Reliance Steel & Aluminum Co

Greetings and welcome to Reliant Steel & Aluminum Co.'s first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brenda Miyamoto. Please go ahead.

Thank you, operator. Good morning and thanks to all of you for joining our conference call to discuss our first quarter 2020 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 operations, will also be available during the question and answer portion of this call. The recording of this call will be posted on the investor section of our website at investor.rsac.com. The press release and the information on this call may contain certain forward-looking statements which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties, or other factors, including the impact of COVID-19 and related economic conditions on our future operations, 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 company's annual report on Form 10-K for the year ended December 31st, 2019 under the caption risk factors, disclosure in our press release this morning 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.

Good morning, everyone. And thank you for joining us to discuss our first quarter 2020 results and our response to the COVID-19 pandemic. We had a strong start to the year following several financial performance records in 2019. Overall demand levels were healthy through most of the first quarter of 2020. Our strong non-GAAP gross profit margin of 31.9% was above our estimated sustainable range of 28 to 30% and produced non-GAAP gross profit dollars of $820.5 million on net sales of $2.57 billion. and non-GAAP pre-tax income of $220.6 million. Our non-GAAP earnings per diluted share of $2.45 significantly exceeded our first quarter guidance. I will provide additional details on our Q1 performance drivers in a moment. But first, I would like to address the coronavirus pandemic and how we expect it to impact our business and actions Reliance is taking to address this extraordinary situation. First and foremost, our thoughts and prayers go out to everyone around the world fighting this virus, especially those on the front lines helping the people who are directly impacted. Most of our locations continue to operate, albeit at reduced levels, as essential businesses under the United States Department of Homeland Security, Cybersecurity, and Infrastructure Security Agency, CISA, guidance. We continue to work closely with our suppliers and are grateful for their ongoing support and partnership to withstand these challenging circumstances. We are engaged with and listening to our customers and adapting to address and support their needs through this uncertain and difficult time. We have taken difficult actions, including workforce reductions, to right-size our operations to sustainable levels that we believe will enable us to emerge from this current crisis intact, prepared, and positioned to face new business realities, including the ability to quickly ramp up with our customers and suppliers and to recall laid-off employees when the time comes. Importantly, many of our businesses are supporting customers on mission-critical projects to aid in the COVID-19 response around the country. To name a few, we are pleased to be supplying processed aluminum necessary for ventilator production, metal doors for hospital walls and facilities being converted for patient care, and metal for construction of decontamination systems to sanitize N95 masks. We are proud to support these and many other opportunities that improve our service and contribution to the communities in which we live and work. To that end, many of our businesses have been donating personal protective equipment such as masks and safety glasses to support first responders and healthcare providers on the front lines of the fight against COVID-19. As I have stated time and time again, The health, safety, and well-being of our employees is our most important core value at Reliance. As such, we took immediate action to lower the risk to our employees by promoting remote work routines, canceling employee travel and group events, and restricting visitors to our facilities. We implemented social distancing and improved sanitation measures in the workforce to comply with heightened safety standards. We provided temporary aid in the form of paid time away from work to support our employees impacted by COVID-19, whether due to exposure to the virus or needed care for their families. We have expanded our employee emergency assistance fund, Reliance Cares, to provide grants to our employees impacted by COVID-19. I want to take a minute to thank each and every one of our employees for their unwavering commitment and dedication to health and safety at Reliance and our communities at large. Finally, I would like to reinforce that our operating model is designed to support the company through both good times and bad, as we have demonstrated throughout our 80-year history. Although the current situation, unlike anything we have experienced, we believe the resilience of our business model will help us manage through this particularly challenging time, just as it has in the past. For instance, during the Great Recession, when our 2009 shipment fell 32% and our average selling price declined 18.4% from 2008, we took immediate action. including reducing our workforce by 21% and lowering inventory by over $1 billion in a nine-month period from September 2008 through June of 2009. These actions allowed us to remain profitable for the 2009 year. While we're doing what we need to do to ensure Reliance stays safe and healthy, we're concurrently focused on maintaining our solid financial position. We have a very strong balance sheet with an investment grade credit rating of $831.5 million available for borrowing on our $1.5 billion revolving credit facility as of March 31st. Our business model promotes counter-cyclical cash flow generation, which we can combine with effective working capital management enhances liquidity. In addition, our highly variable cost structure provides financial flexibility with approximately 65% of our SG&A expense being people related. As I mentioned earlier, we made the difficult decision to reduce our workforce through layoffs and reductions in force. Since March 1st, we have reduced our workforce by approximately 1,600 people, or 11% of our workforce, including reductions at the three energy businesses we have closed permanently. These decisions were made on a location-by-location basis, which provides us the flexibility to continue to make changes as warranted going forward further. either with further cuts if business continues to slow or by quickly bringing back employees to support stronger demand. Recognizing the unique nature of this downturn, we extended healthcare benefits for a transitionary period to support impacted employees and their families, which is something we have never done in the past. We continue to actively monitor daily and hourly developments of this unprecedented emergency situation, including federal, state, and local orders, as well as recommendations of public health authorities. I would like to thank each of my Reliance colleagues for sharing the commitment to promote a healthy and safe workplace by practicing social distancing and heightened sanitation procedures in the workforce and working from home, if practical. or perhaps most importantly, I am grateful to see the consistent application of practical, common sense, good judgment as we all work together to protect each other in these extraordinary and unprecedented times. I'll now shift gears to a more detailed discussion of our first quarter performance drive. Our shipments were generally in line with our expectations supported by a relatively healthy demand environment while overall metals pricing softened compared to the prior quarter. Despite pricing pressure, our non-GAAP FIFO gross profit margin of 31.1% remained at strong levels as a direct result of our management's disciplined approach to pricing and focus on high quality High Margin Business. Turning to market conditions and our key end markets. Demand for non-residential construction, the largest end market we serve, remains solid for the majority of the first quarter, supported by strength and shipment volumes of carbon steel structural and tubing products. While we are beginning to see some second quarter projects being deferred We are cautiously optimistic that demand trends in the non-residential construction market will recover once construction activities picks up after the COVID-19 related shelter-in-place orders are lifted. Demand for the toll processing service we provide to the automotive market started the year off strong, supported by ongoing demand strength for aluminum content in vehicles. However, The sudden closure of many of these automotive OEMs and steel and aluminum mills in mid-March due to COVID-19 sharply reduced demand, focusing us to drastically cut production at our toll processing operations in both the U.S. and Mexico. We took decisive, immediate action reducing the workforce at our toll processing operations by almost 50% by the end of the first quarter. While the duration of the shutdown remains highly uncertain at this time, we believe we are well positioned to support increased production level as the automotive market recovers due to our proactive investments in facilities and value-added processing equipment and the expectations that we will be able to quickly bring back our highly skilled employees. On a more positive note, our toll processing volumes for the canned beverage and appliance end market remained fairly steady throughout the first quarter. Aerospace demand was relatively steady during the quarter as we continued to ship against strong backlogs and orders already in progress. With our first quarter of 2020, aerospace tons down only 3.2% compared to the first quarter of 2019 and our average selling price holding relatively flat. Going forward, we are expecting activity for commercial aerospace to decline beginning in the second quarter as a direct result of COVID-19. We will continue to monitor the evolving situation regarding air traffic and our aerospace businesses supporting these end markets given the uncertain long-term impact. Conversely, defense-related aerospace demand has remained strong. with stable trends continuing into April. Demand in heavy industry for both agriculture and construction equipment was steady throughout January and February. However, reductions in spending significantly declined in both of these markets in March and April, leaving our outlook highly uncertain at this point in time. Demand for energy, which is mainly oil and natural gas, remains at low levels. Given changes in drilling technology and increased global oil production that led to significantly lower oil prices in the first quarter of 2020, we've made the decision to permanently close three of our businesses supporting the energy and market. We also assessed our remaining energy business, Given that our long-term outlook for energy market is significantly reduced from prior cycles with an unclear path to recovery, which resulted in impairment charges of those businesses as well as the closed business. As a result, we recognized impairment and restructuring charges of $137.5 million in the first quarter of 2020, which Karla will elaborate on shortly. The semiconductor market was a bright spot for the quarter, with demand continuing its steady improvement from 2019. While up overall, our semiconductor operations in Asia were negatively impacted by COVID-19 in the earlier part of the quarter as compared to our North American operations. In the first two and a half weeks of April, our tons sold per day were down 20% compared to the same period in March. While our outlook for nearly all of our end markets remains challenging and unclear today, I'd like to highlight that we anticipate that our intentional diversification of end markets, products, and geography, as well as our decentralized operating model, will serve us well through recovery that will follow these difficult and uncertain times. turning to capital allocation. Our overall philosophy on this subject has not changed. Even in challenging times like these, we're executing the same strategy through a balanced focus on growth and stockholder returns. Because we sell into cyclical market, characterized by pricing and demand volatility, we believe it is critically important to maintain a flexible Thank you for joining us today. and many more. We will deploy cash fund essential needs and certain strategic projects to support our customers, through the additional innovative equipment and advanced technology in an effort to further strengthen our value-added processing capabilities. We will defer nonessential CapEx until we determine that it is prudent to invest in these opportunities. As it relates to M&A, we are not surprised to see a reduction in the number of potential acquisition opportunities in the market given the current environment. Meanwhile, the integration of Fry Steel Company, which we acquired on December 31st, remains on track. As you will recall, Fry Steel is a general line long bar distributor in Santa Fe Springs, California, with a strong brand reputation driven by its superior customer service, diverse product offerings, and next day delivery commitment. In regard to stockholder returns, we are pleased to continue delivering value to our stockholders through the payment of a regular quarterly dividend as we have done for 61 consecutive years. Since our IPO in 1994, we've increased the dividend 27 times, including our most recent increase of 13.6% in the first quarter of 2020. We also repurchased Thank you for joining us today. Extraordinarily difficult circumstances resulting from the coronavirus pandemic that directly impacted our business beginning in mid-March. I would like to once again thank each and every employee in the Reliance family of companies for their ongoing hard work and flexibility as well as their unwavering commitment to operating in a safe environment. Their collective efforts empower us to support our customers in essential businesses as we manage through this unprecedented crisis. As a result, we will challenge ourselves to drive continuous improvement in all aspects of our business. However, as we make decisions moving forward, I want to emphasize that the health and safety of our employees, customers, suppliers, and communities will always reign supreme. As we look forward, we believe our diversification strategy and our model of focusing on higher margin businesses and value-added processing will help support us through the recovery that will follow this crisis. Our decentralized operating model enables us to evaluate each of our businesses on its own merits and to ramp up individual operations quickly. Our strong balance sheet and cash flow enables us to continue operating our business today, preserve jobs for the majority of our employees, help support future demand from our customers, and strategically partner with our key suppliers once the situation stabilizes. We believe that we are well positioned to emerge from this situation as a stronger and more innovative company, and we look forward to bringing back those dedicated employees who are currently laid off. Thank you for your time and attention today. I will now turn the call over to Karla to review our first quarter 2020 financial results in more detail. Karla?