Yahoo Finance Reliance Steel & Aluminum Co. (NYSE:RS) Q1 2024 Earnings Call Transcript
Reliance Steel & Aluminum Co. (NYSE:RS) Q1 2024 Earnings Call Transcript April 25, 2024
Reliance Steel & Aluminum Co. misses on earnings expectations. Reported EPS is $5.3 EPS, expectations were $5.51. Reliance Steel & Aluminum Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to Reliance, Inc. First Quarter 2024 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations. Thank you, Ms. Orlando. You may begin.
Kim Orlando: Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's first quarter 2024 financial results. I’m joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.reliance.com. Please read the forward-looking statement disclosures included in our earnings release issued this morning, and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance.
Karla Lewis: Good morning, everyone, and thank you all for joining us today to discuss our first quarter 2024 results. Our resilient business model, most notably the diversity of our products, end markets and geography once again delivered strong performance in the first quarter. Despite a challenging pricing environment, we continue to drive smart profitable growth surpassing broader industry shipment levels and maintain pricing discipline and a strong gross profit margin, all of which collectively contributed to our first quarter non-GAAP earnings per diluted share of $5.30. Our significant investments in value-added processing capabilities continue to bolster our gross profit margin throughout market cycles. Our profitable operations and consistent ability to generate cash enable us to continue allocating capital across our core priorities.
We have completed three acquisitions to-date in 2024, expanding our product offerings, processing capabilities and geographic reach and collectively adding nearly $500 million in annualized sales based on 2023 results. We also invested $108.7 million back into our business through capital expenditures, predominantly targeted towards growth opportunities that increase capacity and value-added processing capabilities. Our CapEx budget for the calendar year 2024 is $440 million, with an expected total cash outlay of approximately $500 million which includes certain carryover projects from prior years. As previously noted, we expect approximately two-thirds of our CapEx spend will be used for growth projects. We also returned $65.3 million to our valued stockholders in dividends.
On the M&A side, in addition to acquiring Cooksey Steel on February 1, we completed two acquisitions earlier this month, American Alloy and Mid-West Materials. American Alloy brings specialty carbon steel plate to our product portfolio as well as new fabrication capabilities through the addition of six service center locations in the U.S. Mid-West Materials increases our flat-rolled presence in and around Ohio, primarily servicing North American OEMs. All of these transactions fit our acquisition strategy of acquiring immediately accretive, well-run companies with strong management teams. We have now completed 75 acquisitions since our 1994 IPO, and the M&A pipeline remains strong as we continue to evaluate a wide array of potential future opportunities.
And please note that our first quarter results include contributions from Cooksey that was acquired on February 1, but do not include American Alloy or Mid-West Materials, both of which closed on April 1. Before I close, I'd like to thank the entire Reliance team for a strong start to the year through their commitment to exceptional customer service, marked profitable growth and most importantly, their commitment to safety. In the medium to long-term, we believe the investments we have made and continue to make in our business position Reliance to benefit from growth opportunities under the infrastructure bill, the CHIPS Act and the Inflation Reduction Act along with the robust reshoring and near-shoring activity currently underway in several of the end markets we service.
Thank you all for your time today. I'll now turn the call over to Steve, who will review our first quarter demand and pricing trends.
Steve Koch: Thanks, Karla, and good morning, everyone. I'd also like to express my gratitude to our strong team at Reliance for a great start to the year and the continued commitment to safety. Further, I'd like to extend a warm welcome to the Reliance family of companies, the teams at Cooksey, American Alloy and Mid-West Materials. I'll now turn to our first quarter demand and pricing trends. Our tons sold increased 10.3% compared to the fourth quarter of 2023, in line with both our expectations of up 9% to 11% and typical seasonal trends. Compared to the prior year quarter, our tons sold were down 1.7%, but still well below the service center industry decrease of 4.2% as reported by the MSCI. We believe our continued outperformance of our MSCI peers is supported by both organic growth and strategic acquisitions.
First quarter 2024 volumes were also impacted by one less shipping day in the first quarter of 2023. Our first quarter average selling price per ton sold at $2,442 declined by 1% compared to the fourth quarter of 2023 below our expectations of up 1% to 3%. We experienced lower-than-anticipated pricing across carbon and stainless steel products as the quarter progressed. Pressure on carbon steel product pricing contributed to a temporary decline in shipment activity during March as some customers delayed orders in anticipation of lower prices. While carbon steel prices increased 1% compared to the fourth quarter, they nonetheless and in the second quarter trending down. Stainless steel prices were down 6.2% compared to the fourth quarter but stabilized heading into the second quarter.
Next, I will turn to an overview of trends we saw within our products in key end markets. Carbon steel tubing, plate and structurals represented about one-third of our first quarter sales. All these products experienced solid volume growth and outperformed industry shipment levels compared to the first quarter of 2023. During the first quarter of 2024, strong nonresidential construction activity supported healthy demand for carbon steel, structural and tubing products with plate demand softening due to declining prices. Aluminum stainless products represented just over 30% of our first quarter sales. While stainless shows more favorable volume trends than aluminum, we outperformed industry shipment levels across both product groups year-over-year.
Aerospace products comprise about 9% of our total sales and aerospace demand remained stable year-over-year. We primarily service the automotive market through our toll processing operations, which are not reflected in our tons sold. Our tolling business processed 4.8% more tons in the first quarter of 2024 than in the prior year, fueled by continuing strong demand from the automotive market and our significant investments to increase capacity. Our general manufacturing market business, which is roughly one-third of our total sales is highly diversified across products and includes industrial machinery, consumer products, heavy equipment and military. Shipments declined year-over-year driven by weakness in agricultural equipment and consumer products, partially offset by stronger industrial machinery shipments supported by military manufacturing demand.
Demand in the semiconductor industry has stabilized, but remained down year-over-year. Our long-term outlook for the semiconductor market remains positive reinforced by the CHIPS Act and significant semiconductor fabrication expansion underway in the United States, and we continue to invest in semiconductor capacity. Overall, we see demand across the end markets we serve remaining stable to strong in the second quarter of 2024. Please refer to our earnings release for additional commentary on our end markets and product diversification. I will now turn the call over to Arthur to review our financial results and outlook.
Arthur Ajemyan: Thanks, Steve and good morning, everyone. Our first quarter 2024 non-GAAP diluted earnings per share of $5.30 were at the low end of our guided range as our tons sold seasonally improved, but pricing softened more than we anticipated. We successfully outperformed industry shipment levels across nearly all products, which bolstered our quarterly earnings despite the challenging pricing environment. Our 31% gross profit margin for the first quarter was attributable in part to higher-than-anticipated LIFO benefit, better alignment of costs on hand and replacement costs and gross profit margin stability from our value-added processing capabilities. We recorded LIFO income of $50 million in the first quarter compared to our guidance of $20 million.
As prices declined more than we anticipated, we have increased our 2024 annual LIFO income estimate from $80 million to $200 million. Accordingly, we currently expect to record approximately $50 million of LIFO income in the second quarter of 2024. On a FIFO basis, which is how we monitor our day-to-day operating performance and which excludes the effect of our LIFO inventory valuation method our gross profit margin improved by roughly 80 basis points compared to the prior quarter to 29.6%, as we saw improved alignment of inventory cost on hand with replacement costs. This trend began to reverse in March and has continued in the second quarter. While most carbon product prices began to stabilize in April, we’ll continue to see short-term gross profit margin pressures throughout the second quarter as we get per alignment of costs on hand with replacement costs.
As of the end of the first quarter, the LIFO reserve on our balance sheet was $529 million, which will generate LIFO income and benefit future period operating results to mitigate the impact of potential further declines in metal prices. Moving along to expenses. On a year-over-year basis, same-store non-GAAP SG&A expenses increased $7.1 million or 1.1%, primarily due to the increased head count to accommodate organic growth, which was partially offset by lower incentive-based compensation resulting from lower profitability. As a reminder, our model normalizes expenses by rightsizing incentives as profits trend down. I’ll now move on to discuss balance sheet and cash flow. For the first quarter, we generated $126.3 million in operating cash flow, which helps fund $108.7 million in capital expenditures, $53.7 million for an acquisition and the return of $65.3 million to our stockholders through dividends.
While we did not have any share repurchases in the first quarter of 2024, we have $1.44 billion remaining under our share repurchase authorization and ample liquidity for opportunistic repurchases. Turning now to our second quarter outlook. Overall, we expect a better-than-normal seasonal recovery in demand in the second quarter of 2024 despite prevailing macroeconomic uncertainty and geopolitical matters. We also expect shipping volumes to increase 2.5% to 4.5% sequentially in the second quarter with approximately 2% of the sequential growth coming from recently completed acquisitions. On the pricing side, we expect our average selling price per ton sold for the second quarter to be down 1% to 3% compared to the first quarter, which will generate some short-term pressure on our gross profit margin as we work through higher cost inventory on hand.
Based on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $4.70 to $4.90 for the second quarter of 2024. This concludes our prepared remarks. Thank you for your participation. And at this time, we’ll now open the call up to questions. Operator?
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