Q3 2024 Reliance Steel & Aluminum Co Earnings Call
Ladies and gentlemen, good morning, and welcome to the Reliance Inc. Third quarter 'twenty 'twenty full earnings conference call.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference. Please press star and zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host Kim Orlando Idle Investor Relations. Please go ahead.
Kim Orlando: Thank you operator.
Kim Orlando: And thanks to all of you for joining our conference call to discuss Reliance's third quarter 2024 financial results.
Speaker Change: I'm joined by Karla Lewis, President and Chief Executive Officer.
Speaker Change: Steve Cook Executive Vice President and Chief operating Officer.
Speaker Change: Arthur Xiaomi, Senior Vice President and Chief Financial Officer.
Speaker Change: A recording of this call will be posted on the investors section of our website at investors thought reliance dotcom.
Speaker Change: Please read the forward looking statement disclosures included in our earnings release issued this morning.
Speaker Change: That it applies to all statements made during this teleconference.
Speaker Change: A reconciliation of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release.
Speaker Change: I will now turn the call over to Karla Lewis President and CEO of reliance.
Karla Lewis: Good morning, everyone and thank you all for joining us today to discuss our third quarter 'twenty 'twenty four results our businesses continued to execute well through challenging market conditions in the third quarter once again outperforming industry shipments, while maintaining gross profit margin within.
Karla Lewis: Our sustainable range, which we refer to as smart profitable growth.
Karla Lewis: Although metals pricing declined more than anticipated.
Karla Lewis: Parent resilience of our business model servicing diverse end markets with expansive value added processing capabilities and quick turn orders as well as increased volume from our targeted growth efforts helped mitigate the impact of lower pricing on our gross profit margin and our earnings level.
Karla Lewis: Resulting in non-GAAP earnings per diluted share of $3.64 in line with our guidance.
Karla Lewis: In the third quarter, we generated $463 $9 million in cash flow from operations underpinned by strong profitability and effective working capital management through cyclical markets.
Karla Lewis: Our consistently strong cash flow continues to feel execution in all elements of our capital allocation strategy, we invested $112 $8 million in capital expenditures. The majority of which was directed toward growth activities. Our capex budget for the calendar year 'twenty 'twenty four.
Karla Lewis: Remains $440 million with an expected total cash outlay of approximately $425 million to $450 million.
Karla Lewis: Since our 1994 I P. O. We have completed 76 acquisitions that support our growth strategy, expanding our product diversification and value added processing capabilities. We.
Karla Lewis: We've completed four acquisitions to date in 'twenty 'twenty four including our August acquisition of certain toll processing assets of the Ferro South Division are ceragon incorporation and the M&A pipeline remains active.
Karla Lewis: We will continue to seek acquisition candidates that align with our standards for a well managed service centers and metals processors that possess strong brand equity and solid reputation in the marketplace and are immediately accretive to our earnings.
Karla Lewis: During the quarter, we repurchased $432 million of our common stock, reducing our total shares outstanding by nearly 3% as we opportunistically repurchased shares and that the broader pullback in equity prices across the metal space. In addition, we paid 66 million.
Karla Lewis: Dollars in dividends, highlighting our ongoing commitment to our valued stockholders next I'd like to acknowledge some previously announced updates regarding our board of directors, we appointed Jim can sickness as an independent director effective October 1st increasing our board to nine members, we look forward to Jim's.
Karla Lewis: Fusions from his experience and expertise in industrial manufacturing and safety.
Karla Lewis: Consistent with corporate governance, best practices, and our strategic and deliberate long term succession plan, Mark Kaminski will step down as our non executive chair on January 1st 2025, Mark will continue to serve as an independent board member and we thank him for his many contributions as chair.
Karla Lewis: Since 2016.
Karla Lewis: Doug Stotler, a director since 2016 will succeed Mark as our independent non executive chair effective January one 2020 five.
Speaker Change: For my closing remarks, I'd like to acknowledge all who have been impacted by the severe weather events. These past few weeks, well hurricane Helane and Hurricane Milton had minimal impact on our consolidated results. Many of our employees were personally impacted and we're very grateful to report that all reliance person.
Speaker Change: Lanell and their families are safe and.
Speaker Change: In closing I'd like to recognize our dedicated team at reliance for their strong execution through challenging and increasingly competitive market dynamics and their continued commitment to working safely.
Speaker Change: Just last month, we celebrated 85 years in business and our 30th anniversary as a publicly traded company, which would not have been possible without the daily focus and contributions from each member of our reliance family.
Speaker Change: While heightened near term uncertainty in the fourth quarter is contributing to headwinds in demand and pricing our resilient business model and positive long range view support our confidence in our ability to continue executing our strategic growth and stockholder return priorities.
Speaker Change: Thank you all for your time today I'll now turn the call over to Steve who will review, our third quarter demand in pricing trends.
Steve Cook: Thanks, Carla and good morning, everyone I'd like to begin by expressing my gratitude to our dedicated team for their commitment to operating safely and executing our strategy on that now.
Now I'll turn to our third quarter demand in pricing trends.
Steve Cook: Our tons sold increased seven 1% or three 7% on a same store basis compared to the third quarter of 2023 significantly outperforming the service center industry decrease of one 2% as reported by the MSCI.
Well it sounds decreased two 1% compared to the second quarter of 2024, we beat our expectations of down two 5% to four 9% due to increased shipments of carbon steel plate and structural products to the nonresidential construction market as the quarter progressed.
Steve Cook: We believe our growth and continued outperformance of our MSCI peers, while maintaining industry, leading profitability are supported by our diversified business model customer service and strategic investments in organic growth and acquisitions, our third quarter average selling price per ton sold up $2246 declined four point.
Steve Cook: 3% compared to the second quarter of 2024 exceeding our expectations of down 2% to 4% as carbon steel product prices declined more than anticipated as the quarter progressed aluminum prices also declined as the global market corrected from the short lived impact of Russian sanctions and the U S market dealt with an abundance.
Steve Cook: Low priced imports stainless steel prices showed signs of stabilization.
Steve Cook: Next I will turn to an overview of notable third quarter trends within our key end markets and products.
Steve Cook: Beginning with nonresidential construction.
Steve Cook: Carbon steel tubing plate and structural products, which are predominantly sold into the nonresidential construction market represented about one third of our sales in the third quarter.
Steve Cook: All three products had significant year over year growth outperforming industry shipment levels.
Steve Cook: Our diversified exposure to the nonresidential construction market, including publicly funded infrastructure projects Datacenters and related energy project supported solid demand for these products as the contribution from our recent acquisitions, despite macro economic uncertainty delaying projects in certain areas of the market.
Steve Cook: Yeah.
Steve Cook: Our general manufacturing business, which represents roughly one third of our total sales is highly diversified across both products and industries, including industrial machinery.
Steve Cook: Tumor products heavy equipment and military.
Steve Cook: <unk> increased year over year across the broader manufacturing sector, primarily reflecting strength in industrial machinery military shipbuilding in rail offsetting weaker demand in agricultural and heavy equipment and household consumer products, our industry outperformance across key product groups should be the general manufacturing.
Steve Cook: <unk> highlights the benefits of our diversified business model and a dynamic and uncertain demand environment.
Steve Cook: Aerospace products comprise approximately 10% of our total sales commercial aerospace demand remains fundamentally healthy despite short term production and supply chain challenges associated with the ongoing Boeing labor stoppage or defense related aerospace and space program demand remained stable at strong levels.
Steve Cook: We primarily service the automotive market through our toll processing operations, which are not included in our tons sold our tolling business, which represents 4% of our total sales saw improved demand in the third quarter of 2024 compared to the prior year due to healthy demand in both the U S and Mexican automotive markets.
Steve Cook: And our ongoing investments to increase capacity.
Steve Cook: Yeah.
Steve Cook: Semiconductor industry.
Steve Cook: Demand remained subdued with continued excess inventories in the supply chain, but showed signs of stabilization in certain areas.
Steve Cook: Long term outlook for the semiconductor market remains positive overall.
Steve Cook: Overall, we are experiencing relatively steady demand with continued strength in certain key end markets counterbalancing pressures in other end markets. Please.
Steve Cook: Please refer to our earnings release for additional commentary on our end markets and product diversification. We are very proud of our team's outstanding efforts, which enabled our continued industry, leading performance reliance's unrivaled scale and strong balance sheet.
Steve Cook: Highly attractive partner a mill suppliers in all market conditions.
Steve Cook: Reliance continues to win new business from new and existing customers recognize the quality and reliability of our service as well as the breadth.
Steve Cook: And depth of our product offerings and value added service capabilities.
Steve Cook: Now I'll turn the call over to Arthur to review, our financial results and outlook.
Steve Cook: Yeah.
Arthur Xiaomi: Thanks, Steve and thank you everyone for joining today's call our third quarter 2024, non-GAAP diluted earnings per share of $3.64 came in towards the low end of our guided range.
Arthur Xiaomi: Despite the difficult pricing environment, which was the primary driver of a 21, 7% decrease in our non-GAAP diluted earnings per share compared to the second quarter of 2024, our tons sold surpassed our expectations, leading us to outperform industry shipment levels once again across nearly all.
Arthur Xiaomi: Product.
Arthur Xiaomi: Differentiating value of our significant scale and diversified product offerings to a diverse end market is made evident in the current choppy economic environment as they allow us to participate in the pockets of the economy, where activity is strong these factors along with our broad and expanding processing capabilities.
Arthur Xiaomi: And industry, leading quality of service contributed two or 3.7% year over year growth in tons sold on a same store basis in the third quarter.
Our gross profit margin declined from 29, 8% in the second quarter to 29, 4% in the third quarter from continued pricing headwind again, our value added processing capabilities moderated the decline in gross profit margin as orders with value added processing continue to experience.
Arthur Xiaomi: And the last gross profit margin contraction in times of declining prices versus orders without processing.
Arthur Xiaomi: Our LIFO inventory valuation method provides further stability to our gross profit margin.
Arthur Xiaomi: Adjusting our cost of sales to align with current replacement costs.
Arthur Xiaomi: Consistent with our guidance, we recorded LIFO income of $50 million in the third quarter and we continue to anticipate LIFO income of $200 million for the full year, 2024, which implies $50 million of LIFO income for the fourth quarter of 2024 as a reminder.
Arthur Xiaomi: LIFO for the fourth quarter will include a true up to our interim annual LIFO estimate based on year end inventory levels.
Arthur Xiaomi: Factors, such as inventory costs per ton trends, along with changes in product mix and quantities will impact our annual LIFO calculation.
Arthur Xiaomi: As of September 32020 for the LIFO reserve on our balance sheet was $429 $3 million, which remains available to generate LIFO income and benefit future period operating results by mitigating the impact of potential further declines in metal prices move.
Arthur Xiaomi: Moving along to expenses same store non-GAAP SG&A expenses increased approximately $17 million or 3% year over year. As a result of slightly higher same store head count of 2% to support higher shipment levels and general wage inflation offset by lower incentive.
Arthur Xiaomi: Compensation sequentially.
Arthur Xiaomi: Sequentially same store non-GAAP, SG&A expenses declined approximately $4 million or less than 1% our model inherently normalizes expenses by right sizing incentives that's profit trend down.
Arthur Xiaomi: I'll now address our balance sheet and cash flow reliance generated operating cash flow of $463 $9 million in the third quarter, largely flat compared with $466 million generated in the third quarter of 2023 did.
Arthur Xiaomi: The decline in our profitability was offset by higher working capital release, resulting in relatively consistent quarterly cash flow from operations.
Arthur Xiaomi: Our healthy inventory turn rate based on tons, a 4.6 times and accounts receivable DSO of 41 days also contributed to strong cash flow generation in the third quarter.
Furthermore, our focus on inventory management help lessen the impact of declining prices on our gross profit margin.
Arthur Xiaomi: During the quarter, we invested $112 $8 million in capital expenditures completed a 22 million dollar acquisition returned $60.6 million to our stockholders through cash dividends and repurchased $432 million worth of our shares.
Arthur Xiaomi: And average cost of approximately $281 per share.
Arthur Xiaomi: In the first nine months of 2024, we have repurchased $951.3 million worth of our shares at an average cost of approximately $285 per share.
Arthur Xiaomi: All thing and nearly a 6% reduction in total shares outstanding as announced in our release our board of directors approved a one and a half billion dollar a refresh of our share repurchase plan, which we will use for ongoing opportunistic repurchases our leverage position remains favorable with a net debt to EBITDA ratio.
Arthur Xiaomi: Less than one providing ample liquidity to continue executing our capital allocation priorities.
Arthur Xiaomi: As previously announced in mid September we entered into an amended and restated $1 billion five year unsecured revolving credit facility with more favorable pricing and fewer restrictive covenants, reflecting our improved financial condition and upgraded credit ratings.
Arthur Xiaomi: Turning now to our fourth quarter outlook.
Arthur Xiaomi: As discussed in our release this morning, due to normal seasonal trends and temporary headwinds from heightened macroeconomic and political uncertainty we estimate our tons sold will be down six 8% in the fourth quarter compared to the third quarter.
Arthur Xiaomi: But up 46% compared with the fourth quarter of 2023.
Arthur Xiaomi: With half to 2.5% attributable to same store growth.
Arthur Xiaomi: On the pricing side, we expect our average selling price per tons sold for the fourth quarter to be down one and a half to three and a half per cent compared to the third quarter, reflecting continued pricing pressure across carbon steel products roughly a third of the expected quarterly pricing decline is due to the end.
Arthur Xiaomi: Tree point in the fourth quarter being below the third quarter average.
Arthur Xiaomi: We anticipate our FIFO gross profit margins will stabilize in the fourth quarter from better alignment of replacement cost with inventory costs on hand, as well as relatively lower anticipated selling price declines.
Arthur Xiaomi: Based on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $2 65 to $2.85 for the fourth quarter of 2024. This concludes our prepared remarks. Thank you again for your time and participation and we will now open the call to questions.
Arthur Xiaomi: Operator.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.
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Speaker Change: Ladies and gentlemen, we will wait for a moment, while the question queue assembler.
Speaker Change: The first question is from the line of Gotcha Johnson from BMO capital markets. Please go ahead.
Gotcha Johnson: Hi, Thank you for taking my questions, maybe starting on the commentary about <unk> being impacted by temporary factors can you talk a bit about what gives you confidence that solve the impact in Q S temporary temporary and what will drive better demand and Tonight.
Speaker Change: Yeah.
Speaker Change: Hi, <unk>. Thanks.
Speaker Change: Thanks for joining the call today.
Speaker Change: Yeah.
Speaker Change: We just as we reach out to our different teens running our businesses, who are close to our customers.
Speaker Change: As we talk with them over the past week or two there just seems to be more uncertainty at the customer level than we have.
Speaker Change: I have seen in prior periods the presidential election being cited as quite a bit of.
Speaker Change: That I would say overall, we're confident long term because either administration seems to be supporting manufacturing and trade policy and even if you know investments had in different directions, whether its on energy or or different area.
Speaker Change: He is most of those products those solutions require steel of one kind or another and with our diversified a breadth of products. You know we expect to have a position wherever the policy may go up it just seems that theres more trepidation.
Speaker Change: Of our customers trying to understand.
Speaker Change: Whereas it headed what impact and when will the the lower interest rates will help spur economic activity. The question is at what point does that really kick in we believe in 2025, maybe got January 1st but with the trajectory as we move through 2025, we expect.
Speaker Change: Pick up in activity related to that so again you know we also have heard of a few customers taking extended shutdowns maybe over the holidays. In Q4. So you know, we're being probably a little cautious.
Speaker Change: With our our Q4 guide just because there are a lot of factors that we can't control, but we do think having that presidential election behind us.
Speaker Change: Lower interest rates. The continued strong tailwind that are there with a lot of unspent dollars still under you know the different government stimulus products.
Speaker Change: Often the industry up well for 2025.
And then maybe just quickly on the auto side and I know you're exposed to it through the tolling business, but are you hearing any slowdown in that market or that business.
Yeah for the most part from from the platforms, we're on with our automotive toll processing customer.
Speaker Change: We have not seen a pullback we think it'll be normal seasonality for for those businesses in Q4, and generally you know stable demand you know our platforms were on a lot of the Suvs and light trucks, even some of the Super duty trucks, where there is a lot.
Speaker Change: <unk> demand and some ramp up coming so we are we read the headlines we hear people are concerned also again, the lower interest rates could help them with a consumer activity in the automotive market. So we have not experienced a slowdown yet.
Speaker Change: And currently expect a stable activity.
Speaker Change: Thank you very much thanks.
Speaker Change: Thanks, Scott Yeah.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, a reminder, if you wish to ask a question. Please press star and one.
Speaker Change: The next question comes from the line of Phil Gibbs from Keybanc capital markets. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: Okay.
Phil Gibbs: So the pricing and mix in the third quarter was a little bit below what you all were anticipating with with the guidance and completely understandable with the market dynamics, but.
Speaker Change:
Speaker Change: Just try to help me a little bit why the the LIFO reserve wasn't change too.
Speaker Change: Like that.
Speaker Change: Yeah. Good question, Phil So he spoke to this briefly at the last call, but Oh provide some additional color or as we're seeing some things play out as the year is progressing so we're having some interesting you know it makes impact this year that we really haven't seen in the past there's some.
Speaker Change: You know specialty you know aerospace products that have really long lead times.
Speaker Change: And you know all the rest of our inventory Tory cycling through and getting the lower replacement cost you know some of these products at 50 to 70 week long lead times so.
We're basically going to see the benefit of lower cost of those products in 2025, so well its effectively happening.
Speaker Change: Shifting some of that LIFO income from 2024 into 2025.
Speaker Change: And that's the primary reason why you havent really seen us.
Speaker Change: Our LIFO estimate for the year as the years progressed, because some of that impact is gonna be felt or realized in 2025 and Phil I would just add you know this is kind of a unique phenomenon you know I've been here for 30 years and this is the first time, we've really had something like this happen.
Speaker Change: Because you know the pricing of those products has basically doubled and they're high priced products and we'd never seen lead times like that for especially for that large of a chunk of our inventory. The dollars are higher you know Ana you know relatively lower volume just because of the type of product.
Speaker Change: So this is something we've been kind of learning as we've gone through the year. This year and seeing you know the impact on life, though of those unique characteristics are those products.
Speaker Change: Well youre not alone I've never seen it either [laughter].
Speaker Change: [laughter] cellphone were aligned.
Speaker Change:
Speaker Change: Question on the gross margins that you made about the fourth quarter. You said, you expected things to better align and stabilize in the fourth quarter does that mean.
Speaker Change: The you expect the fourth quarter to be the trough are you you are you, saying you already saw the trough in the third quarter.
Speaker Change: Good question, Phil So it depends with pricing that in the first quarter right. So if you are forecasting that pricing in the first quarter. It will go up and you know that would imply that Q4 would be a trough, but just to be clear, we're not putting guidance out for Q1 or argues for pricing for Q1.
Speaker Change: But.
Speaker Change: Again, depending on what pricing does.
In 2025, then yeah, I mean, if there's something some tailwind in the beginning of the year, then presumably that would be true that Q4 could be the trough.
Phil Gibbs: Oh I'm I'm just I appreciate that I'm, just saying relative to the third quarter are you, saying the third quarter, and you're saying, it's going to be lower than the third quarter, but stabilizing or is it gonna be kidding.
Speaker Change: Based on our guidance, we're staying consistent with the third quarter.
Phil Gibbs: Okay.
Speaker Change: Its helpful and last last question for me on the semi side.
Speaker Change: You largely due somebody's infrastructure from what I remember not somebody's consumables, but.
Speaker Change: There's been a little bit squishy, but saying, maybe seeing seeing some signs that that might be.
Speaker Change: It was stabilizing what what does that mean from from year end is it just that the supply chain feels a little bit over inventoried now that some of these projects have been a little bit deferred and you know that might be breaking after.
Speaker Change: The election cycle, just trying to get some kind of context behind that I appreciate it. Thanks.
Speaker Change: Yes, they'll be on the semi conductor, we do sell some into the consumables to the equipment manufacturers and then the infrastructure as you mentioned and it is one of our companies selling more into the consumables, we did see a little more activity in Q3 then.
Speaker Change: We had seen for the last several.
Speaker Change: Several quarters.
Speaker Change: As we see customers working through the inventory glut that they had still some room to go on on the equipment manufacturers.
Speaker Change: Some activity there, but not really picking up yet and then on the infrastructure side, the new ship builds.
There are a lot of factors I think impacting timing, we're still very bullish long term I don't know how much of that is the election. We hear about you know permitting slowdowns are getting construction workers just different reasons why it's starting to stop on some of the projects and most of the prop.
Speaker Change: Jack you see the big headline numbers, but a lot of them were planned in different phases, where it wasn't all going to come immediately which is quite honestly, a better environment, where its spread out a little bit.
Speaker Change: Thank you.
Speaker Change: Yep. Thanks, Bill Thank you.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, if you wish to ask a question Please press star and one.
Speaker Change: Yeah.
Speaker Change: As there are no further questions I now hand, the conference over to Karla Lewis President and CEO for closing comments.
Karla Lewis: Thank you and thanks again to everyone, who joined our call today I would like to remind everyone that next month, we'll be in Chicago presenting at Baird's Global Industrials Conference and we hope to meet with many of you. There I also want to just reiterate our confidence in the ability of the reliance team.
Karla Lewis: <unk> to operate well through all market conditions, even with some potential temporary headwinds in Q4, and we're confident with our team moving into 2025 and we'd like to thank our customers our suppliers and our stockholders for all of your support thank you.
Karla Lewis: Yeah.
Speaker Change: Thank you the conference of the Alliance Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
Karla Lewis: Okay.
Karla Lewis: Okay.
Karla Lewis: Yeah.
Karla Lewis: [music].