Reliance, Inc. Q1 FY2020 Earnings Call

Greetings, and welcome to Reliance Steel and Aluminum Company's First Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brenda Miyamoto. Please go ahead.

Thank you, Operator. Good morning, and thanks to all of you for joining our conference call to discuss our first 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. 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 COVID-19 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 31, 2019, 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.

Good morning, everyone, and thank you for joining us to discuss our first quarter 2020 results and our response to the COVID-19 pandemic. We had a strong start to the year, following several financial performance records in 2019. Overall demand levels were healthy, through most of the first quarter of 2020. Our strong non-GAAP gross profit margin of 31.9% was above our estimated sustainable range of 28% to 30% and produced non-GAAP gross profit dollars of $820.5 million on net sales of $2.57 billion and non-GAAP pretax income of $220.6 million. Our non-GAAP earnings per diluted share of $2.45 significantly exceeded our first quarter guidance. I will provide additional details on our Q1 performance drivers in a moment. But first, I would like to address the coronavirus pandemic and how we expect it to impact our business, and the actions Reliance is taking to address this extraordinary situation. First and foremost, our thoughts and prayers go out to everyone around the world fighting this war, especially those on the front line, helping the people who are directly impacted. Most of our locations continue to operate, albeit at reduced levels as essential businesses under the United States Department of Homeland Security's Cybersecurity and Infrastructure Security Agency (CISA) guidance. We continue to work closely with our suppliers and are grateful for their ongoing support and partnership to withstand these challenging circumstances. We are engaged with and listening to our customers and adapting to address and support their needs through this uncertain and difficult time. We have taken difficult actions, including workforce reductions to right-size our operations to sustainable levels that we believe will enable us to emerge from this current crisis intact, prepared and positioned to face new business reality, including the ability to quickly ramp up with our customers and suppliers and to recall laid-off employees when the time comes. Importantly, many of our businesses are supporting customers on mission-critical projects to aid in the COVID-19 response around the country. To name a few, we are pleased to be supplying processed aluminum necessary for ventilator production, metal doors for hospital walls and facilities being converted for patient care and metal for the construction of decontamination systems to sanitize N95 masks. We are proud to support these and many other opportunities that improve our service and contributions to the communities in which we live and work. To that end, many of our businesses have been donating personal protective equipment such as masks and safety glasses to support first responders and health care providers on the front lines of the fight against COVID-19. As I have stated, time and time again, the health, safety and well-being of our employees is our most important core value at Reliance. As such, we took immediate action to lower the risk to our employees by promoting remote work routines, canceling employee travel and group events and restricting visitors to our facilities. We implemented social distancing and improved sanitation measures in the workforce to comply with heightened safety standards. We provided temporary aid in the form of paid time away from work to support our employees impacted by COVID-19, whether due to exposure to the virus or needed care for their families. We have expanded our employee emergency assistance fund Reliance Cares to provide grants to our employees impacted by COVID-19. I want to take a minute to thank each and every one of our employees for their unwavering commitment and dedication to health and safety at Reliance and our communities at large. Finally, I would like to reinforce that our operating model is designed to support the company through both good times and bad as we have demonstrated throughout our 80-year history. Although the current situation, unlike anything we have experienced, we believe the resilience of our business model will help us manage through this particularly challenging time just as it has in the past. For instance, during the great recession in 2009, shipments fell 32% and our average selling price declined 18.4% from 2008. We took immediate actions including reducing our workforce by 21% and lowering inventory by over $1 billion in a 9-month period from September 2008 through June of 2009. These actions allowed us to remain profitable for the 2009 year. We're doing what we need to do to ensure Reliance stays safe and healthy. We're concurrently focused on maintaining our solid financial position. We have a very strong balance sheet with an investment-grade credit rating of $831.5 million available for borrowing on our $1.5 billion revolving credit facility as of March 31. Our business model promotes countercyclical cash flow generation, which when combined with effective working capital management enhances liquidity. In addition, our highly variable cost structure provides financial flexibility, with approximately 65% of our SG&A expense being people-related. As I mentioned earlier, we made the difficult decision to reduce our workforce through layoffs and reductions in force. Since March 4, we have reduced our workforce by approximately 1,600 people or 11% of our workforce, including reductions at the 3 energy businesses we have closed permanently. These decisions were made on a location-by-location basis, which provides us the flexibility to continue to make changes as warranted going forward, either with further cuts, if business continues to flow or by quickly bringing back employees to support stronger demand. Recognizing the unique nature of this downturn, we extended health care benefits for a transitionary period to support impacted employees and their families, which is something we have never done in the past. We continue to actively monitor daily and hourly developments of this unprecedented emergency situation, including federal, state and local orders as well as recommendations of public health authorities. I would like to thank each of my reliance colleagues for sharing the commitment to promote a healthy and safe workplace by practicing social distancing and heightened sanitation procedures in the workforce and working from home, if practical. Perhaps most importantly, I am grateful to see the consistent application of practical common sense and good judgment as we all work together to protect each other in these extraordinary and unprecedented times. I'll now shift gears to a more detailed discussion of our first quarter performance drivers. Our shipments were generally in line with our expectations, supported by a relatively healthy demand environment, while overall metals pricing softened compared to the prior quarter. Despite pricing pressure, our non-GAAP FIFO gross profit margin of 31.1% remained at strong levels as a direct result of our management's disciplined approach to pricing and focus on high-quality, high-margin business. Turning to market conditions in our key end markets, demand for nonresidential construction, the largest end market we serve, remains solid for the majority of the first quarter, supported by strength in shipment volumes of carbon steel structural and tubing products. While we are beginning to see some second quarter projects being deferred, we are cautiously optimistic that demand trends in the nonresidential construction market will recover once construction activities pick up after the COVID-19 related shelter in place orders are lifted. Demand for the toll processing service we provide to the automotive market started the year off strong, supported by ongoing demand strength for aluminum content in vehicles. However, the sudden closure of many of these automotive OEMs and steel and aluminum mills in mid-March due to COVID-19 sharply reduced demand, forcing us to drastically cut production at our toll processing operations in both the U.S. and Mexico. We took decisive, immediate action, reducing the workforce at our toll processing operations by almost 50% by the end of the first quarter. While the duration of the shutdown remains highly uncertain at this time, we believe we are well-positioned to support increased production levels as the automotive market recovers due to our proactive investments in facilities and value-added processing equipment, and the expectations that we will be able to quickly bring back our highly skilled employees. On a more positive note, our toll processing volumes for the canned beverage and appliance end market remained fairly steady throughout the first quarter. Aerospace demand was relatively steady during the quarter as we continued to ship against strong backlogs and orders already in progress. With our first quarter of 2020 aerospace tons down only 3.2% compared to the first quarter of 2019, and our average selling price holding relatively flat. Going forward, we are expecting activity for commercial aerospace to decline beginning in the second quarter as a direct result of COVID-19. We will continue to monitor the evolving situation regarding air traffic and our aerospace businesses supporting these end markets, given the uncertain long-term impact. Conversely, defense-related aerospace demand has remained strong with stable trends continuing into April. Demand in heavy industry for both agriculture and construction equipment was steady throughout January and February. However, reductions in spending significantly declined in both of these markets in March and April, leaving our outlook highly uncertain at this point in time. Demand for energy, which is mainly oil and natural gas, remains at low levels. Given changes in drilling technology and increased global oil production that led to significantly lower oil prices in the first quarter of 2020, we've made the decision to permanently close 3 of our businesses supporting the energy end market. We also assessed our remaining energy business, given that our long-term outlook for the energy market has significantly reduced from prior cycles with an unclear path to recovery, which resulted in impairment charges of those businesses as well as the closed business. As a result, we recognized impairment and restructuring charges of $137.5 million in the first quarter of 2020, which Karla will elaborate on shortly. The semiconductor market was a bright spot for the quarter, with demand continuing its steady improvement from 2019. While up overall, our semiconductor operations in Asia were negatively impacted by COVID-19 in the earlier part of the quarter as compared to our North American operations. In the first 2.5 weeks of April, our tons sold per day were down 20% compared to the same period in March, excluding our toll processing ton. While our outlook for nearly all of our end markets remains challenging and unclear today, I'd like to highlight that we anticipate that our intentional diversification of end markets, products and geography as well as our decentralized operating model will serve us well through the recovery that will follow these difficult and uncertain times. Turning to capital allocation, our overall philosophy on this subject has not changed. Even in challenging times like these, we're executing the same strategy through a balanced focus on growth and stockholder returns. Because we sell into cyclical markets characterized 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 the countercyclical cash flow generation built into our business model, even during the first quarter, which is typically a period in which our working capital needs are higher. Further, consistent with our ongoing philosophy, we are continuing to rightsize our inventory to reflect current demand levels, which helps free up cash during a downturn. Although we remain comfortable with our current liquidity position, we have reduced our 2020 capital expenditure budget from $250 million to $190 million. We will deploy cash to fund essential needs and certain strategic projects to support our customers through the additional innovative equipment and advanced technology in an effort to further strengthen our value-added processing capabilities. We will defer nonessential CapEx until we determine that it is prudent to invest in these opportunities. As it relates to M&A, we are not surprised to see a reduction in the number of potential acquisition opportunities in the market, given the current environment. Meanwhile, the integration of Fry Steel Company, which we acquired on December 31, remains on track. As you will recall, Fry Steel is a general line, long bar distributor in Santa Fe Springs, California, with a strong brand reputation, driven by superior customer service, diverse product offerings and a next-day delivery commitment. In regard to stockholder return, we are pleased to continue delivering value to our stockholders through the payment of a regular quarterly dividend as we have done for 61 consecutive years. Since our IPO in 1994, we've increased the dividend 27 times, including our most recent increase of 13.6% in the first quarter of 2020. We also repurchased $300 million of our common stock in the first quarter. While we expect to remain opportunistic in our approach to repurchases, we must concurrently consider our near-term focus on cash preservation as our markets recover from the impact of COVID-19. In summary, market conditions were generally favorable in the first quarter, and we delivered solid results despite extraordinarily difficult circumstances resulting from the coronavirus pandemic that directly impacted our business beginning in mid-March. I would like to once again thank each and every employee in the Reliance family of companies for their ongoing hard work and flexibility as well as their unwavering commitment to operating in a safe environment. Their collective efforts empower us to support our customers in essential businesses as we manage through this unprecedented crisis. As a result, we will challenge ourselves to drive continuous improvement in all aspects of our business. However, as we make decisions moving forward, I want to emphasize that the health and safety of our employees, customers, suppliers and communities will always reign supreme. As we look forward, we believe our diversification strategy and our model of focusing on higher-margin businesses and value-added processing will help support us through the recovery that will follow this crisis. Our decentralized operating model enables us to evaluate each of our business on its own merits and to ramp up individual operations quickly. Our strong balance sheet and cash flow enable us to continue operating our business today, preserve jobs for the majority of our employees, help support future demand from our customers and strategically partner with our key suppliers once the situation stabilizes. We believe that we are well positioned to emerge from this situation as a stronger and more innovative company, and we look forward to bringing back those dedicated employees who are currently laid off. Thank you for your time and attention today. I will now turn the call over to Karla to review our first quarter 2020 financial results in more detail. Karla?

Thanks, Jim, and good morning, everyone. Net sales of $2.57 billion for the first quarter of 2020 decreased 13% from the first quarter of 2019, mainly due to lower metal prices, with our average selling price down 11%. Demand was healthy with only a slight 2.2% reduction in shipment levels. Compared to the fourth quarter of 2019, net sales increased 5.1%, driven by a 6.8% increase in tons sold, which was consistent with our guidance of up 6% to 8%. Our average selling price per ton sold declined 1.2% compared to the fourth quarter of 2019, and was below our guidance of up 1% to 2%, mainly as a result of downward pricing pressure due to the coronavirus pandemic. Our gross profit margin on a GAAP basis for the first quarter of 2020 was strong at 30.3% and was slightly above our estimated sustainable range of 28% to 30%. Our strong non-GAAP gross profit margin of 31.9% included $20 million of LIFO income and excluded charges related to the closure of certain of our energy businesses that resulted in a $39.8 million charge to inventory and cost of sales. On a non-GAAP FIFO basis, which is the best measure of our day-to-day operations, our gross profit margin of 31.1% increased 200 basis points from 29.1% in the fourth 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 and increasing the level of value-added processing services provided to our customers. We are very proud of and grateful for their efforts. As I mentioned, we recorded LIFO income of $20 million or $0.23 of earnings per diluted share in the first quarter of 2020 compared to LIFO income of $12.5 million or $0.14 of earnings per share in the first quarter of 2019 and LIFO income of $81 million or $0.89 of earnings per share in the fourth quarter of 2019. As a result of downward pressure on metal pricing and significant uncertainty in the current environment, we have updated our estimated annual LIFO adjustment to $80 million of LIFO income from our prior estimate of $20 million annual LIFO expense. Similar to what we experienced in 2019, should metal pricing continue to decline and as we right-size our inventory quantities to reflect lower demand levels, we expect to generate LIFO income which will positively benefit our gross profit margin and earnings. At March 31, our LIFO reserve was $117.6 million and we believe that the LIFO method helps reduce the volatility of our earnings. Our first quarter same-store SG&A expenses decreased $15.3 million or 2.9% compared to the first quarter of 2019 on a 2.2% reduction in shipments, with our average headcount down 3.7% in the 2020 first quarter compared to the 2019 first quarter. Our performance-based compensation structure also contributed to lower expenses. I'll discuss our expense drivers in more detail shortly when I discuss the cost reduction actions we are in the process of implementing. As Jim noted, our overall outlook for certain of our energy businesses has deteriorated significantly. Although we have consistently reacted to declines in this market over the years, we made the decision during the first quarter to close 3 of our businesses and to assess future outlooks for our remaining businesses servicing the energy market. As a result, we recorded pretax charges of $137.5 million or $1.53 of earnings per share including a $97.7 million impairment charge and $39.8 million of inventory write-downs included in cost of sales in the first quarter of 2020. Our non-GAAP pretax income was $220.6 million, with a pretax margin of 8.6% for the first quarter of 2020, consistent with our pretax margin in the first quarter of 2019, and we are very proud of these results. Our effective income tax rate for the first quarter was 24.3%, down slightly from 25% in the first quarter of 2019. At this time, we estimate our effective tax rate for the full year of 2020 will be approximately 24.3%. Non-GAAP net income attributable to Reliance for the first quarter of 2020 was $164.8 million, resulting in non-GAAP earnings per diluted share of $2.45. If you were to back out the change in our LIFO estimate to $20 million of income from $5 million of expense, our first quarter of 2020 non-GAAP earnings per share would have been approximately $2.17, which would have exceeded our guidance range of $2 to $2.10. Our earnings per diluted share were $0.92 in the first quarter of 2020 and down from $2.80 in the first quarter of 2019, mainly due to both lower metal pricing and the impairment and restructuring charges. Turning to our balance sheet and cash flow, we generated cash flow from operations of $170.8 million during the first quarter of 2020. We invested $55.5 million in capital expenditures, paid dividends of $41.9 million to our stockholders and repurchased approximately 3.3 million shares of our common stock at an average cost of $90.09 for a total of $300 million. As Jim mentioned, with the significant uncertainty that currently exists, we have adjusted our capital allocation priorities to focus on cash preservation, including rightsizing our inventory and pausing nonessential capital expenditures. Nevertheless, we remain committed to concurrently making investments that support the long-term growth and sustainability of our company as well as continuing to provide returns to our stockholders. At March 31, 2020, our total debt outstanding was $1.84 billion, resulting in a net-debt-to-total capital ratio of 25.4%. Our net-debt-to-EBITDA multiple was 1.4x. Our leverage ratios support our investment-grade credit rating and are well below our financial covenants. As of the end of the first quarter, we had $831.5 million available on our $1.5 billion revolving credit facility, and 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. Due to the macroeconomic uncertainty stemming from the coronavirus pandemic and overall lack of visibility into future demand trends, metal pricing and market conditions in the end markets in which we operate, we will not provide guidance for the second quarter of 2020 at this time. However, we will provide general guidance as to overall market conditions and the actions we expect to take to help us manage through this downturn. We anticipate that shipment levels in the near term could decline even further than the April levels previously discussed, and that metal pricing will remain under pressure and could fall further from current levels. In this type of environment, we expect competition to increase, which could lead to some erosion of our currently strong gross profit margin. To offset lower shipment levels, we have reduced our workforce by approximately 11%, which is expected to reduce our SG&A expenses beginning in the second quarter of 2020, net of any related severance and extended benefit coverage costs. We expect further workforce reductions if our shipment levels continue to decline. In addition, lower profitability levels will result in reduced performance-based compensation expense. We are also focused on rightsizing our inventory to meet current shipment levels. We have worked with our mill partners to cancel and push out certain orders and expect to reduce our mill purchases in the near term. We will look to leverage Reliance's company-wide inventory and purchase from each other in smaller quantities to bring down our overall inventory levels. However, with lower shipment levels, there will be a lag in rightsizing our inventory. While we never take these actions lightly, given the impact on our employees and their families, and also on our suppliers, we believe these are the necessary and appropriate steps to maintain our operating efficiencies and to help preserve liquidity and long-term profitability. In closing, we produced strong first quarter results despite a softer pricing environment than we had anticipated. Excellent execution by our managers in the field, along with our strategic focus on high levels of customer service and value-added processing resulted in yet another quarter of strong non-GAAP earnings. Thank you again to all of our employees in the Reliance family of companies for your ongoing commitment to health, safety and operational excellence. While we face difficult times ahead as we all work together to slow the spread of COVID-19, I would like to echo Jim's statement that we believe our proven business model, strategy and the proactive measures we're taking today will help us emerge from this downturn even stronger than before. Our thoughts are with our impacted employees and their families, and we look forward to improved business activity levels so that we can safely bring our employees back to work. We wish good health to all. That concludes our prepared remarks. Thank you for your attention. And at this time, we would like to open the call up to questions.

Our first question comes from Seth Rosenfeld with Exane BNP.

Just like to get a better sense of the impact of the sharp decline in the auto market on your toll processing operations. You commented earlier that, I believe, headcount has been reduced by roughly 50% in this part of your business. Is that representative of the scale of volume decline you witnessed? Or have you seen perhaps a sharper decline in that figure? And when we think about the outlook for gross margins going into Q2, obviously, the Q1 performance is particularly robust. I believe that you commented earlier in the prepared remarks that you should expect to see some compression in the margin figure. How should we think about that in terms of the risk of perhaps fixed costs under-absorption, inventory holding losses or just much lower contribution from toll processing? How should we think about the moving part and the potential scale of gross margin compression into Q2?

Okay. So a couple of questions in there. Let me talk about a little bit about the automotive first, and we have Bill Sales, who's not in the room, but I'm going to ask Bill to jump in on the auto part. The 50% reduction, that's kind of reflective of what the business drop we saw. I'll remind you that we've been through this before, 2009 is a good example of what happens when a certain market goes down. We're having a nice start and fulfilling our obligations to our partners. I'll remind you that our customers are not the automotive companies themselves but the suppliers of metal. We were doing well, and they started announcing closures on the steel and aluminum market and in response to the automotive shutdowns. The good part about that is we have a schedule as to when they are coming up. We'll see those are estimates on their part. So again, we simply react to what our customers are telling us. We don't speculate. But it's a strong market for us. We've invested a lot of money in. We continue to see that as a great market going forward. And I'm going to ask Bill, if you don't mind, Bill, giving us some more color to address Seth's question on the automotive?

Yes, Jim. Yes, the 50% reduction was really tied to those auto plant closures. And so as Jim said, we've got a schedule. It looks like a majority of those plants are going to be reopening in early May. We've got a structure in place in terms of how we structured the layoff, where those highly skilled employees, we can bring back as those plants start to ramp back up. So I think that was a snapshot in time based on the closures. As things reopen and they start to ramp back up, we'll react to that and be able to meet their requirements.

Karla addressed Seth's questions regarding the cost and gross profit outlook. She acknowledged that with a decrease in volumes, there is indeed a decline. However, due to their variable cost structure, where 65% of SG&A expenses are related to personnel, the company made significant workforce reductions quickly amid the precision strip. They are optimistic about being able to scale back up quickly when auto production resumes. While current reductions have cut a substantial portion of their costs, various other variable costs remain. The impact was particularly severe due to the abrupt halt in the auto sector, but they have also implemented changes across other affected businesses based on their clients' operational status as essential enterprises. They are committed to this focus. Regarding inventory losses from declining prices, their LIFO inventory costing method provides a buffer, which mitigates potential losses and stabilizes earnings. They do not expect inventory losses, especially since they do not own the inventory in the auto sector, which is the most significantly affected market. Karla noted that competitive pressures in times of lower demand with supply still available, coupled with firms holding higher-cost inventory, might erode margins slightly. Previously, the company experienced strong gross profit margins in the first quarter, largely due to value-added processing, next-day delivery, and small order sizes. They believe these factors will remain less affected compared to the broader market, though they are cautiously explaining the potential challenges ahead that may exert downward pressure.

Yes. So just one more comment, Seth, the automotive companies do not hold inventory at their plant. So when they do ramp up, they look to us to get right back in as quickly as possible, which we can do very quickly to start supplying parts to that.

If I can just press with one quick follow-up. The recently revised guidance range of 28% to 30% gross margin. Obviously, you're now expecting a greater LIFO tailwind into Q2. But are you still confident that at least the bottom end of that range can be met going into Q2?

I believe we are quite confident about our outlook. For Q2, we anticipate it will be the most challenging period as we navigate through the COVID-19 crisis. We'll have to see how things develop. While it's possible we could see a decline, we aim to maintain a sustainable performance on an annual basis. We believe we should be able to achieve that. However, as we've mentioned, the situation is fluid and can change daily. As of now, we expect to remain within that range on a LIFO basis.

Our next question comes from Timna Tanners with Bank of America Merrill Lynch.

I would like to clarify something. The previous questions were quite broad, so I want to focus on a specific aspect. The key issue we need to address is how much you can adjust operations, as you've already made significant changes. Can you provide more detail about your overhead framework? If two-thirds of it is labor, would it be correct to assume that two-thirds of that is flexible while only one-third is more fixed? Could you give us a clearer understanding of this?

That's an interesting perspective. It's important to consider how unusual the current situation is. We frequently mention uncertainty and challenges in our operations. There's a minimum number of staff required to fulfill orders, and we are currently meeting those orders. As demand increases, we can quickly adjust our staffing levels. This is why we have laid off some employees but have communicated that they could be recalled soon, as we play a significant role in our customers' businesses. They consistently request more from us, and I expect that when we bring back staff, there will be added value. Given the current market fluctuations, we believe our current headcount is appropriate, and we have valuable employees that we want to retain. We've managed similar situations before and are adept at it. Although this scenario is atypical, we will continue to make thoughtful decisions regarding our SG&A cost adjustments.

I can't provide a specific formula for this situation because it differs from previous downturns we've experienced. As I mentioned earlier, we believe it's a relatively short list of challenges. Our approach has been unique due to the circumstances. If we see a recovery resembling a B or U shape, it will be different from our return after 2009, which was a prolonged and gradual improvement. We anticipate bringing back many of the employees we had to let go. Our strategy for workforce reduction during this downturn has differed from what we did in 2008 and 2009, where we reduced our workforce by 23% over 9 months and cut over half of our inventory, amounting to more than $1 billion then. That situation involved actual separations rather than temporary layoffs. We need to observe how this current situation develops, and we don't have a precise model for how far we can go. While we have numerous variable costs, our business structure varies significantly, making it challenging to provide a standard fixed versus variable percentage. As Jim mentioned, we are considering the available options.

Operations vary by location and are influenced by the specific order volume at each site.

Sure. To summarize, looking at the period from Q3 '08 to Q2 '09, gross profit margins were depressed for four consecutive quarters, which raises concerns about potential outcomes. That's why you mentioned full-year gross margins might fall within a certain range, if I understood you correctly. I just wanted to clarify that. Additionally, I'm interested in how negotiations at the mills are going. Can you delay and extend? Are they aware that you'll recover those volumes when demand returns? I would appreciate more insight on whether this situation is unusual.

Yes. So, to the first part of your question, yes, you're right. Our actions are a little different this time with the way we're reacting because like we said, we think the nature of this is more short-term based on what we know today. So I think that's the positive that we're taking the appropriate actions, but we're taking it in anticipation of coming out of this fairly quickly and being able to be there to support the increased business activity at whatever level that is. And with our model, with our high-value add, with our quick deliveries, we anticipate maintaining the value that we provide our customers and being able to get those gross profit margins that we've risen to over the last few years.

Yes. And as far as the mills, obviously, we don't like to do what we're doing. However, we've got long-standing relationships with these folks. We've supported them year in, year out for a long period of time. We're a domestic buyer. I'll remind you that less than 5% of our spend even in normal times has been domestic. I know they appreciate that. They appreciate Reliance. And we do everything we can to be a good partner with them. And our communication with them is almost on a daily basis, and we're here to support them in these situations; they're going to support us, and we're both going to need each other in the supply chain when this does ramp up. So they're going according to plan.

And just to clarify 95% domestic, 5% import.

Next question comes from Chris Terry with Deutsche Bank.

I would like to ask about working capital expectations. Are you experiencing any challenges with cash collection from your customers, or are there any concerns to be aware of?

We are optimistic that our customers are maintaining their normal payment patterns, and so far, we haven't observed any changes in that regard. However, we anticipate there may be a slight slowdown in the next quarter. We see working capital as a significant source of liquidity this year, especially with the expectation that metal prices might decrease and shipping losses continuing to decline, which will reduce our accounts receivable faster than our inventory. We're aiming to reduce our inventory levels. These factors—lower metal prices, reduced inventory, and lower shipping levels—will also generate cash. Consequently, we expect to see positive contributions to our cash flow from working capital reductions this year.

Okay. You mentioned the auto market, and I heard there was a 20% decline in shipments in April. Could you elaborate on the aerospace market and what you're observing there? Also, could you provide more details regarding that 20% decline, assuming it excludes tolling? I would appreciate any insights on aerospace in relation to the various market segments.

The aerospace business has clearly been negatively affected. We monitor build rates, backlogs, and mill lead times to assess the health of this sector. Airbus has announced a reduction in build rates by approximately one-third. The situation with Boeing is less clear, but we know their build rates are decreasing, and backlogs are diminishing due to order cancellations. We estimate that the backlog might decrease by up to 50%, which would still leave us with a backlog of around three to four years, similar to historical levels prior to the current super cycle. Like the auto industry, we are evaluating the situation on a program-by-program basis and adjusting our inventory and staffing based on our observations. The commercial aerospace market is influenced by passenger travel, and as we emerge from this situation, we will need to see how quickly travel resumes. We will closely monitor developments and adjust our strategies accordingly.

Yes. And Chris, Bill just addressed primarily the commercial market. We've also got some good exposure on the defense side. And as we've talked about the last few quarters, that's been strong. We see that continuing at strong levels. So far through April, defense has held up. And we actually just extended our Joint Strike Fighter program. We announced that about 4 years ago when we initially got that program. It's a big program for us, and we were just awarded a 5-year extension on that, about $660 million over that time frame.

Yes. That program will take us out through 2026. And then the other thing to remember about our aerospace business is we're less than 50%, probably around 40% commercial aerospace, and then the balance of that would be noncommercial aerospace with defense being a big part of that.

Our next question comes from Phil Gibbs with KeyBanc Capital Markets.

Some of the essential growth CapEx that you're keeping for this year? Anything that we should be thinking specifically in terms of the projects?

In general, we discuss our capital expenditures. Our CapEx consists of 300 line items, some of which we've chosen to keep, including orders or projects that were already initiated and are necessary moving forward. This includes equipment and maintenance needs. Each year, a portion of our CapEx can be classified as maintenance, while another part focuses on growth and new innovative equipment, which we have retained. It's easier to highlight the expenditures we have chosen to delay, such as lease buyouts, resurfacing parking lots, and redecorating offices—these are not essential and can be postponed until next year if necessary. We carefully reviewed our plans, understanding that during recessions, our customers often request more from us upon recovery. Therefore, we've maintained the innovative equipment that enhances our capabilities and the maintenance equipment that improves our efficiency. We will continue to participate in CapEx spending, though not to the extent we initially anticipated.

That makes sense, Jim. When we think about the here and now, I know a lot of people are basing their decisions on survival and cash preservation. But as you look out over the next several years, are your customers being more adamant and saying we need to diversify our supply chain away from China? We need you to make these components. We need to start moving more of these specialized value-added steps away from them. Because clearly, what happened in the last 2 or 3 months shouldn't be acceptable to anyone.

I agree and hope many are listening. We have identified a shift towards reshoring, and I believe there will be more of it. Our strategy is designed to accommodate this shift, and we expect to see more of it returning, which would be beneficial for the U.S. and North America. We are monitoring the situation closely. If I were managing one of those companies, I would not ignore the current global dynamics. We are considering not only our current operations but also how we will operate in the future. It is important for us to understand how the business landscape will evolve, and we want to stay ahead of these changes. This will definitely be a factor in our planning. As an American, I believe that increased domestic manufacturing will benefit the country and be advantageous for Reliance and our domestic suppliers.

And Phil, we can't say that this has been broad-based at this point. But certainly, with all the trade issues over the past few years, we have seen some of our customers take some actions to do that. And now we've talked about the fact that overall shipment levels are down. But within that, we have picked up some new pieces of business and seeing some opportunities where some customers and further downstream are adjusting and have to look for new partners to help them breach their products.

Yes, Phil. The semiconductor market, as Jim said earlier, has kind of been a bright spot. And we did see a little impact early in the first quarter in Asia, primarily China from the COVID virus. But that's rebounded, and our customers are still optimistic and still talking about good demand through the balance of the year. I will tell you, we're keeping a close watch on that. As you know, that market can stop on a dime. So we're watching it very closely. But so far, all the indications are, it should continue to be very good through the balance of the year.

Next question comes from John Tumazos with Very Independent Research.

Could you elaborate a little more on the outlook for acquisitions? It would seem like there could be some smaller operations here and there that with less revenue and less volume could be a lot more willing to sell because they have debt? And maybe even chances to buy things below tangible book value since inventory values have fallen so much?

Yes, John, this is Jim. Our M&A strategy remains unchanged. We don’t buy companies that need significant improvements; they must be immediately profitable. We've acquired both small and large companies, and regardless of their size, each acquisition involves considerable effort. Currently, we have primarily seen opportunities on the very small side, but none have met our profitability or interest criteria. However, we are still open to pursuing acquisitions. Over the past couple of years, we have reviewed many companies, but we have only completed one acquisition, which occurred in December 2019. We purchased a high-quality company at that time. This year, there have been fewer attractive options, and what we have seen so far has not sparked our interest.

Yes. The accounts receivable category used up about $150 million of cash in the March quarter. Is there a seasonal explanation to that? Or do you have some customers that are paying a little bit slower? Yes, that's the usual seasonality, John, along with our sales due to the holidays and customer closures in Q4. Our shipment levels are down, which leads to lower receivables. With the seasonality returning in Q1, we keep track of days sales outstanding, which remains relatively steady quarter-over-quarter, typically around 42 days. So far, we've observed that consistency.

Thank you. There are no further questions. I would like to turn the floor over to Jim for closing comments.

Okay. Thank you very much for taking the time and attention today. And I'd like to reiterate that the health, safety of our employees, their families, our suppliers, our customers and our communities has always been our top priority. And I'd like to sincerely thank the first responders, especially the health care workers serving on the front lines to care for those needs. Our thoughts and prayers are with all of you through this difficult time. Now before I conclude, I'd like to remind everybody that in May, we plan to participate in a B&A Merrill Lynch Global Metals and Mining Steel Conference as well as the KeyBanc Basic Materials conference both of which will be held virtually. So I'd like to thank you all for your continued support and commitment to Reliance, and I hope you all stay safe and healthy. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.