Reliance Steel & Aluminum Co

Welcome to the Reliant Steel and Aluminum Company First Quarter 2021 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. Please note this conference is being recorded. I will now turn the conference over to your host, Kim Orlando of Addo Investor Relations. You may begin. Thank you, Operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's first quarter 2021 financial results. I am joined by Jim Hoffman, CEO, Carla Lewis, President, and Arthur Demian, Vice President and CFO. Bill Sayles, Executive Vice President, 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.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 and 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 31, 2020, under the caption Risk Factors, disclosure in our press release this morning, and other documents for alliance files or furnishes 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, CEO of Reliance.

Good morning, everyone, and thank you all for joining us today to discuss our first quarter 2021 financial results. I will begin today with a high-level overview of our first quarter performance and capital allocation priorities. Carla will then speak to our operating results and demand trends by end market. And Arthur will conclude the review of our first quarter 2021 financials. Our resilient business model coupled with outstanding execution in a favorable market resulted in record financial performance during the first quarter of 2021. I would like to personally thank all of my colleagues within the Reliance family of companies for their dedication to help safety and operational excellence, despite disruptions from the ongoing global pandemic and various supply chain constraints. We experienced ongoing strength in metals pricing during the first quarter, led by multiple price increases for carbon steel products, along with improving demand in many markets, and leveraged our decentralized operating structure, small order sizes, and diversification of products, and markets and geographies to achieve record gross profit margin for the third consecutive quarter of 33.6 percent, up 60 basis points from the fourth quarter of 2020, and up 330 basis points from the first quarter of 2020. Our record quarterly gross profit margin combined with average selling prices well above our expectations and our continued focus on expense control contributed to record pre-tax income of $359 million in the first quarter of 2021, up over 100% from the prior quarter and up over 300% from the prior year period. Our quarterly earnings per diluted share of $4.12 were also a record and substantially exceeded our outlook. Our strong earnings and effective working capital management resulted in cash flow from operations of $161.8 million in the first quarter of 2021, despite $182.8 million of working capital investment. This is a significant result as we typically use cash in the first quarter as we rebuild working capital from seasonal low fourth quarter levels compounded by the significant increases in metals costs we are experiencing. We improved our inventory turn rate to 5.4 times, surpassing our 2020 annual rate and company-wide turn goal of 4.7 times. Our ability to cross-sell inventory among our family of companies, which we believe is the key advantage and differentiator of our model and scale, was a significant contributor to our improved inventory management. Despite extended mill lead times and inventory shortages, collaboration among our family of companies and strong, long-standing relationships with our domestic mills enabled us to source the metal needed by our customers. Our managers in the field effectively supported our valued customers by ensuring inventory availability while maximizing margin on opportunistic orders. Our strong cash flow generation and significantly enhanced liquidity position enables us to maintain a flexible capital allocation strategy focused on both growth and stockholder returns. Our 2021 capital expenditure budget of $245 million includes new buildings and other projects to expand, upgrade, and maintain many of our existing operating facilities. However, when factoring in project delays and extended lead times for equipment due to COVID-19, we believe our potential cash flow outlays for capital expenditure will be closer to $300 million in 2021 due to the prior year holdover spending. During the first quarter of 2021, we invested $43.7 million back into our business through capital expenditures, including several growth opportunities to address and exceed our customers' and suppliers' needs. For instance, we've invested in toll processing expansions in Texas and Kentucky, given the significant demand we've experienced in our toll processing capabilities throughout our footprint. Operations at our Kentucky facility commenced in November 2020 and have been steadily ramping ever since. Construction continues in Texas on our new Greenfield facility focused on carbon steel tolling, which will support increased capacity of our toll processing customers who are primarily metals producers and their end customers. We're very excited about these opportunities to expand our toll processing service offerings and see many more possibilities in the future for our toll processing capabilities moving forward. As mentioned on the last call, we are installing energy-efficient lighting and solar panels in certain of our facilities, as well as investing in additional innovative processing equipment to continue providing our customers with the highest quality products and services. Turning to M&A, we continue to see a healthy pipeline of prospective opportunities, including in adjacent businesses, in addition to traditional metal service center businesses, as we've broadened our universe of potential acquisition candidates. Nevertheless, we will maintain our strict transaction criteria including our focus on quality of earnings when evaluating prospective targets to ensure a strong fit within our family of companies. I will now turn to our stockholder return activity. During the first quarter of 2021, we paid $44.8 million in dividends to our stockholders. We've maintained our payment of regular quarterly dividends for 62 consecutive years without ever suspending payments or reducing our dividend rate. In fact, we've increased our dividend 28 times since our 1994 IPO, including the most recent increase of 10% in the first quarter of 2021. At March 31, 2021, approximately 2.8 million shares remained available for repurchase under our stock repurchase program. We expect to remain a prudent allocator of capital by maintaining our flexible approach focused on both growth, which remains our top priority, and stockholder return activities, including opportunistic repurchases of our common stock. In summary, I am inspired by the strong operational execution demonstrated by the entire Reliance team during the first quarter of 2021. Our unwavering focus on the core elements of the Reliance business model, including health and safety, pricing discipline, diligent expense control, when needed inventory management, organic growth and innovation, enables us to perform from a position of strength in both good times and bad. In the current environment characterized by extremely high metal pricing, strong demand from many of our customers, and limited metal availability, we believe Reliance remains well positioned to continue generating strong earnings. Given our strong liquidity position, we look forward to continuing to support the growth and needs of our customers and suppliers, while also returning value to our stockholders. We will continue to support our colleagues, customers, suppliers, and communities in a sustainable manner through both the challenges and opportunities that lie ahead. We remain confident that America is going to need Reliance to rebuild. Thank you for your time and attention today. I will now turn the call over to Carla to review our operating results and demand trends. Carla?

Thanks, Jim, and good morning, everyone. I would like to echo Jim's sentiment by thanking all of our colleagues within the Reliance family of companies for their amazing performance during the first quarter. Strong demand conditions in the majority of our end markets resulted in our tons sold increasing 11.3% compared to the fourth quarter, which was within our guidance range of up 10% to 12%, and above the typical seasonal improvement in shipping volumes we experienced in the first quarter. While demand is healthy and continues to improve in most markets, our first quarter shipments did not reach pre-pandemic levels and were down 4% from the first quarter of 2020. However, on a per-day basis, our tons sold were down only 2.5%. And we believe underlying demand is stronger than our shipment levels reflect, given many factors holding back economic activity for us, our customers, and our suppliers, including metal supply constraints, supply chain disruptions for various components and materials, and labor and trucking shortages. The good news is we expect to fill this demand in future periods, and these factors support increased metal pricing. This strength in demand, coupled with rising input costs and limited metal availability, resulted in metal prices accelerating throughout the first quarter for many of the products we sell, most notably carbon steel products. Our average selling price increased 20 percent compared to the fourth quarter of 2020, exceeding our guidance of up 12 to 14 percent by a significant margin. These robust demand and pricing conditions contributed to an all-time high quarterly gross profit margin of 33.6%. On a non-GAAP FIFO basis, which we believe is the best measure of our day-to-day operating performance, we achieved a record gross profit margin of 37.1%, an increase of 350 basis points compared to the prior quarter, and up 600 basis points from the first quarter of 2020. Way to go, Team Reliance. Our record gross profit margin was the result of outstanding execution by our managers in the field who, once again, effectively implemented price increases at the time of mill announcement prior to receiving the higher cost metal into inventory, maintained their focus on higher margin orders and were very selective given limited metal supply, which enabled us to capture an incremental margin benefit in excess of already strong levels. I'll now turn to a high-level overview of our key end markets. Demand for non-residential construction, which includes infrastructure and is the largest end market we serve, continued to improve with first quarter shipments approaching pre-pandemic levels. We continue to experience strong quoting activity for projects for big box retailers, healthcare facilities, schools, large warehouses and data processing centers, among others. And given our healthy backlogs, quoting activity, and positive customer sentiment, we believe demand will remain steady at current solid levels. We saw continued strength in demand for the toll processing services we provide to the automotive market, surpassing activity levels in both the fourth and first quarters of 2020 with automotive OEMs and steel and aluminum mills continuing to ramp production. Importantly, our tolling operations serving the automotive market saw only minimal impacts to date as a result of the global microchip shortage and we expect toll processing volumes to remain strong. Demand in heavy industry for both agricultural and construction equipment continued to improve in the first quarter as our customers increased production levels to meet customer demand and replenish dealer inventories. Demand for industrial machinery used in manufacturing processes was also strong in the first quarter of 2021. Absent disruptions for our customers that impact their production, we expect demand to continue at strong levels. Semiconductor demand during the first quarter continued to strengthen from the fourth quarter, and we expect this to continue. The semiconductor space continues to be one of our strongest end markets. In regard to aerospace, I'd like to remind you all that commercial aerospace represents roughly half of our aerospace exposure. Demand in commercial aerospace began to experience limited signs of improvement compared to the fourth quarter of 2020, which we believe was the trough of the current cycle. We expect limited improvement throughout 2021. On the other hand, demand in the military, defense, and space portions of our aerospace business remains strong, with backlog improving during the quarter. We anticipate strong demand continuing in the noncommercial aerospace market for the balance of the year. Finally, demand in the energy sector, which is mainly oil and natural gas, saw a modest recovery towards the end of the first quarter of 2021. We anticipate a slight improvement in the second quarter given current oil prices and customers needing to replenish inventory for certain products. We entered the second quarter of 2021 with strong demand and pricing momentum that create an environment for us to optimize our model and deliver strong results. We remain dedicated to partnering with our key customers and suppliers during these extraordinary times. And we can only do this with a continued commitment to health and safety and operational excellence that our Reliance colleagues have demonstrated every day throughout very challenging times. Thank you all. I will now turn the call over to Arthur, who will review our financial results. Arthur?