Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Reliance Inc (RS, Financial) achieved a strong gross profit margin of 29.8%, within their long-term sustainable range of 29% to 31%, despite a challenging pricing environment.
- The company completed two acquisitions in the second quarter and three year-to-date, adding nearly $500 million in annualized net sales based on 2023 results.
- Reliance Inc (RS) repurchased $519.3 million of common stock during the second quarter and $165.4 million in July, demonstrating confidence in their future.
- The company invested $98.2 million in capital expenditures during the second quarter, primarily directed towards growth by improving value-added processing capabilities and increasing capacity.
- Reliance Inc (RS) outperformed industry shipment levels, with tons sold increasing 4% compared to the first quarter of 2024 and 4.7% year-over-year.
Negative Points
- Carbon steel pricing declined further than anticipated during the second quarter, negatively impacting gross profit margins and earnings per diluted share.
- The average selling price per ton sold decreased by 3.8% compared to the first quarter of 2024, exceeding expectations of a 1% to 3% decline.
- The semiconductor industry demand continued to contract due to excess inventories in the supply chain, although signs of stabilization were noted.
- The company anticipates continued pricing pressure in the third quarter of 2024, with expected declines in tons sold and average selling prices.
- Non-GAAP diluted earnings per share of $4.65 came in slightly below the guided range due to pricing levels retreating further than anticipated.
Q & A Highlights
Q: Looking past the 3Q gross margin weakness due to lower carbon steel pricing, if prices overall are flattish on an ASP basis in 4Q, do you think you're going to be able to work through some of the higher cost inventories so that gross margins will start to converge more towards a normalized level on a FIFO basis?
A: Yes, Martin. So we certainly do. I mean, that's normal cyclicality for us managing through the different pricing cycles. Our people have done this for decades out there in our world. Prices go up and they go down and we try to really focus on managing our inventory well, turning our inventory in line with our shipment levels which staying ahead of that helps us as we go through these cycles. Certainly, there has been some pressure. Prices did fall more than we had anticipated. So we had hoped that we would have leveled off a bit more on gross profit margin by now. But as prices continue to decline, we've got to work through that inventory. But it's typically a two, maybe three month lag. Lead times on a lot of our major products right now are normal to short. And so with that, we can work through our inventory a little faster too.
Q: Coming back to the share repurchases, that were substantial in 2Q. I believe that eclipsed what was done in all '23. There was 755 million remaining on the authorization, ended the quarter with $350 million of cash. Maybe if you could touch on expectations for 3Q working capital, company's availability to continue repurchases at an elevated level and if there's a minimum cash balance that you'd be targeting?
A: Yes, Martin. So Reliance has always been a growth company and also a company to return value to our stockholders. So we try to continuously execute on all of that in an opportunistic manner. We felt the market gave us a great opportunity to be in repurchasing Reliance shares during the second quarter. We heard from everyone on the first quarter when we were not in the market, there was a lot of surprise. But again, that goes with our opportunistic approach to how we're repurchasing the shares. We also completed three acquisitions already this year and announced another small one. We're in a financial position where we're able to execute on all of our different capital allocation and growth strategies and we expect to be able to continue doing that in third quarter, fourth quarter and beyond. So we're still in really good shape to execute, but I'll let Arthur address your working capital part of your question.
A: Yes. So Martin, while we don't necessarily put out a guidance for cash flow, you could look at typical seasonality for our business. Typically in the first half, there's working capital build in the second half. Just given the seasonality of the business, there's working capital release. And then you can take our assumptions for pricing and volume. So as prices go down, you'd have slightly more working capital release than just from purely adjusting volume and inventory on hand levels. Hope that answers your question.
Q: Can you just help us understand the LIFO dynamic a little bit better, if pricing inherently missed what you were expecting, why didn't this change to a higher income accrual in the quarter?
A: Yes, great question, Phil. So when we put out a quarterly guidance, it's for pricing, that's just pricing for the quarter. LIFO guidance is an annual estimate where basically what we're doing is forecasting inventory costs on hand at the end of the year. So as we were making our annual LIFO projection at the end of the first quarter, we're certainly looking at pricing expectations, not just through the end of the second quarter but through the balance of the year. So what we experienced through the second quarter, certainly there was more price contraction, but at a high level when we looked at our estimates through the end of the year, they did not change materially, so we kept our LIFO estimate unchanged. Now we're going to revisit this at the end of the third quarter and see where we are with our assumptions and then adjust as needed. And at the end of the year, the numbers are what they are based on actual costs on hand. So then typically in the fourth quarter, you have a true up to the estimate that you're making.
Q: Clearly about a buyback activity during the second quarter and early in third. It looks like the share count didn't fall all that much, which tells me you bought a lot back in the latter part of Q2. If we were just to still assume that you didn't make any further repurchases in the quarter, where would that shake us out for share count in Q2?
A: So I think we provided the total shares purchased in the earnings release, Phil. So it's roughly $2.4 million through July. So yes, I mean, you're right, the weighted average shares that you used for EPS calculations, that's weighted. So Q3 is going to have the benefit of all Q2 share repurchases and then anything that was purchased in July, that will be weighted. But you'll get the full benefit of Q2 buybacks on Q3. I should point out that offsetting some of that benefit is the lower interest income that you get from lower cash on hand. So it's not just purely incremental, so there's some offsetting impact there.
Q: I know you have a lot of balls in the air with CapEx and new sites, new processing and fabrication and distribution sites. Are there still a few of those that are in relatively, call it, low rate production or startup mode that you don't have full or near full contribution on? I know the mills like to call them startup costs, but for you, I know it's just everyday business until they get to full adoption. But are there a handful of your facilities or your new key facilities that are still in that level? Are they starting to contribute?
A: Yes, Phil. So we have as you commented on when you were asking the question. As you've known from following us for many years, we don't go build $2 billion projects. So we have a lot of different projects very meaningful for us in each of our business, but certainly, not at the scale of our suppliers and people like that. But we have had quite a few growth activities. I mean, we've talked over the last few years about our on campus Greenfields in Sinton and in Gallatin. And Gallatin is pretty fully ramped. Sinton, we produce at the levels the mills are. So we've seen improvement there, probably a little more to go there. Our toll processing operations here in the US, we've added some capacity through some lines and expansions. A couple of those are still pretty early processing, but still more room to grow on those lines. We've got another US toll processing expansion that probably won't come on until late this year, beginning of next year to really contribute. Down in Mexico, our tolling operations there, we've continued to expand and add
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
