Reliance Steel & Aluminum Co

Ladies and gentlemen, and welcome to the Reliance Steel & Aluminum Company's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Any question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Ms. 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 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 of 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 impacts of the COVID-19 pandemic 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 and as updated in the company's quarterly report on Form 10-Q for the quarter ended March 31st, 2020 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.

Thanks, Brenda. Good morning, everyone, and thank you all for joining us today to discuss our second quarter 2020 financial results. The strength and resiliency of our business model produce solid results during an extraordinary and extremely challenging course. Because we support many customers deemed essential businesses, our tons sold declined only 17.5% compared to the first quarter of 2020. We maintained a strong gross profit margin of 30.4% on net sales of $2.02 billion, which combined with reduced operating expenses resulted in pre-tax income of $102 million and earnings per diluted share of $1.24. We adjusted our working capital in response to reduced activity levels and generated cash flow from operations of $475.7 million. At the outset, I'd like to sincerely thank each and every one of my Reliance colleagues for their flexibility and hard work in a truly extraordinary environment. We are the best at what we do because of you, and your effort in this quarter proves it. Our managers in the field did an exceptional job navigating a highly volatile quarter while remaining focused on employee health and safety, including implementing enhanced practices to mitigate COVID-19. We remain dedicated to keeping our employees, customers, suppliers, and communities safe while providing exceptional customer service across our diversified customer base. The combined efforts of all of our employees, including adherence to our new health and safety protocols by our frontline employees, resulted in improved safety performance during the quarter and allowed us to continue supporting our valued customers through these extraordinary times. I'd also like to highlight the strength of our gross profit margin during the quarter, which once again exceeded our estimated sustainable range of 28 to 30%. Our strong gross profit margin is a direct result of the exceptional execution of our managers in the field. Our local managers continue to leverage the significant investments we've made in recent years to expand our value-added processing capabilities to focus on higher margin business and appropriately price the value we provide our customers by delivering the highest quality products and services when needed. Now, let's turn to a more detailed discussion of our second quarter performance drop. As mentioned, our shipments decreased 17.5% compared to the first quarter of 2020 due to decreased demand in nearly all of our end markets as a result of customer shutdowns and project delays attributable to COVID-19. Metal pricing was also better than we anticipated, with our average selling price per ton sold down only 3.5%. compared to the first quarter of 2020, driven by declines in pricing across the majority of the commodities we sell. We reacted quickly to rapidly changing business conditions and reduced our second quarter SG&A expenses by 16.1% compared to the first quarter of 2020, consistent with our resilient model and actions taken in prior downturns We reduced expenses by addressing variable costs that fluctuate with shipment levels. As about 65% of our SG&A expenses are people-related, we reduced our workforce through temporary layoffs and permanent reductions in force, impacting a total of approximately 2,100 employees by mid-July. The majority of these actions were implemented in late March and early April. in immediate response to significant declines in demand. Fortunately, we have now recalled approximately 900 or over 40% of our impacted employees as certain of our businesses have recovered, most notably our toll processing operations servicing the auto industry. Our decentralized structure allows us to react quickly to market conditions on a local, Thank you for joining us. Our largest end market softened during the second quarter as shelter-in-place orders resulted in the deferral of numerous projects. However, as restrictions began to lift across the country in May, we experienced an increase in activity as customers focused on completing projects that had previously been put on hold. Quoting activity remains strong for projects related to schools, data centers, and warehouse distribution. We have also seen an increase in certain infrastructure projects such as bridges. As such, we remain cautiously optimistic that demand for non-residential construction activity will continue to improve in the second half of 2020 based on healthy backlogs and positive customer settlement. for the toll processing services we provide the automotive market fell sharply in the second quarter following the mid-March closure of many automotive OEMs and steel and aluminum mills due to COVID-19. This resulted in significantly reduced processing volumes at our toll processing operations in both the US and Mexico. We responded with significant reductions to our workforce at our toll processing operations of almost 50% by the end of the first quarter. As automotive OEMs began to reopen and ramp up production in early June, we were very pleased to quickly bring back many of our highly skilled employees back to work. As of today, the majority of our furloughed employees servicing automotive end markets have returned to work on improved activity levels. Importantly, our toll processing operations support many light truck and SUV programs that are experiencing a strong recovery. We continue to focus on growth and innovation in toll processing, including expansion of our toll processing operations to support increased future demand. Demand in heavy industry, both agriculture and construction equipment, also declined in the second quarter as a result of reduced production schedules and customer shutdowns related to COVID-19. Based on positive feedback from our diverse range of industrial customers, we are cautiously optimistic our businesses servicing the broad industrial market should begin to recover from current levels in the second half of 2020. The semiconductor market remained a bright spot in the second quarter as demand continued to improve steadily compared to the first quarter of 2020. Our outlook remains positive for both the OEM and project-based portions of this market across the various geographies that we service. Turning to aerospace, demand in defense market remained fairly stable at solid levels. However, commercial aerospace demand declined considerably as a direct result of the reduced travel due to COVID-19. In response to reduced commercial airplane build rates, we made significant workforce reductions and closed two of our smaller international locations supporting the commercial aerospace market. We anticipate commercial aerospace demand to soften further in the third quarter, and we will take additional cost reduction actions if and when necessary to ensure the continued long-term profitability of these businesses. Our long-term outlook for commercial aerospace remains uncertain at this time. Finally, demand in energy, which is mainly oil and natural gas, remains under significant pressure for the second quarter, marking the lowest level of activity we've seen in this market in the past 25 years. In response to these conditions, We've continued to take proactive cost reduction measures, including additional headcount reductions and the closure of three of our energy-focused businesses in the first quarter of 2020. As a result of these actions, we believe our remaining businesses servicing the energy sector are well-positioned to support our future recovery in energy. Although our outlook for nearly all of our end markets remains challenging and uncertain, we believe our resilient business model and diverse end markets, products, and geographies, along with our decentralized operating structure, will continue to serve us well for the recovery that will follow these extraordinary times. We believe customers realize the increased value in Reliance's model during challenging markets as they confidently rely on us to do more for them, often in smaller sizes or on more frequent basis. Turning to capital allocation. Even in this current environment, our long-term strategy of appropriately balancing growth and stockholder return priorities has not changed. Since we sell into cyclical markets impacted by pricing and demand volatility, We believe it is critically important to maintain a flexible and opportunistic capital allocation strategy. Our operations continue to generate cash as a result of our counter-cyclical cash flow characteristics of our business model. We also continue to right-size our inventory to reflect current demand levels through reduced buying activity as well as cross-selling inventory within our expansive reliance network Our current 2020 capital expenditure budget of $190 million will be utilized to fund essential needs and certain strategic projects to support our customers through the addition of innovative equipment and advanced technologies to expand and strengthen our value-added processing capabilities and to maintain our facilities and equipment. to meet our stringent quality and safety standards. As for M&A, we have seen an increase in the number of potential acquisition opportunities in the market compared to the first quarter. Though we remain selective and highly disciplined in our approach, we continue to look for targets that meet our strict criteria of profitability, high quality businesses, strong management teams, and superior customer service. Acquisitions must also complement our product and end market diversification strategy and be immediately accretive to our earnings. We are pleased to continue delivering value to our stockholders through the payment of regular quarterly dividends as we have done for 61 consecutive years. We've increased our dividend 27 times since our 1994 IPO including the most recent increase of 13.6% in the first quarter of 2020. We have never suspended or reduced our quarterly dividend. Although we did not repurchase any shares in the second quarter, we did repurchase $300 million of our common stock in the first quarter of 2020. In summary, Once again, I'd like to thank each and every one of my colleagues in the Reliance family of companies for their perseverance, hard work, and flexibility, as well as their steadfast commitment to health and safety. It is this dedication to health and safety, combined with the solid execution of our tried and true model of focusing on higher margin business and value-added processing, that empowers us to operate our business profitably through these unprecedented times. Our solid second quarter results demonstrate the strength and resiliency of our business model and our ability to successfully operate in all environments. In the second quarter, our decentralized model provided us with flexibility to immediately reduce and subsequently ramp up individual operations quickly in response to the rapid changes in demand trends and to restructure other businesses that were more severely impacted to ensure long-term profitability. This flexibility coupled with our strong balance sheet and cash flow enables us to remain profitable despite extraordinary market challenges, preserve jobs for the significant majority of our employees, and provide enhanced solutions to support our customers changing and growing needs. Thank you for your time and attention today. I will now turn the call over to Karla to review our second quarter 2020 financial results in more detail. Karla?