting out a specific guidance on a DNA though. Thank you for that. We'll think across the different metals product lines here and your comments more broadly within the guidance on modest gross margin pressure on quarter on quarter here. Are there any particular products where you feel that here's where you're seeing the majority of the pricing pressure or margin pressure, rather?
Companies and you know, we're we're excited with what we see out there.
Perfect. Thank you.
Thank you.
Yeah.
Thank you there are no further questions at this time I would like to turn the floor back over to Carl Lewis for closing comments.
Great. Thanks, again, everyone for joining our call today and thank you to our big reliance family out there for all that you do every day and before we close out the call I'd like to remind everyone that we'll be in New York City in mid November presenting at the Goldman Sachs metals and mining conference.
Martin Englert: Yeah, I'm Martin, Carla. You know, that's going to vary a watch based on, you know, each of the different products. The markets were selling into the amount of value added processing that we're doing. So generally at a high overall level, you know, when mills are announcing price increases, we're typically able to get a temporary margin expansion on those products. But when prices are declining and we're selling off our higher cost, you know, inventory that's on hand, you can see a little compression.
And we hope to see many of you there. Thank thank you again to all of you for your continued support of reliance.
Okay.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
Uh-huh.
Hmm.
Mhm.
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Martin Englert: So, there are most products have been declining really for about the last seven months. We've seen some consistent pricing pressures. So, we've been dealing with that for several months. And I think our teams done a great job of being able to manage through that and maintain a very strong growth profit margin, although not at some of the peak levels we had seen recently. And, you know, with the current outlook, although there are price increases on certain products announced, and we anticipate there could be more and on some additional products overall, we're anticipating downward pressure, at least compared to the average from Q3 into Q4.
Hum.
Oh, Oh Oh.
Martin Englert: But we do think in a lot of our products, we'll see some leveling off. But overall, expect some continued pressure. Okay, understood. Appreciate all the color. If I could one last quick one. And again, you touch on this a little bit in the prepared remarks and no material impact in the towing business from the UAW strike. But is this something there might be a bit of a delayed impact, or based on what you're seeing today kind of similar in kind of negligible implications on for you?
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Mhm mhm.
Mhm.
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Okay.
[music] mhm.
Martin Englert: Yeah, Martin, so in our towing business, about 60 to 65% of our towing is automotive related. And then, you know, a portion of that is related to the big three where the strike activity is occurring. And we've seen very limited impact so far. However, you know, each time the scope of the strike expands, we could see, you know, more impact. So there is some impact based on there being, you know, more locations on strike, you know, in particular the Ford plant and Kentucky.
Hum.
Hum [music].
Martin Englert: We will see a bit more impact. We anticipate in Q4, but we're very hopeful that the strike will be resolved soon. And everyone will be back at work and we'll be back to normal levels. But even if there's a broad expansion, it will not be. Material to Reliance as a whole in the fourth quarter. All right, I appreciate that. Nice job navigating the down market. Thank you. Thanks for your time. Thank you. As a reminder, press star one to ask a question at this time.
Phil Gibbs: Our next question comes from Phil Gibbs with key bank capital markets. Please proceed with your question. Good morning. Good morning, Phil. So firstly, I wanted clarification on the buy back. I had read it as you had about one and a half billion on a fresh authorization. And then Arthur, I think you made some comment about almost 150 million purchased in October. Is that part of that one and a half billion new?
Phil Gibbs: Buy back authorization or is that this new one after that one? I'm trying to understand the kind of months. Good question. So now that 150 in October goes against the previous authorization. The one and a half billion starts fresh that the clock on that starts now.
Phil Gibbs: Okay, perfect. And secondly, at least in my model, I had 425 million cash catbacks for this year. I think at the midpoint, you said about 465 did some catbacks get pulled into 23 from 24 or are you adding new growth and capability projects? Yes, Phil. So we do an annual budget that we approve many, many projects for our many different companies. And that 2023 budget has remained consistent at $520 million. However, timing of some of those projects can flip the cash outlay can flip into a different year.
Phil Gibbs: We know some of those $520 million projects will extend and some of the cash will go out into 2024. And with you know, they extended lead times, they've experienced for equipment, construction, et cetera, over the last couple of years that has been more pronounced than historically. We've tried to give you guys a better idea of the cash outlay. So yeah, earlier in the year, I think we maybe said 400 to 450 million, we thought would be the cash outlay this year.
Phil Gibbs: We've seen some lead times come in a bit for some of the equipment, some of the projects accelerate a bit. And with that, we upped our cash outlay this year to 450 to 475. Again, it's timing and you know, we're giving you our best estimate at different points in time on the cash outlay.
Unknown Attendee: Thank you.
Katja Jancic: Hi, thank you for taking my questions. First, can you talk about what percent of orders right now includes Valietta processing? Hi, Katja, this is Arthur. We don't normally update that disclosure throughout the year, but last time we provided an update, we say it was a little over 50% and we expect to kind of be in that range. But we don't know normally put out quarterly updates on that.
Katja Jancic: Okay, and is there expectation that, you know, would you continuously investing in Valietta processing equipment that that could grow over the next few years? Hi, Katja. Yeah, we certainly do anticipate with the investments we're making that, you know, that will grow. You know, we've been a little over 50%. I think for the last couple of years, but with certain act, acquisitions, including an acquisition, we made in late 2021, that's more of a wholesale distribution model that does not perform value added processing.
Katja Jancic: That may be slowed a bit, the incremental growth in orders with value added processing, but we certainly anticipate that we will continue to grow. You know, we continue to see good opportunity from our customers and even from our suppliers on opportunities to do more and more for them and expand our value added processing capabilities. And we're very happy to invest in those opportunities to help better support our customers. Katja, the only thing I would add to that is, you know, our value added processing capabilities provide a tremendous amount of stability to our growth profit margins, and especially at times like this, when you have consecutive months of declining prices, and when you're providing service, you have orders with value added processing. I think those, you know, you tend to do much better on those than on the straight distribution orders.
Karla Lewis: Just wanted to highlight that.
Katja Jancic: Thank you.
Katja Jancic: And then is it fair to assume that cap expanding will stay elevated over the next few years given that there is a desire to continuously invest in growth? Katja, we're actually in process on our 2024 CapEx budget now, and, you know, we'll be giving that number in February on our call. But as I just kind of alluded to, we do see continued opportunity from our customers, especially with a lot of the, you know, really positive things in the market right now with the different government stimulus and the activity we expect.
Katja Jancic: There, as some of the suppliers expand capacity, we're able to work with them to get some opportunities there that, you know, re-shoring, near-shoring is real. And that all provides increased opportunity for us. And, you know, we're fortunate to have our folks execute the way that they do that we have the strong cash flow and the balance sheet to be able to support our customers and continue to work with them. So, we don't have a number yet, but we do anticipate a healthy budget next year because of the opportunity we see.
Karla Lewis: Okay, if I may one more, Karla, you mentioned the acquisition pipeline is solid. Can you talk a bit more? Is there an increase in willingness of these companies to sell what are the valuations you're seeing? Yeah, you know, we've seen a flow. I think it's probably increased a bit more with the more traditional types of services. Service center companies over the last nine months or so. There were some opportunities that came to market in peak periods that it appears deals did not get completed.
Karla Lewis: So we're seeing a few of those come back around. So we're expecting more reasonable expectations in our view on valuation. Reliance, we're very consistent on how we value companies, looking at a normalized pre-tax income number for the long term going forward and we value from that. We continue to do that and do believe that we should be closer in expectations with some of those sellers, but not not all sellers are expecting to be paid off of the peak.
Karla Lewis: The good companies that we acquire have been in this business for a long time. They understand that there are different cycles we go through and look at and understand our approach to the valuations that we expect to continue to be able to acquire more good companies and we're excited with what we see out there.
Katja Jancic: Perfect. Thank you.
Unknown Attendee: There are no further questions at this time.
Karla Lewis: I would like to turn the floor back over to Cara Lewis for closing comments. Great. Thanks again everyone for joining our call today and thank you to our big reliance family out there for all that you do every day. And before we close out the call, I'd like to remind everyone that we'll be in New York City in mid-November presenting at the Goldman Sachs medals and mining conference and we hope to see many of you there. Thank you again to all of you for your continued support of reliance.
Operator: This concludes today's teleconference. You may disconnect your lives at this time. Thank you for your participation. Martin Englert, Timna Tanners, Karla Lewis, Alexander Hacking Martin Englert, Timna Tanners,