Reliance, Inc. Q2 FY2020 Earnings Call

Greetings, 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. A question-and-answer session will follow the formal presentation. 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. 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, 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 and as updated in the company's quarterly report on Form 10-Q for the quarter ended March 31, 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 for joining us today to discuss our second quarter 2020 financial results. The strength and resilience of our business model produced solid results during an extraordinarily challenging quarter. Supporting many 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 decreased activity levels and generated cash flow from operations of $475.7 million. I want to sincerely thank all of my colleagues at Reliance for their flexibility and hard work in such a remarkable environment. Our success comes from your efforts, and this quarter is a testament to that. Our field managers did an exceptional job navigating a volatile quarter while prioritizing employee health and safety, implementing enhanced practices to mitigate COVID-19. We are committed to keeping our employees, customers, suppliers, and communities safe while delivering exceptional service to our diverse customer base. The combined efforts of our employees, including adherence to our new health and safety protocols, led to improved safety performance during the quarter and enabled us to continue supporting our valued customers through these difficult times. I want to highlight the strength of our gross profit margin during this quarter, which once again exceeded our estimated sustainable range of 28% to 30%. This strong margin is due to the exceptional execution by our field managers. They continued to leverage significant investments we've made to enhance our value-added processing capabilities, focusing on higher margin business and appropriately pricing the value we provide our customers through high-quality products and services. Now, let’s delve into a more detailed discussion of our second quarter performance drivers. Our shipments decreased 17.5% compared to the first quarter of 2020 due to a decline in demand across nearly all of our end markets, spurred by customer shutdowns and project delays related to COVID-19. Metal pricing was better than anticipated, with our average selling price per ton sold down only 3.5% compared to the first quarter of 2020, driven by price declines across most of the commodities we sell. We acted quickly to the rapidly changing business environment and reduced our SG&A expenses by 16.1% compared to the first quarter of 2020. In line with the resilience of our model and actions taken during prior downturns, we cut expenses by addressing variable costs that fluctuate with shipment levels. Given that about 65% of our SG&A expenses are people-related, we had to reduce our workforce through temporary layoffs and permanent cuts that affected approximately 2,100 employees by mid-July, mainly implemented in late March and early April as an immediate response to substantial declines in demand. Fortunately, we have now recalled around 900 employees, or over 40% of those impacted, as some of our businesses have started to recover, particularly our toll processing operations serving the auto industry. Our decentralized structure enables us to react rapidly to market conditions on a local basis. As we progressed through the second quarter, our daily shipment levels began to stabilize to around 16% lower than the first quarter of 2020. Should shipment activities change further, we will take necessary steps to realign our workforce. Regarding market conditions in our key end markets, demand in non-residential construction, our largest segment, softened during the second quarter due to shelter-in-place orders that delayed many projects. However, as restrictions were lifted across the country in May, we saw an uptick in activity as customers moved to complete projects that had been postponed. Quoting activity remained robust for projects involving schools, data centers, and warehouse distribution, along with an increase in certain infrastructure projects like bridges. Thus, we remain cautiously optimistic that non-residential construction demand will continue to recover in the second half of 2020, driven by healthy backlogs and positive customer sentiment. Demand for our toll processing services in the automotive sector fell sharply in the second quarter, following widespread closures of automotive OEMs and steel and aluminum mills due to COVID-19, leading to drastically reduced processing volumes in both the US and Mexico. We responded with significant staff reductions at our toll processing operations, nearly 50% by the end of the first quarter. As automotive OEMs reopened and increased production in early June, we were thrilled to recall many of our highly skilled employees. Currently, the majority of our furloughed employees ready to serve automotive markets have returned to work as activity levels improve, notably in light truck and SUV programs showing strong recovery. We are focusing on growth and innovation in toll processing, including expanding our operations to meet future demand. Demand in heavy industry, particularly agriculture and construction, also declined in the second quarter due to reduced production schedules and customer shutdowns stemming from COVID-19. Based on positive feedback from our diverse range of industrial customers, we are cautiously optimistic that our businesses in broad industrial markets may recover in the second half of 2020. The semiconductor market continued to shine in the second quarter with steady demand improvement compared to the first quarter of 2020. Our outlook for both OEM and project-based segments across various geographies remains positive. In aerospace, while defense market demand steadied at strong levels, commercial aerospace demand significantly declined due to reduced travel resulting from COVID-19. Consequently, we executed substantial workforce reductions and closed two smaller international locations supporting the commercial aerospace sector. We expect further softening in commercial aerospace demand in the third quarter and will implement additional cost reduction measures as necessary to ensure long-term profitability. The long-term outlook for commercial aerospace remains uncertain. Lastly, energy demand, primarily oil and natural gas, faced significant challenges in the second quarter, marking the lowest activity levels we've seen in this market in 25 years. We have proactively implemented cost reduction measures, including further headcount reductions and the closure of three energy-focused businesses during the first quarter of 2020. Following these actions, we believe our remaining energy sector businesses are well-positioned for future recovery. Although the outlook for nearly all our end markets remains challenging and uncertain, we trust that our resilient business model and diverse markets, products, and geographies, combined with our decentralized operating structure, will support us through the upcoming recovery. We believe customers recognize the increased value in Reliance's model during tough markets, relying on us to deliver more, often in smaller sizes or on a more frequent basis. On capital allocation, even in the current environment, our long-term strategy of balancing growth and shareholder return remains unchanged. Given the cyclical nature of the markets we serve, affected by pricing and demand fluctuations, we see the critical importance of a flexible and opportunistic capital allocation strategy. Our operations continue to generate cash due to our counter-cyclical cash flow characteristics. We also continue to adjust our inventory to align with current demand levels through reduced purchasing and cross-selling within our extensive Reliance network of service centers. Our planned capital expenditures of $190 million for 2020 will cover essential needs in strategic projects aimed at supporting our customers through innovative equipment and advanced technologies, in addition to maintaining our facilities and equipment to uphold our strict quality and safety standards. Regarding M&A, we have noted an uptick in potential acquisition opportunities compared to the first quarter, yet we remain selective and disciplined. We are searching for targets that align with our strict criteria of profitability, high-quality businesses, strong management teams, and superior customer service, ensuring acquisitions complement our product diversification strategy and are immediately accretive to earnings. We are proud to continue delivering shareholder value through our regular quarterly dividend, maintaining this for 61 consecutive years. We've increased our dividend 27 times since our IPO in 1994, with the most recent boost of 13.6% in the first quarter of 2020, and we have never suspended or reduced our dividend. While we did not repurchase shares in the second quarter, we acquired $300 million of common stock in the first quarter of 2020. In summary, I want to again express my gratitude to every one of my colleagues at Reliance for their perseverance, hard work, and adaptability, along with their commitment to health and safety. This dedication, combined with our focus on higher margin business and value-added processing, empowers us to navigate profitability in these unprecedented times. Our solid second quarter results reflect the strength and resilience of our business model and our capability to operate successfully in all environments. Throughout the second quarter, our decentralized model provided the flexibility to quickly adjust and ramp up individual operations in response to rapid demand changes and restructure businesses that were more significantly affected to ensure long-term profitability. This adaptability, together with our strong balance sheet and cash flow, allows us to remain profitable despite extraordinary market challenges, preserve jobs for the majority of our employees, and offer enhanced solutions to meet our customers' evolving needs. Thank you for your time and attention. I will now hand the call over to Karla for a more detailed review of our second quarter 2020 financial results. 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 toll processing operations followed a slightly different path as approximately 60% of our tolling volume is processed for the automotive market. 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% of our January and February levels and have continued to improve in July. 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 FIFO 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 the field, who, despite the challenging circumstances, continued 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 a higher gross profit margin than our service center businesses, so increasing our gross profit margin despite significantly reduced tolling volume 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 30, our LIFO reserve was $112.6 million. Our second quarter same-store non-GAAP SG&A expenses decreased $102.6 million or 19.3% compared to the second quarter of 2019. While certain variable expenses such as plant supplies and freight costs declined as a direct result of our 19.7% reduction in shipments, our most significant reduction was in our average headcount, which was down 16.4% in 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 Plan. We remain 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 impact 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 was $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 days sales outstanding increased by only 1 day to 43 days, as cash collection 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 of cash flow from operations. 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 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 to 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 we'll execute on acquisitions and share repurchases, if and when we believe attractive opportunities exist. Turning to our outlook, given the continued macroeconomic uncertainty stemming from the COVID-19 pandemic, 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 volumes 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 volumes 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 model 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 continued 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. Our first question comes from Seth Rosenfeld with Exane BNP Paribas. Please proceed with your question.

Hi. Thank you very much for taking the question today and congrats on the very strong performance in Q2. If I may, I have a couple of questions with regards to the volume outlook 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 business model actually allowed you to take some of market share during the recent months of market volatility? And looking forward, do you view those as sustainable or more of temporary factors as some of your competitors were perhaps temporarily knocked out of the market? And then, secondly with regards to the inventory outlook, I believe you did comment 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 as you view a more gradual recovery through the course of H2? Thank you very much.

Sure. Thanks, Seth. First, regarding market share, we don’t really focus on it. Karla will share some numbers we receive from MSCI. Our main priorities are the bottom line, our employees, shareholder returns, and our execution. Market share tends to follow from that. Karla, you have some numbers to share about our performance compared to MSCI.

Yes, if you look at Reliance, our tons sold in Q2 decreased by 17.5% compared to Q1, while MSCI industry shipments declined by 26.5%. Our tolling tons, mainly for automotive, are not reflected in our numbers, but we believe that MSCI shipments are significantly focused on carbon flat-rolled products, which we think were more affected during this quarter than our shipments. However, we have received feedback indicating that we gained some business. During tough times, service center customers often prefer smaller order quantities with more frequent deliveries, possibly due to concerns about their own credit. They tend to favor financially stable suppliers. Therefore, we believe we received some orders in this environment, and we're optimistic that the excellent service provided by our team will encourage those customers to return.

And regarding inventories, that's always been a key driver in our model. Last year, I mentioned that we likely didn't manage our inventories well. However, we made significant progress in aligning our inventory during the last two quarters of the previous year, positioning ourselves effectively for the current unusual circumstances. I'm pleased to report that our returns are actually better than they were last year. Our team on the ground understands the importance of cash flow, and we prioritize this among other factors. At this moment, we feel well-positioned. To reinvigorate America, they will need our support, and we are committed to being there for them. Our relationships with domestic suppliers are strong, and lead times are manageable. Overall, I’m satisfied with our inventory levels. I often joke that we have too much inventory, but we understand where to allocate our resources, so we’re comfortable with our current position on inventory.

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

Yes, this is Karla. Last year, we achieved record cash flow due to strong earnings and successful efforts to manage our inventory in 2019. We will continue to focus on this, especially as we respond to decreased shipments caused by COVID-19. We're in a good position, but still attentive to our inventory. In certain areas where our outlook is weaker, we will continue working to reduce inventory, expecting some relief from sectors like aerospace. We believe non-residential markets will be more favorable. Currently, we feel confident about our inventory levels. If demand surpasses our estimates, we might need to increase working capital, which we would welcome as it would indicate positive growth. However, the second half of the year has traditionally been softer, and we do not anticipate the same cash flow from operations as we saw in the second quarter. That said, we still expect to generate cash with some release of working capital as we move into the second half, following typical seasonal patterns.

Thank you. 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.

I'm sorry, sir. We actually do have a question from Tyler Kenyon with Cowen & Company. Please proceed with your question.

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

Yes. Currently, our performance aligns with our expectations. As mentioned in our earnings release, we experienced a significant decline, but we started to see a recovery in May. We navigated through that period and ended the quarter on a relatively strong note compared to the beginning of the quarter. Now, we are operating at similar levels to that period.

Yes, I think, Tyler, we're pretty early into July. For the first two weeks on a daily basis, we have seen tons shipped per day come down a bit. However, the first couple of weeks of July typically do that because of the July 4th holiday. 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 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.

Yes. Hey, Tyler, it's Bill. As Karla mentioned earlier, we've seen a rebound on the tolling side. June was up about 66% compared to January and February.

Yes.

And then based on the ramp up, we think we'll see that continue to improve in July.

In June, we processed about 66% of the levels we saw in January and February.

In June, right.

In February, we experienced a decline of about 34%. We were in the process of ramping up, which began in June, and during that month, our levels were higher than the 66% we recorded coming into July.

And Tyler, as you all know, that sometimes people think our toll processing is only the automotive industry. It's also clients as well.

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

Yes, we’re not ready to provide a specific number just yet as we are still finalizing it. Historically, we have increased our sales percentage from around 40% to over 51%, and I anticipate this number will continue to rise. I cannot provide the exact figure at this moment because it hasn’t been finalized. However, based on our strategy and the efforts we've made over the last few years, it is expected to increase. We have invested significantly in various activities and processes that our customers have requested, and we have done so strategically and effectively. While the current economic situation was unexpected, history shows that after a significant downturn, our customers typically recover quickly. During challenging times, they tend to cut back on spending and face difficulties in staffing, but once they rebound, they need our support. We have allocated resources to be there for them. Moreover, we have invested in new technology, which I find quite exciting. This investment not only aligns with our operational goals but also contributes positively to our SG&A expenses, as the new equipment increases our efficiency with fewer employees. Therefore, I expect this trend to continue upward, which is the plan moving forward.

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 on the top-line trajectory for volume guidance, or would you expect a bit more upside, given you brought back some of the furloughed workforce on the toll processing side? And if you're expecting some stronger value-added mix?

That's an interesting question. We manage our company on a daily, weekly, and monthly basis. This approach will always be our practice. The fluctuations in our SG&A expenses directly relate to our operational activity. As mentioned, 65% of our SG&A costs are attributed to personnel. We have adjusted accordingly based on our needs. We expect some slower activity in the aerospace sector, which we will keep monitoring to adjust our operations as necessary. As business improves, we will increase our operations accordingly. This is ingrained in our operational philosophy. What was the second part of your question? Did you ask about more value added?

Yes, just the more value-added mix.

Yes, I believe I have addressed that. America needs Reliance to be there when they rebuild, and the value-added processing 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 will see SG&A increase because of that, but we will also have that more than covered by our gross profit that we generate on these tolling tons.

Got it. Thanks very much.

Thanks, Tyler.

Thank you.

Our next question comes from the line of Phil Gibbs with Keybanc Capital Markets. Please proceed with your question.

Hey, good morning.

Good morning.

A 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, we're 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.

Yes, Phil, you are quite familiar with our company. Our focus is on smaller projects that are four stories and below. To address your question regarding the early impact of COVID, it essentially paused the market and many projects. However, we did not experience a lot of cancellations; instead, many people chose to defer their projects to a later date. Fortunately, activity has picked back up, which is beneficial for us. The added value in that market is significant. Presently, strong markets include distribution centers, which are prevalent and actively being constructed, with many projects in our pipeline. Our key areas continue to benefit from favorable demographics, including assisted-living facilities, schools, and data centers, all of which are strong segments for us. I expect this trend to persist. I’ve also noted that some of our steel partners are performing well in the non-residential sector, which is encouraging. Additionally, there is some spending on non-residential infrastructure, such as bridges. I believe that a substantial infrastructure spending bill would greatly benefit the country and Reliance. Therefore, we remain cautiously optimistic about the current trends.

Thanks. Bill, what are your thoughts on the semiconductor situation? I know it has been positive, but it can also be quite unpredictable based on your previous experiences.

Yes. It can start and stop quickly. However, it has been a bright spot for us. The outlook for the remainder of the year remains very positive, so we believe this market will continue to be favorable for us.

I know you mentioned that you took a couple of facilities out in what sounded like Europe for the aerospace side.

Yes.

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?

Yes. Well, as Jim said earlier, 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 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. Yes, the other part of is that 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 will 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?

Yes, we had no business travel until July 1, when we made a change to allow it, but the approval process is quite strict and must go up the hierarchy.

Well, all domestic only.

Yes, there are no international trips at all, and we have the technology to manage without them. However, we have approved a few necessary trips where someone needs to be on-site to assist a customer or address a situation. Generally, travel is not unrestricted. For local driving travel, it's also based on necessity. We have stringent rules and regulations regarding our operations, and I take pride in how quickly we implemented these measures. We are leveraging technology to support this and are adhering to CDC guidelines, along with some stricter rules to ensure our employees' safety and health. Overall, we remain very mindful of the current situation and will continue to be proactive in safeguarding our workforce and communities.

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

Thank you.

Thank you.

Thank you. It appears there are no further questions at this time. I would like to turn the 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 5 we plan to present at the Jefferies 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.