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?

Thanks, Jim, and good morning, everyone. Net sales of $2.02 billion for the second quarter of 2020 decreased 30% from the second quarter of 2019, with our tons sold down 19.6%, and our average selling price down 11.7%. Compared to the first quarter of 2020, net sales decreased 21.5%, with our tons sold down 17.5%, and our average selling price per ton sold down 3.5%. I'll now give a bit more color on our shipment trends during the quarter. Our tons sold for our service center businesses, which excludes our toll processing operations, experienced a slight decrease near the end of March. However, in April, our tons shipped declined more significantly, down 20% compared to our January and February average tons shipped per day due to business closures across the country. We saw a slight improvement in May as businesses began to reopen. June daily shipments were consistent with May at levels approximately 16% lower than January and February shipment levels. Our total processing operations followed a slightly different path as approximately 60% Our tolling tons per day declined 15% in March compared to January and February and fell a further 52% in April before bottoming in May at 62% below January and February levels. Our tolling tons per day in June recovered to about 66% Our gross profit margin for the second quarter of 2020 was strong at 30.4% and included $5 million of LIFO income. On a non-GAAP LIFO basis, which is the best measure of our day-to-day operations, our gross profit margin of 30.2% increased 140 basis points from 28.8% in the second quarter of 2019. This is a direct result of the outstanding performance by our managers in this field who, despite the challenging circumstances, continue to maintain pricing discipline by focusing on higher margin orders. Importantly, our gross profit margin improved despite the significant reduction in our tolling volumes I just discussed. Our toll processing businesses generally operate at higher gross profit margins than our service center businesses so increasing our gross profit margin despite significantly reduced tolling volumes truly highlights the strength of our gross profit margin and business model. We recorded LIFO income of $5 million in the second quarter of 2020 compared to LIFO income of $22.5 million in the second quarter of 2019 and $20 million in the first quarter of 2020. Because overall metal pricing levels held up better than we had anticipated in the second quarter of 2020, we have revised our estimated annual LIFO income to $50 million from our prior estimate of $80 million. As a result, we currently expect to record $12.5 million of LIFO income in the third quarter of 2020. At June 30th, our LIFO reserve was $112.6 million. Our second quarter same-store non-GAAP SG&A expenses decreased 102 Thank you for joining us. and the 2020 second quarter compared to the 2019 second quarter. Our performance-based compensation structure also contributed meaningfully to lower expenses in the second quarter. As Jim noted, we closed two of our smaller international locations related to commercial aerospace along with certain other minor restructuring activities which resulted in an impairment restructuring charge of approximately $5.6 million in the second quarter of 2020. We also recorded $4.8 million in non-recurring settlement charges related to the termination of multiple small frozen defined benefit plans. We remained solidly profitable in the second quarter of 2020 with non-GAAP pre-tax income of $112.4 million and a pre-tax margin of 5.6%, which was well above our expectations heading into the quarter given the significant uncertainty regarding the potential impact of the COVID-19 pandemic. Our effective income tax rate for the second quarter was 20.9%, down from both 25.0% in the second quarter of 2019 and 24.3% in the first quarter of 2020. Our reduced income levels attributable to the impacts of COVID-19 drove our lower tax rate. At this time, we estimate our effective tax rate for the full year of 2020 will be approximately 22.4%. Non-GAAP net income attributable to Reliance for the second quarter of 2020 with $88 million, resulting in non-GAAP earnings per diluted share of $1.36. Our GAAP earnings per diluted share were $1.24 in the second quarter of 2020, down from $2.69 in the second quarter of 2019, mainly due to lower pricing and demand levels. Turning to our balance sheet and cash flow, we generated strong cash flow from operations of $475.7 million during the second quarter of 2020 due to our continued profitable operations and effective working capital management that generates counter-cyclical cash flow. In the second quarter, our day sales outstanding increased by only one day to 43 days as cash collections exceeded our expectations amidst the COVID-19 pandemic. However, reduced sales activity lowered our accounts receivable balance providing cash flow from operations of $136 million. Further, our focus on right-sizing our inventory to match reduced shipping activity produced $150.5 million We appreciate the flexibility of our key supplier partners as we work together through this difficult and rapidly changing business environment. At June 30, 2020, our total debt outstanding was $1.5 billion, resulting in a net debt to total capital ratio of 20.4%, compared to 25.4% in the first quarter of 2020. Our net debt to EBITDA multiple was 1.3 times. Our leverage ratios should support our investment grade credit rating and are well within our debt covenant requirements. As of the end of the second quarter, we had $1.16 billion available on our $1.5 billion revolving credit facility. We believe we have ample liquidity to continue operating through this challenging environment and remain confident that we could raise additional capital in the credit markets if needed. As Jim explained, despite significant uncertainty in the market, we remain committed to making investments that support the long-term growth and sustainability of our company, as well as continuing to provide returns to our stockholders. Our 2020 capital expenditure budget of $190 million includes strategic investments to support our customers' needs and drive organic growth. And we continue to pay our regular quarterly dividend and will execute on acquisitions and share repurchases if and when we believe attractive opportunities exist. Turning to our outlook, given the continued macroeconomic uncertainty We will not be providing specific earnings per share guidance for the third quarter of 2020 at this time. We would, however, like to share our thoughts on key trends based on our current expectations and market conditions as of today. We expect overall demand in the third quarter of 2020 to improve slightly compared to the second quarter of 2020. We are cautiously optimistic that demand in the non-residential construction market will improve. However, we anticipate this will be offset by continued decline in demand for our aerospace and energy-related end markets, specifically oil and gas. We also anticipate a further offset in shipping volume due to normal seasonal customer shutdowns and vacation schedules typical in the third quarter, although we expect the rate of decline to be less than in prior years due to lower than typical shipment levels in the second quarter. As a result, we estimate that tons sold will be flat to up 2% in the third quarter of 2020. In addition, We expect our tolling volume to increase meaningfully from the second quarter to support current automotive production rates. This improvement is not reflected in our outlook for tons sold as tolling tons are not included in this metric. We expect metal pricing in the third quarter will remain generally consistent with current levels. Given the resiliency of the Reliance business model, demonstrated in the second quarter of 2020 and the execution by our managers in the field, we anticipate that our gross profit margin will remain near the high end of our estimated sustainable range of 28 to 30%. While we remain subject to ongoing impacts of COVID-19, we will continue to execute our business models and remain focused on managing those elements of our business that are within our control. In closing, we were very pleased with our second quarter results amid the COVID-19 pandemic, which resulted in significant reductions in demand and an overall softer pricing environment. Excellent execution by our managers in the field who continue to focus on higher margin business and effective working capital management resulted in yet another quarter of solid profitability and cash flow, enabling us to support our growth and stockholder return priorities. I echo Jim's gratitude to all of our employees in the Reliance family of companies for their ongoing commitment to health, safety, and operational excellence, which we believe is the key to the successful execution of our model. The extraordinary environment in the second quarter highlighted the strength and resiliency of not only our model, but also our people. We look forward to improved conditions in the quarters ahead as we work with our employees, customers, suppliers, and communities to mitigate the impact of COVID-19. 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?

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation phone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment, please. We'll wait for questions. Our first question comes from the line of Seth Rosenfeld with Exxon B&B Powerless. Please proceed with your question.

Hi. Thank you very much for taking the questions today, and congrats on a very strong performance in Q2. If I may, I have a couple of questions with regards to the volume outlook, both with regards to market share and also how you view inventories across the space. With regards to market share, can you comment to what extent do you think the Reliance with Business model actually allowed you to take market share during the recent months of market volatility? Looking forward, do you view those as being sustainable or more of a temporary factor as some of your competitors were perhaps temporarily knocked out of the market? Secondly, with regards to the inventory outlook, I believe you've commented in your prepared remarks ongoing efforts to right-size inventories. Can you just comment a little bit about where you view your own internal inventory levels? Are they at a level that makes you comfortable versus today's demand environment? Or do you view inventories as being either a bit too low with demand recovering or perhaps a bit bloated if you view a more gradual recovery through the course of H2? Thank you very much.

Sure. Thanks, Seth. First on market share, we're not a We really don't focus on market share. Now, Karla is going to give you some numbers that we have that we get basically from the MSCI. We focus on the bottom line. We care about our employees. We care about the shareholder return and our execution. The market share kind of comes along with that. Now, Karla, you've got some numbers in front of you to tell you how we're doing against the MSCI.

you know Reliance our Q2 tons sold compared to Q1 we fell 17.5% and the MSCI industry shipments fell 26.5% you know as you're aware and as we mentioned in our comments you know our tolling tons which a lot of that goes into automotive are not included in those in our numbers but We do believe the MSCI shipments are pretty heavily weighted towards carbon flat rolled, which was, we believe, more impacted during the quarter on their shipments than ours. With that being said, though, we also believe from feedback from the field that we did pick up some business. In challenging times, we typically see service center customers who want smaller order quantities. They want them delivered more frequently. Maybe they're concerned about their own credit. They want financially stable suppliers supporting them. So we do believe we did pick up some orders during this type of environment, and we're hopeful that the great service our people provide them will keep those customers coming back to us.

And on the inventory side, That's always been a key driver, part of our model. Last year, I said I'm sure that we, I don't think we did a great job on our inventory. So we got a nice head start on getting our inventory in line in the third and fourth quarter last year. So we were well positioned going into this unusual situation we find ourselves. But since then, I'm proud of where we are. Our turns are actually better than they were last year. The folks in the field, they get it. They understand cash is king. We really focus on several things, but that's one of them. Now, where we stand right now, we think we're well positioned. Because in my estimation, to get America up and going again, they're going to need reliance. And we need to be there for them. And our relationships with our domestic suppliers are great. Lead times are very manageable. and overall, I'm glad where we are with our inventory. Now, if there's any Reliance folks listening in on the call, I always say we have too much inventory, but we will, we know where to spend our money. So that's, we're okay with where we are with our inventory.

Thank you. And if I can just ask one follow-up with regards to that. You commented that obviously you were at a disappointing level of inventory management in 2019. That must have improved your cash performance subsequently as you brought that down to a more manageable level. How does that tie into your expectation for working capital as we look into the second half of the year? Would you expect the recent strong cash performance with working capital to continue on a structural basis? Or if demand is beginning to recover, you might see some need for actually some rebuilding of working capital in the latter two quarters?

Yes, Seth, it's Karla. You know, as we said, in last year, we had record cash flow for the 2019 year with the strong earnings we had. And then also, as Jim mentioned, our efforts to resize our inventory in 19, which we felt were successful. We've continued that, especially reacting to the fall off in shipments with COVID-19. We're in good shape, but we are still focused on our inventory. Certain of our businesses where our outlook is not as strong, we are continuing to focus to work those down, so we would expect some inventory release from, for instance, aerospace and other parts of our business. To the extent non-res, we think will be more favorable. We're okay right now with our expectations where our inventory position is, If demand comes back better than we're currently estimating, we may have to rebuild some working capital. And we would love to have to do that because that would be very positive for all of us. But we do typically the second half of the year is a little lighter. We don't expect the same level of cash from operations that we had in the second quarter. But at this time, we would expect to still generate cash with a little working capital release going into the second half with normal seasonal trends.

That's perfect. Thank you.

Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. It appears there are no further questions at this time. I would like to turn the floor back to Jim Hoffman. All right, thank you very much. We actually do have a question from Tyler Kenyon with Cowan & Company. Please proceed with your question.

Hey, good morning, Jim and Karla and Bill, if you're on. Hello. Congratulations on the second quarter. You know, just wanted to ask maybe if you could give us a sense for, you know, how your volumes have trended into July on a daily basis versus, you know, January and February levels. And maybe if you could kind of speak to the degree of upside maybe you're experiencing in your total processing volumes.

Yeah, as far as how we're doing now, it's kind of where we expected. You know, it's, like we said in our script and, you know, And I think Tyler, you know, we're pretty early and

for the first two weeks on a daily basis. We have seen tons shipped per day come down a bit. However, the first couple weeks of July typically do that because of the July 4th holiday. You know, it was on a Saturday this year, so we don't really think that what we've seen there is a good indication for the full month or the quarter yet. But, you know, we think generally hanging in with the normal holiday impact that we have is what we've seen so far. And on tolling, Bill can hit that.

Hey, Tyler, it's Bill. As Karla mentioned earlier, you know, we've seen a rebound on the tolling side. June was up about 66% compared to January and February. Yeah. And then, you know, based on the ramp-up, We think, you know, we'll see that continue to improve in July.

Yeah, actually, so in June, we processed about 66% of what our processing levels were in January and February. So we were down about 34% from those levels. But we were, remember, we were The ramp started in June, so that was for the whole month of June, so we were at a higher level than the 66% coming into July.

And that should continue in July from what we're hearing from our customers.

And Tally, as you all know, sometimes people think our total processing is only the automotive industry. It's also appliance as well.

Right. Okay, very helpful. Thank you. and then I was curious if there's been a considerable change just in your value-added processing mix in the second quarter, you know, say versus the first quarter and maybe how would you expect that to trend moving into the third quarter, you know, given your outlook for various end markets in terms of the trajectory?

Yeah, we're not ready to give you the number yet. We're still working on it. As you know, in the past, we've gone from kind of a historic 40% of what we sell up towards over 51%. I expect that to go up. I can't give you the number right now because they haven't given it to me yet. But with our game plan and our model and what we've been doing over the last several years, it should go up. We've spent a lot of money to do all of these different activities and processes that our customers have asked us to do. We spent our money wisely, timed it very nicely. Obviously, nobody saw this coming, but the history has been after a dramatic downturn, and you picked a year, but after that happens, our customers come out of it. They come out of it quickly, and when they're in the doldrums, they don't spend much, and they have a hard time getting the right people to be at work and They downsize, and when they come out, they need somebody, they need a reliance to be there for them. And we've spent our money to do that. We've invested money in the new technology. It's fascinating to me. We continue to do that. And that helps us with our SG&A lines as well, because the equipment we've added, it also allows us to do it more efficiently with less people. So saying all that, I would expect that number to continue to go up. That's the plan anyway.

Great. Okay. And that's actually a good segue to another question I had just on SG&A progression moving into the third quarter. Should that track your expectations in terms of the top line trajectory or volume guidance? or would you expect a bit more upside given you've brought back some of the furloughed workforce and the total processing side and if you're expecting some stronger value-added mix?

You know, that's an interesting question. I can tell you this. We run our company day-to-day, week-to-week, month-to-month. Always have, always will. The way our SG&A line goes, it has everything to do with the activity. As we said, 65% of our SG&A costs are in people. We know how to ramp up and ramp down the other way when we need to, and we'll just have to see how it goes. We're anticipating some sluggish activity, if you will, in aerospace, and we'll continue to monitor that and operate accordingly. When business starts coming back up, will ramp up according to that as well. That's just part of our DNA. That's the way we operate our businesses. And that was the second part of your question. More value added. I forgot what you asked. Yeah, more value added. Yeah, I think I addressed that. Of course. That's what America needs. It needs reliance to be there to rebuild this thing and and the value-added processing that we do will be part of that rebuilding.

And Tyler, I would say we're not anticipating the level of workforce reduction activity in Q3 that we had in Q2 based on our shipment and demand outlook. based on where we are today. So there were some extra costs in Q2, some severance carrying benefits which we extended to some of the employees that were laid off and also to the reductions in force. So we will not have those extra costs in Q3 or at least not to the same extent as in Q2. So that would bring SG&A down a bit. However, with activity levels back up, in particular where you commented on the tolling and the fact that we brought most of those employees back to work, you know, you will see SG&A increase because of that. But we will also have that, you know, more than covered by our gross profit that we generate on the tolling ton.

Got it. Thanks very much. Thanks, Bob.

Thank you. Thank you. Our next question comes from the line of Phil Gibbs at KeyBank Capital Markets. Please proceed with your question.

Hey, good morning. Good morning. Question just generally speaking on the non-residential construction market. I know that market is very key to you all. Curious in terms of how you saw the quarter progress. were still low points, and also where we are now in terms of what you see. I mean, a lot of mixed things in terms of public staying strong, but perhaps new projects on the private side, people taking a pause due to the issues, obviously, we all know of.

Yeah, so you know our company very well. Our sweet spot... is in the smaller projects, three or four stories and below. And to answer your question, how it went early on when the COVID hit, it kind of froze the market and froze a lot of projects. We didn't have a lot of cancellations, though. We had a lot of people just deferring to later dates. Thank goodness that they cranked back up, which was good. We were there for them. And the value added play in that market is a really strong one for us. So that was good. The hot markets right now, I'm sure it's your home too. My wife has no problem spending money online and the Amazon guy shows up at our door it seems like every day. So those distribution centers that are out there, that's a good market for us. And there's plenty of those out there in the middle of being built and plenty on the books. And we're a strong participant there. As I've said in the past, our sweet spot, the demographics help our sweet spot. You know, assisted living facilities, schools, data centers, those are all strong markets for us and those have been carrying weight for us. And I just anticipate that to continue to go. I know that I haven't listened, but I've heard some other of our good steel partners out there have reported that they're doing well in the non-resident. And we'll follow that, which is good for us. And also, there's some, as we mentioned, there's some infrastructure-type spend that we put in that non-residential. For instance, bridges and what have you. Again, I've said in the past, good old-fashioned, real infrastructure spend, Bill, would be a good thing for the country and a really good thing for Reliance. So we were cautiously optimistic about the trend there.

Thanks. And Bill, on the semi side, what... What's the vibes out there? I know it's been good, but it also can be very erratic per your own historical observations.

Yeah, it can start and stop quickly. But as we mentioned, it's been a bright spot for us. And the outlook for the balance of the year is still very positive. So we think that market is going to continue to be a good one for us.

I know you all mentioned that you took a couple of facilities out in what sounded like Europe for the aerospace side. How are you all, I guess, planning for the next year or two or three based on what the indications you're getting from the mills and the OEMs at this point?

Yeah, well, you know, as Jim said earlier, you know, we kind of run our business day to day, week to week, month to month. But that whole aerospace, particularly commercial aerospace, is a very fluid situation. Our guys have done a great job of looking at where the demand level is, where we think it's going to be, and really attacking both the expense side and inventory. But it's going to be a challenge. We know it's going to be a challenge for the balance of the year and in probably the next year. And we're really just trying to stay abreast of where the market is headed, where the demand is going to be, and make those adjustments as we need to.

The other part...

The other part of that is the bright spot in our aerospace business is the military and defense side. And so that we continue to see strength there. And we think the second half there, we're going to continue to see strength. So that's the good news. So that'll partially offset some of what we're going to see from a negative standpoint on the commercial aerospace side.

Just sticking to that, just Jim, out of curiosity, what's been the company policy in terms of business travel given everything that's been going on now?

Yeah, we had zero business travel for, oh gosh, I think we listed the business travel July 1st, but that's pretty strict. It has to go way up the food chain to... Get that approved. And that was domestic only. Oh yeah, there's no international travel at all. And the technology today, we've gotten pretty good at it. So you really don't need that. But when needed, we've approved a couple of trips that actually need somebody to be on site to help a customer out or to help somebody through a situation. But basically, it's not wide open, I can tell you that. and as far as the local driving type travel, once again, it's on a as needed basis. We've got a lot of really strict rules and regulations about coming and going in our operations. I'm real proud of the fact that we jumped on that very quickly. We're using technology to help us with that. We're following a lot of CDC rules, but we also have stricter rules to keep our people and just in general. We're all very aware of what's going on out there and we'll continue to be extremely diligent when it comes to keeping our folks and our communities safe.

Thanks. Good job managing through some weird times. Appreciate it.

Thank you. Thank you. We've got a good model and good execution out there.

Thank you. As a reminder, ladies and gentlemen, you may press star 1 on your telephone keypad if you'd like to ask a question. It appears there are no further questions at this time. I would like to turn this floor back to Jim Hoffman for closing comments.

All right. Hey, thank you very much for your time today and attention. Before I conclude, I'd like to remind you all that on August the 5th, we plan to present at the Jeffries Industrial Conference, which will be held virtually and will be webcast live over the internet. Thanks again for your continued support and commitment to reliance, and I hope you all stay safe and healthy. Thank you.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.