Q2 2019 Earnings Call
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The Conference Center, which conference.
Midline steel and aluminum company.
Your name please.
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Hey, F.L.A.M.E.
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Greetings and welcome to reliance steel and aluminum company second quarter 2019 earnings Conference 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.
I would now like to turn the conference over to your host Brenda Miyamoto.
Thank you you may begin.
Thank you operator, good morning, and thanks to all of you for joining our conference call to discuss our second quarter 2019 financial results I'm joined by Jim Hoffman, Our President and CEO and Karla Lewis, our senior Executive Vice President and CFO Bill sales, our executive Vice President of operations will also be available during the question and answer portion of this call.
A recording of this call will be posted on the investors section of our website at Investor Day, Our house they see dotcom.
The press release and the information on this call may contain certain forward looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks uncertainties or other factors, which may not be under the company's control, which may cause the actual results performance or achievement of the company to be materially different from the results performance or other expectations implied by these forward looking statements.
These factors include but are not limited to those factors disclosed in the Companys annual report on Form 10-K for the year ended December 30, Onest 2018 under the caption risk factors and other reports filed with the Securities and Exchange Commission.
The press release and the information on this call speak only as of today's date and the company disclaims any duty to update the information provided therein and herein.
I will now turn the call over to Jim Hoffman, President and CEO of reliance.
Thanks, Robert Good morning, everyone. Thank you for joining us I'm very pleased to discuss our 2019 second quarter results with you today, we had a solid second quarter characterized by relatively steady demand conditions in most of the key more goods we serve.
We generated quarterly sales of $2.88 billion and a strong gross profit margin of 29.6%, which produced second quarter gross profit dollars of $853.6 million the third highest in reliance with history.
Our non-GAAP net income and non-GAAP quarterly earnings per share were also the third highest in our history trailing only the record second quarter of 2018, and the first quarter of 2019.
We also continue to make progress improving our safety performance, which remains a top priority I want to thank the 15000 plus employees for their ongoing commitment to maintaining a safe working environment each and every day.
Underlying demand trends remained relatively healthy in the second quarter across the key end markets we serve.
However, metal pricing was slightly weaker than we anticipated while there were multiple mill price decreases on many of the carbon steel products, we sell our broad diversification of products.
Customers and end markets helped mitigate the impact on our business.
During periods of declining metal prices customers, often changes are buying pattern.
Delaying purchases and reducing order sizes. However, our customers buying patterns are generally more consistent as they focus more on need versus price.
We serve we service the majority of our customers on a just in time basis, which typically involve smaller order sizes that require next day delivery.
We believe this contributed to our shipment volume declining less than the industry average.
Our same store tons sold declined 5.5% in the first half of 2019 compared to the first half of 2018, which compares favorably to the industry could decline of 6.9% reported by the MSC for the comparable period.
Our managers in the field continue to maintain our disciplined strategy of focusing on high quality high margin business, including increasing levels of value added processing.
As such we believe our expenses and diverse customer base.
Smaller order sizes, just in time delivery and significant value added processing capabilities.
Meaningfully.
Differentiate us from our peers.
These business models characteristics also support our ability to maintain industry, leading gross profit margins for our industry cycles.
This is especially evident in the second quarter of 2019.
As we maintained a FIFO gross profit margin of 28.8% compared to a 28.9% in the first quarter of 2019, despite declining prices.
Turning to market conditions in our key end markets.
Demand for processing services, we provide to automotive market, which we serve is mainly through our toll processing operations in the us and Mexico remains strong.
Our outlook for toll processing remains very positive as demand for aluminum content in vehicles continues to grow we have been proactively investing in facilities and value added processing equipment to meet this increasing demand.
During the quarter, we completed 150000 square foot building expansion and the installation of additional Aluminums slitting line in Kentucky and production is ramping up nicely.
We are also in the process of expanding three of our toll processing operations in Mexico to support increased automotive activity in that region.
Aerospace demand remains strong with a growing order back log our sales into the aerospace market consist of heat treated aluminum products, primarily replay and well as well as specialties stainless steel and titanium products.
Given strong demand environment, the recently announced 5% price increase on heat treated aluminum plate effective in August .
He has been fully supported by the market.
Demand for common alloy aluminum sheet also remained steady although availability has increased from the tight levels previously experience, which could pressure pricing going forward.
Demand for our stainless steel flat products remained steady.
Demand in heavy industry and nonresidential construction remained relatively steady in the second quarter. However volumes in some areas were impacted by customer buying patterns due to declining prices for certain of our carbon steel products. We believe carbon steel prices have generally bottom and therefore expect customers to resume more normal buying patterns in the near term. We are optimistic in regards to potential tailwinds in nonresidential construction in the second half of 2019 as we believe large project projects were delayed due to difficult weather conditions in the first half of the year. In addition, the active fabricated structural steel trade case could shift more activity to the U.S.
Demand for energy, which is mainly oil and natural gas has been slowing with declining rig counts and muted overall activity. We anticipate continued steady slowdown in activity in this market in the near term.
Turning to capital allocation.
Our 2019 capital expenditure budget of $245 million includes strategic investments to support our customers' needs and drive organic growth.
Our investments primarily focus on facility upgrades and expansions new innovative equipment and advanced technology Importantly, we continue to identify opportunities to expand our value added processing capabilities in high performing operations that significantly contribute to our gross profit margins and earnings.
In regard to acquisitions, we are pleased with a broad area of opportunity. We are seeing in the market. We will remain selective in our M&A activities executing on opportunities to meet our strict criteria of high quality businesses with experienced management team and excellent customer service.
And that are complimentary to our diverse product and service offerings and immediately accretive to our earnings.
Return on capital to our shareholders remains a key focus to realize.
During the second quarter, we repurchased $50 million of our stock.
Reflecting the confidence our board and the management team have in our long term strategy and outlook.
We will continue to be opportunistic in our approach to stock repurchase activities.
We have continued to pay our regular quarterly dividend as we have now done for 60 consecutive years.
We most recently increased our regular quarterly dividend by 10% in the first quarter of 2019, marking the 26 increase since our.
1994 IPO.
In closing we are pleased with our second quarter results, which were once again largely attributed to the strong execution of our managers in the field.
We achieved the third highest gross profit dollars non-GAAP net income and non-GAAP earnings per share and our history. Despite steeper pricing declines than we anticipated, which is a testament to our unique business model and pricing discipline as well as our strategy of concentrating on higher margin business.
Looking ahead, we will continue to focus on providing industry, leading service to our customers.
While at the same time, maximizing our earnings power and increasing value to our stockholders.
Thank you for your attention today I will now turn the car color over to Karla to review, our second quarter financial results and third quarter 2019 outlook in more detail.
Thanks, Jim and good morning, everyone. We are very proud of our second quarter results. Our net sales in the second quarter of 2019 decreased 2.5% from the first quarter of 2019, mainly due to downward pricing pressure on many carbon steel products.
Our tons sold increased 0.4% compared to the first quarter of 2019.
In line with our expectations of down 1% to up 2% with one more shipping day in the second quarter of 2018, and the first quarter of 2019.
Compared to the second quarter of 2018, our tons sold declined 4.9%. However, we do not believe the decline in shipments is reflective of end demand as there was unusual buying activity in the second quarter of 2018 due to the enactment of section 232 tariffs at that time.
Our average selling price per ton sold was down 2.8% compared to the first quarter of 2019 outside of our expected range of flat to down 1% due to multiple mill price decreases on many of the carbon steel products, we sell our average selling price per ton sold increased for our aluminum stainless and alloy products.
Our continued pricing discipline and focus on higher margin orders by our managers in the field as well as our continued investments in value added processing equipment resulted in a strong gross profit margin of 29.6% in the second quarter of 2019.
Slightly above our estimated sustainable range at 27% to 29%.
Because metal prices decreased more than we expected in the second quarter. We have increased our estimated full year LIFO income to $70 million from our previous estimate of $50 million. As a result, we recorded LIFO income of $22.5 million or 25 cents of earnings per diluted share in the second quarter of 2019 compared to LIFO income of $12.5 million or 14 cents of earnings per share in the first quarter of 2019.
Given our current estimate of annual LIFO income of $70 million in 2019, we expect to record $17.5 million of LIFO income in the third quarter of 2019.
Our second quarter SGN expenses of $531.4 million declined slightly from the first quarter of 2018 and relatively steady demand given our continued focus on expense control.
Our effective income tax rate for the second quarter was 25.0% up from 24.0% in the second quarter of 2018.
And we expect our effective tax rate for the full year of 2019 to be approximately 25%.
Up from our full year 2018 tax rate of 24.5%, primarily due to increased state income taxes.
non-GAAP net income attributable to reliance for the second quarter of 2019 was $184 million, resulting in non-GAAP earnings per diluted share up $2.71, both the third highest and reliance's history.
Turning to our balance sheet and cash flow.
We generated very strong cash from operations of $346 million during the second quarter of 2019.
We invested $70.9 million and capital expenditures in the second quarter and paid regular cash dividend of $36.9 million to our stockholders.
We also repurchased approximately 592000 shares of our common stock at an average cost of $84.33 per share for a total of $50 million.
At June Thirtyth 2018, our total debt outstanding was $2.02 billion, resulting in a net debt to total capital ratio of 27.4% and we had $699 million available our $1.5 billion revolving credit facility, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy.
Turning to our outlook, we remain optimistic with regard to business conditions in the third quarter of 2019.
We expect that end demand will remain relatively steady with shipment levels impacted by normal seasonal patterns, which included client shipping volume due to customer shutdowns and vacation schedules.
As a result, we estimate our tons sold will be down 4% to 6% in the third quarter of 2018 compared to the second quarter of 2019.
Additionally, we anticipate that overall metals pricing will generally remain consistent with current levels.
However, because metal prices, especially for many carbon steel products declined throughout the second quarter of 2019, we expect that our average selling price in the third quarter of 2018 will be down 1.5% to 2.5% compared to the second quarter of 2019 to adjust to current price levels.
Also given that carbon steel prices appear to have bottomed with potential for mill price increases in certain products.
We expect our FIFO gross profit margin to remain consistent with levels achieved so far in 2019.
As a result, we currently expect non-GAAP earnings per diluted share to be in the range of $1.90 cents to $2 for the third quarter of 2019.
In closing we were very pleased with our financial and operational performance in the second quarter, Despite a softer pricing environment for certain of our products.
Excellent execution by our employees, coupled with our disciplined strategy resulted in yet another quarter of strong earnings and excellent cash flow, enabling us to continue executing on our capital allocation priorities of investing in the growth of our business and returning value to our stockholders.
That concludes our prepared remarks, thank you for your attention and at this time, we would like to open the call up to questions operator.
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[noise].
My first question comes from Martin Englert with Jefferies. Please proceed with your question.
Hi, good morning, everyone.
All right.
So based on the sequential volume guide of down 4% to 6% continues to indicate that mid single digit year on year declines that we've seen so far year to date and you did touch on this earlier, but can you discuss end user de stocking that's distorting the volumes, where you think true underlying demand may be trending.
Yes. This is Jim the term de stocking of never really understood. It.
We really don't.
Change our model our model as we listen to our customers. They tell us what they're going to buy we make sure we have the product form and we service the way they need us to service so.
We we reacted to what they do we react to the intelligence, we get from our suppliers.
That's just where we see things that I don't think Theres I understand why people use that terminology, but we don't.
As far as the markets themselves, what we said there's just some seasonality in our business. It's been there for a long time and it really hasn't changed that much one way or the other.
I think that's reflected on our comments and the markets themselves or are okay. Other than the ones. We that we have pointed out.
Energy seems to be slowing a little bit lot of geopolitical.
Issues involved with that semiconductor has has been slow and though.
Perhaps there may be a.
<expletive> in the future we hope for that.
And.
The other markets, we sell into are relatively steady.
And I think Martin just to expand on that.
No we want to be clear that we think as Jim said end demand will continue its continued at reasonable rates for us. So theres no change in our outlook for that other than the comments Jim made on the specific end markets. It's really the downward guide, it's our normal seasonality in 2018, our third quarter tons sold were down 5%, 5.1% from the second quarter.
2017, we actually were up slightly 2016, we were down 4.9%. So we are just at this point guiding to reflect the typical seasonality that we see to a lot of our customers doing extended shutdowns at our small customers.
Vacation schedules can impact order activity also.
Okay. Thank you for the additional color there and if I could one other quick one within aerospace there has been increased caution within the supply chain due to the Max grounding can you provide an update on overall demand and I know you touched on this earlier, but also any other changes within the supply chain inventories and maybe more specifically touch on product demand for air aluminum heat treat plate.
Yeah, Mark this is bill sales.
We still see good strong dedicated steady demand on the aluminum aerospace plate.
Market.
We also or continue to monitor and evaluate the 737 Mac situation. We've got action plans ready to implement as things become more clear on that situation to date the impact on our business is negligible and we believe that the plane is recertified if that happens this year the impact to our business will be minimal so.
I think you are hearing most of the mills are still really bullish and have a positive outlook for 2020 and based on our demand and what we see we would agree with that.
And remember total aerospace sales are only about 10% of our overall sales dollars and we're selling to several different customers on several different programs. So you know the exposure is pretty limited for us if anything would happen right.
Understood and then just from a gross margin perspective, I would imagine that those gross margin dollars are higher than group coverage for the aerospace right.
Generally on on those types of orders, we give some contractual business.
Some of the aerospace products that we sell us theyre higher prices based on the product mix I mean, especially the heat treat aluminum plate is.
One of our more valuable products that we're selling other margins are generally kind of in line right.
Okay excellent. Thanks for all the color and congratulations on the results.
Okay.
Our next question comes from Matthew Korn with Goldman Sachs. Please proceed with your question.
Hi, This is Hunter valley on for Matthew Korn, how should we think about the removal of section to 32 pair of strong 10 out of Mexico impacting reliance do you all see it as a tailwind or headwind any color you can provide there.
Yeah, we we.
When all that started when that's announced and what have you.
Obviously, nobody really knows whats going to happen with that so we're like everybody else. We just operate our business day to day week to week month to month.
The one thing it did do and we knew that would do it if the prices went up.
And that's good we appreciate it we appreciate higher pricing I'd say, our domestic partners deserve that money.
Thursday file the they filed the suit based on facts and it seems like that the results have.
Basically just on that give them an opportunity to to raise the prices go somewhat but if you go back and compare the prices where they are today to win the hit they are actually below that level, so I'm not sure.
Where it's going to go from here, but suffice it to say.
That.
We'll we'll react.
Accordingly, and I think.
The the actual the resolution of Canada, Mexico, and the removal of the tariffs are down.
Generally it's not it's not that big of an impact to us because we're typically serving local customers generally within a 200 mile radius of our our locations. We do have operations in Mexico that primarily servicing those markets same thing in Canada. So if anything we think theres a little more certainty now that that part is behind us and we support free trade throughout North America. So to the extent our customers are busier, that's a positive for us, but but overall I'm not even sure ill.
Impact anticipated for rail line.
Great. Thank you that's very helpful and one more if I may I'm, just trying to pricing steel prices have moved materially lower lower from the start of the year, albeit they've seen an uptake more recently, how how should we think about this impacting reliance can can you maybe just walk us through the lag is we should see on on pricing and cost. Thank you.
Yes, I'm, assuming you're referring to the the price increases this week actually in flat roll.
They have we seen three three increases this week alone.
I hope they stick.
But that is not a big part of our business that just happens to be the the the focused product if you will.
I think it's less than 7% of our business is certainly it is important to us but.
It's just one piece of the piece of that.
If you go through all the rest of the products and.
No material, we sell some prices are up some prices are down.
And Thats all based on demand and like we said we the demand we see right now is steady to good depending on the market, we are selling into and as far as the lag is concerned.
Tom as soon as the prices are announced.
We do our best to get those prices out.
And when they are going down we like to we'd like to see what's going to happen. So we don't we don't.
I can't give you a definitive answer on what exactly happens with pricing other than the fact that when they go up we support them and there is you know from the timing standpoint, as Jim said, we expect to get that sell price benefit right away when prices go up but on the kind of receiving side from an inventory cost and cash flow standpoint, you know lead time very that we are usually out usually at least two months for us to receive in the lower cost metal and have our average cost decline. So we would anticipate going into third quarter still receiving in some lower cost metal, which will be positive for us from a working capital release and cash flow standpoint. So we would expect to see a little continued benefit of that in the third quarter.
Great. Thank you that's that's all from me congratulations on the strong quarter.
Thank you. Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from Phil Gibbs with Keybanc capital markets. Please proceed with your question Hi, Good morning.
Good morning.
Hey, Jim can you educate us a little bit just here on this fabricated trade case and how you all play.
In that arena, and how you would be.
Positively impacted by the resolution here.
I think.
Given that it's a reasonably new issue.
And it's starting to be talked about a little bit more just trying to trying to get a better feel for what this all means.
Sure.
First of all it's a very complex issue.
Well because what happened was the.
The.
Basically the domestic suppliers.
We have been getting cheated.
You know you're the Theres theres countries that they're just starting all the owners of the laws.
The.
Government subsidized.
Producing mills wood, which we don't hear.
And the countries like China.
I had been shipping subsidized material into Canada, and Mexico, having some fabrication done two and shift right back into the United States and that's not the way. The rules are supposed to boast be followed so they filed the suit. So what's happened recently they over a period of time short period of time. They did rule that there has been subsidy subsidies to certain countries, China and Mexico were the two that that got hit with that Canada was found to be doing some of it but to a very very small degrees. So they didnt hit the register where they are actually going to have something.
Some some some negative impact so that's what's happening right now.
There is more to come now they've identified there has been subsidies are going up there has been.
Damage. The next the next phase of that will be how much of the damage is and what the tariff quotas finds will be for the countries and continue to do that and Thats scheduled I believe for November . So we'll know more in November hot actually reaction I can tell you. This.
There is enough there was enough information around that for fabricators in the us to just determined it's not worth it. So we have seen some business that would have been earmarked for that kind of behavior that has come back into the United States I think the I think the domestic mills are doing the right thing.
They're as good as it gets when it comes to making material making material they make.
Worldwide.
They just you just can't find a battle.
When with one arm behind your back so I think they did they have done what they needed to do.
I think long term if everything plays out the way it.
It could.
There will be.
There will be stronger.
I think the fabricators to be stronger I think some of the the domestic manufacturing.
Business will return onshore, which is a good thing for the us economy, and certainly a good thing for for reliance but.
Right now right now Phil it's all very positive and we hope we hope that.
Although business strategy, we it looks like it's going to be a good thing for reliance and.
Well, we'll continue to service those customers who are in that space. Yes. Thanks, Phil specific server alliances I think you're aware non residential construction is our largest end market exposure.
Structurals of the big part of that it's usually about 9% to 10% of our revenue dollars.
That we sell and structural so as Jim said to the extent that there is more activity sourced within the U.S., we would hope to sell more metal.
To our customers to support that and also we've talked in the past about the fact that we have made a lot of investments in our non residential construction businesses.
In the form of additional value added processing equipment. So if theres more fabricating Dennis you as we could pick some of that up or certainly support our customers and we would like to see them be stronger and.
Port them with whatever they need from us So we look at that as a positive.
We did make a comment in the script about.
Potential tailwinds on Nonres construction in the second half due to difficult weather in the first half hour hearing that from others in the industry, we have not factored any of that into our guidance.
On volume for the third quarter. So just wanted to be clear that we there's none of that factored in so that could be a positive for us if we see more activity from both the trade case and stronger activity in the second half until just one other comment along the way. These trade cases, the 232, it certainly hasn't still some out.
Positive.
Forward looking.
Issues with or domestic suppliers.
The capacity and more importantly, the capabilities that these are partners are investing in.
They're very very encouraging.
You're talking about I believe it's over $13 billion worth of future investment in the United States in our in our economy and that's.
That's really good to see so I'm happy with that.
Our partners are able to feel good about.
What's been going on.
As far as material coming into United States being dumped in the United States that seems to be something that they're not going to have to fight with as much going forward. So.
Thats very positive and looks good for lines too.
So if I'm hearing you right on the fabricated.
Peace piece of the equation I can consider you to some degree.
A fabricator.
And then certainly are your customers is that the right way.
I would consider us a value add or material I would consider our customers fabricators. We don't okay. Yeah, we don't we don't compete with our customers or our supplier.
Understood.
And then second question I have is just on the energy market clearly.
Clearly drilling is down completion activity, though is strong.
Internationally things look look strong.
So kind of a mixed bag when you look at the world, but certainly slowing down here.
How do you see.
The inventories right now generally positioned at the distributor level and also at the.
The the end user level, because I know, we are heavy coming into the year. Thanks.
Yes, we were we were have become an engineer I can just I mean, just think for reliance we've done a lot of work to get our inventories in line I think were closed.
As far as what's in the pipeline at the end users.
My guess is not a lot they don't have a tendency to use reliance versus putting in their own inventory, which we're good with that it's just an interesting market I mean, the world changed I mean, the whole technology of drilling and completions and want to have it and I've said this before I don't think we're ever going to see the days, where we have upwards of 2000 active rigs in the United States, which they just don't need that anymore with the with the with the.
Sophisticated way that they can bring oil and natural gas out of the ground with fracking and what have you. There is no need for that many wells, but there certainly is.
The need for a lot of metal that goes into the completion and theres plenty of Aptar to come and we're very active in that with a lot of our customers and then the takeaway you the tanks in the or the.
The pipelines and what have you and LNG plants and always all these this infrastructure when it comes to natural gas and oil.
That all consumes metal and we are heavily involved in that it's just a matter of.
What happened yesterday as far as geopolitical winners, Iran or.
Many different things. So we're it's a good market for us it's a it's a.
It's a value added market for for us.
And that big consumer of metal. So we're we like that space. It's not it's not a huge part of our business is smaller than it used to be paced and all things that just said, but we still like it and our companies that are in that space are involved with the drilling and the completions.
We've got.
Right, where we'd like to our space.
Thanks, I appreciate the consistency.
Right.
Ladies and gentlemen, we've reached the end of the question and answer session. At this time I'd like to turn the call back to Jim Hoffman for closing comments.
Yes. Thank you everyone for sitting on the call today and your continued support and commitment to reliance have a great rest of your day.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Conference call has ended please disconnect your lines. Thank you.