Greetings and welcome to Reliance Steel & Aluminum Co.'s Third 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, 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 third 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 impact of the COVID-19 pandemic and related economic conditions on our future operation, 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 then updated in the company's quarterly report on Form 10-Q for the quarter ended March 31, 2020, and the company's quarterly report on Form 10-Q for the quarter ended June 30, 2020, under the caption Risk Factors, disclosed in our press release this morning and other documents Reliance files or furnishes with the Securities and Exchange Commission. The press release and the information on this call speak only as of today's date, and the company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Jim Hoffman, President and CEO of Reliance.

Thanks, Brenda. Good morning, everyone, and thank you all for joining us today to discuss our third quarter 2020 financial performance. We hope you are all doing well and staying healthy. We are very pleased with our third quarter results, which once again demonstrates the strength of Reliance's resilient business model. Our diverse product mix and end-market exposures, along with our decentralized operating structure enabled us to quickly respond to varying fluid market conditions. Our gross profit margin expanded 200 basis points from the prior quarter to a record 32.4%, significantly exceeding our estimated sustainable range of 28% to 30% on net sales of $2.09 billion. Our increased gross profit margin combined with diligent expense control increased our non-GAAP earnings per diluted share to $1.80, a 37.5% increase from the prior quarter and generated strong cash flow from operations of $296.3 million. I would like to thank our managers in the field for their continued efforts to increase the value we provide to our customers during these challenging times, which meaningfully contributed to our increased earnings levels. Even more importantly, we would once again like to express our gratitude to all of our outstanding folks for their hard work and perseverance through one of the most challenging times in our company's history. Our people are truly the key ingredient of the secret sauce of Reliance and we would not be where we are today without their unwavering commitment and support. Our managers maintain their focus on employee health and safety, including adherence to strict procedures to prevent the spread of COVID-19 and improve our safety performance on a year-to-date basis compared to the same period in 2019. We continue to support our employees and their families, as well as our customers, suppliers, and communities in a safe, positive, sustainable manner. Getting back to our third quarter financial results, our shipments surpassed our expectations, increasing 5.9% over the prior quarter, despite typical third quarter normal seasonal customer shutdowns and vacation schedules. Improved demand in the majority of our end markets, as the economy continued to slowly reopen following COVID-19-related shutdowns and project delays in the second quarter of 2020, drove this strength. In addition, our toll processing volumes increased materially compared to the second quarter levels, as automotive production continued to ramp up. As a reminder, since we do not take ownership of the metal, our toll processing volumes are not reflected in our tons sold metric. Metal pricing began to improve in the third quarter, as mill price increases from many of the products we sell were implemented, with announcements for further price increases continuing into the fourth quarter. Despite these mill price increases, our average selling price per ton sold in the third quarter was down 4.3% compared to the second quarter, primarily as a result of product mix changes that Karla will discuss in more detail. The 200 basis points improvement in our gross profit margin to a record 32.4% was a major highlight of our third quarter financial performance, which drove a 40.6% increase in our non-GAAP pre-tax income over the prior quarter. The primary contributor to our record gross profit margin was a significant rebound in our tolling businesses that service the automotive market, which generally operate at higher gross profit margins than our company-wide average. In addition, shifts in our diverse product mix, along with our ability to implement price increases at the time of mill announcements, collectively drove incremental increases in our third quarter gross profit margin. While we expect that the impact of certain of these factors will be temporary, we believe our managers will continue to successfully leverage the significant investments we have made to expand our value-added processing capabilities to support a sustainable higher gross profit margin. In regard to conditions in our key end markets, demand in non-residential construction, the largest market we serve, continued to slowly increase during the third quarter due to healthy bidding activity for new projects and the restart of projects that had previously been put on hold. Quoting activity remains strong for projects related to transmission towers, the military, schools and municipalities, as well as large warehouses, data processing centers, and assisted living facilities. We have also seen an increase in certain infrastructure projects, such as roads and highways and water treatment plants. As such, we remain cautiously optimistic that demand for non-residential construction activity will continue to improve through the end of the year, based on healthy backlogs and positive customer sentiment. Demand for the toll processing services we provide to the automotive market rebounded significantly in the third quarter as automotive OEMs and steel and aluminum mills continued to ramp up production following COVID-19 shutdowns in the second quarter. We simultaneously increased our processing volumes at our toll processing operations in both the U.S. and Mexico to support increased activities, and we were pleased to be able to recall the majority of our furloughed employees to our tolling operations. We remain committed to expanding our presence in toll processing in response to ongoing solid demand trends. Earlier this month, we commenced operations at a new facility in Kentucky. We will also soon break ground on a new Greenfield tolling facility in Texas. These new facilities expand our carbon steel tolling capacity and will position us to better service our toll processing customers, primarily metals producers and their end users in the Ohio Valley and the Eastern United States, as well as in the Southwestern U.S. and Mexico. Needless to say, our outlook for our tolling operations remains positive. Demand in heavy industry for both agriculture and construction equipment remained generally consistent with the second quarter. Production schedules in some areas have begun to increase, and we remain cautiously optimistic our businesses servicing the large industrial market should improve from current levels through the remainder of the year. Semiconductor demand steadily improved from the second quarter of 2020 and the market continues to be strong. Leading indicators for the semiconductor space currently point to a more positive development in the fourth quarter and early 2021, and we believe we are very well positioned to participate in any improvement. Turning to aerospace, I'd like to start by noting that our aerospace businesses service diverse segments. Commercial aerospace represents about half of our aerospace exposure. In the third quarter, commercial aerospace demand continued to decline as reductions in travel due to COVID-19 persisted. In response to reduced commercial airline build rates that we expect to continue at low levels in the near term, we recorded impairment and restructuring charges related to facility closures, workforce reductions, and a negative outlook at certain of our businesses servicing the commercial aerospace market. Conversely, demand remains strong in the military, defense, and space portions of our aerospace business, which represents the other half of our aerospace exposure. We continue to see opportunities to expand our participation in defense, which will help offset some of the weakness on the commercial side. We will continue to monitor and assess the health of each of our aerospace businesses and take appropriate cost-reduction actions if and when needed to ensure the continued long-term profitability of these businesses. Finally, demand in the energy sector, which is mainly oil and natural gas, remains under significant pressure. As I highlighted on our last call, we have taken proactive cost-reduction measures throughout 2020, including the consolidation of certain facilities and headcount reduction. As a result, we believe we are well positioned to maintain our presence as a dominant player in the energy spaces and support any further recovery in that market. One bright spot in particular is the renewable energy space, in which we sell a significant amount of metal for solar and wind power projects. Turning to capital allocation, our counter-cyclical cash flow generation enables us to remain flexible and opportunistic as we allocate capital for both growth and stockholder return opportunities in both good times and bad. Our capital expenditure budget for 2020 is weighted towards growth activities that support our customers through the addition of innovative equipment and advanced technology to further expand and strengthen our value-added processing capabilities. We have increased our 2020 capital expenditure budget by $80 million to a total of $270 million in response to opportunities to better service our customers including the toll processing expansion in Texas and to maintain and upgrade our equipment to provide our customers with the highest-quality products and services. On the M&A front, we continue to see a healthy pipeline of prospective opportunities. As always, we evaluate potential candidates using stringent criteria to ensure the best possible fit within our family of companies. We continue to seek well-run profitable businesses that possess strong management teams and superior levels of customer service with a focus on safety. Acquisitions must also complement our product and end-market diversification strategy and be immediately accretive to our earnings. In regard to stockholder returns, we are pleased to maintain our payment of a regular quarterly dividend as we have for 61 consecutive years without ever suspending payment or reducing our dividend rate. We've increased our dividend 27 times since our 1994 IPO, including the most recent increase of 13.6% in the first quarter of 2020. We also repurchased a small amount of our common stock during the third quarter of 2020. Another key highlight during the quarter was our diligent inventory management. We continue to right-size our inventory to reflect current demand levels through reduced buying as well as cross-selling inventory within our expansive network of service centers. And we are pleased to have achieved our company-wide goal of 4.7 inventory turns during the third quarter. In summary, we are very proud to have improved our financial results amid the unprecedented global uncertainty that continues to materially impact the economy. Our decentralized structure afforded us the flexibility to immediately respond to rapidly changing demand trends and help preserve our long-term profitability. I'd like to thank all of our folks within the Reliance family of companies for their dedication, persistence, and hard work to ensure that our entire workforce remains safe and healthy and is in a position to continue providing best-in-class customer service and producing profitable results. It is through their efforts that the unique aspects of our business model were able to really shine through enabling us to achieve significant gross profit margin expansion to a record 32.4%. The consistent execution of our resilient business model is a testament to not only the diversity of our products, end markets, and geographies, but also our commitment to: strong pricing discipline; diligent expense control when needed; inventory management; and leveraging our investments in organic growth and innovation. We believe customers realize increased value in our model during challenging markets as they confidently rely on us to do more for them often in smaller sizes or on a more frequent basis. As Reliance continues to evolve as a leading diversified metal solution provider, we will leverage both the knowledge we have acquired while navigating the pandemic and our commitment to continuous improvement and innovation to provide enhanced solutions to our customers and drive stockholder value through increased efficiencies and profitability. America is going to need Reliance to rebuild. Thank you very much for your time today. I'll now turn the call over to Karla to review our third quarter 2020 financial results in more detail.

Thanks Jim and good morning everyone. Our net sales of $2.09 billion for the third quarter of 2020 decreased 22.4% from the third quarter of 2019 with our tons sold down 13.1% and our average selling price down 11%. Compared to the second quarter of 2020, net sales increased 3.3% with our tons sold up 5.9% and our average selling price per ton sold down 4.3%. Our tons sold exceeded our expectations of flat to up 2% from the prior quarter as demand in many of our end markets improved with the most notable strength in non-residential construction. Although not included in our tons sold metric, the significant rebound in our toll processing operations contributed meaningfully to our increased sales with toll processing volumes up 81.5% from the lows experienced in the second quarter of 2020. Our average selling price per ton sold declined 4.3% compared to the second quarter. Our lower average selling price in the third quarter was mainly due to shifts in our product mix rather than overall metal pricing trends. The most significant shift was a 14.9% decrease in our aerospace tons sold in the third quarter, the majority of which was heat-treated aluminum and titanium products, which represent some of the higher-priced products we sell. Meanwhile, our shipments of flat-rolled carbon steel, which are among our lowest-priced products, increased as a percent of our total shipments which also reduced our average selling price. Lastly, our alloy sales now represent a lower portion of our total tons shipped due to the closure of certain of our energy businesses. Our gross profit margin for the third quarter of 2020 was a record at 32.4% and well above our estimated sustainable range of 28% to 30%. This ties our record gross profit margin set in the fourth quarter of 2019 when we recorded LIFO income of $81 million compared to LIFO income of $12.5 million in the current quarter. On a non-GAAP FIFO basis, which we believe is the best measure of our day-to-day operations, our gross profit margin of 31.8% increased 300 basis points from 28.8% in the third quarter of 2019 and increased 160 basis points from 30.2% in the second quarter of 2020. As Jim highlighted, this is a direct result of the outstanding performance by our managers in the field who despite challenging circumstances maintained pricing discipline by focusing on higher-margin orders and providing more value to our customers through our expanded value-added processing capabilities. These actions are the key drivers behind our ability to increase and sustain our strong gross profit margin. During the third quarter, certain other factors contributed to our increased gross profit margin, the impacts of which we believe may be more temporary. First, a significant rebound in our toll processing volumes drove a meaningful increase in our gross profit margin as our tolling businesses operate at higher margins than our company-wide average. Second, changes in our product mix contributed as our lower-margin contractual commercial aerospace sales declined while shipments of lower-priced carbon flat-rolled products increased. Given a lower average overall selling price, value-added charges are a larger component of our sales which has a positive impact on our gross profit margin. Third, we were able to enhance our gross profit margin for certain of our carbon steel products as mills announced price increases late in the third quarter. We recorded LIFO income of $12.5 million or $0.15 of earnings per diluted share in the third quarter of 2020 compared to LIFO income of $40 million or $0.44 of earnings per share in the third quarter of 2019 and LIFO income of $5 million or $0.06 of earnings per share in the second quarter of 2020. Given our current estimate of $50 million of annual LIFO income in 2020, we expect to record $12.5 million of LIFO income in the fourth quarter of 2020. As a reminder, we will true up to our actual LIFO adjustment at December 31st. Our LIFO reserve was $100.1 million at September 30th. Our third quarter non-GAAP SG&A expenses decreased $75.2 million or 14.5% compared to the third quarter of 2019 on a 13.1% reduction in shipments. The decline in SG&A expense was mainly due to reduced variable expenses such as plant supplies and freight costs along with lower average headcount which was down 13.8%; as well as lower performance-based compensation. When compared to the second quarter of 2020, our non-GAAP SG&A expenses increased only 2.6% on a 5.9% increase in our tons shipped demonstrating the efficiencies gained through our state-of-the-art processing equipment along with our continuous improvement and innovation initiative. During the third quarter of 2020, we recorded impairment and restructuring charges of $14.6 million as we continued to close or merge a few of our smaller locations and wrote off certain intangibles due to our outlook for a more challenging environment in certain markets. We recorded an additional $14.6 million in non-recurring charges comprised of settlement charges related to the termination of multiple small Frozen Defined Benefit Plans and settlement of an obligation in our SERP plan. We also recorded $1.8 million in debt restructuring charges related to our financing activities in the quarter for total non-recurring charges of $31 million in the third quarter of 2020. We remain solidly profitable in the third quarter of 2020 with non-GAAP pre-tax income of $158 million and a non-GAAP pre-tax margin of 7.6%. Our effective income tax rate for the third quarter was 22.6%, down from 25% in the third quarter of 2019 and up from 20.9% in the second quarter of 2020. Our lower tax rate was driven by reduced income levels in 2020 attributable to the impacts of COVID-19. At this time, we estimate our effective tax rate for the full year of 2020 will be approximately 22.5%. Non-GAAP net income attributable to Reliance for the third quarter of 2020 was $120.9 million, resulting in non-GAAP earnings per diluted share of $1.87, down from $2.39 in the third quarter of 2019, mainly due to lower pricing demand levels; and up from $1.36 in the second quarter of 2020 due to our strong gross profit margin and recovering demand. On a GAAP basis, our earnings per diluted share were $1.51 in the third quarter of 2020. Turning to our balance sheet cash flow, we generated strong cash flow from operations of $296.3 million during the third quarter and $942.8 million during the first nine months of 2020 due to our continued profitable operations and effective working capital management, including a continued focus on right-sizing our inventory levels, which resulted in achieving our inventory turn goal of 4.7 times. During the quarter, we issued $400 million of 1.3% five-year senior notes and $500 million of 2.15% 10-year senior notes through a public offering. We used a portion of the proceeds to repay all of our outstanding indebtedness under our unsecured revolving credit facility and term loan, and we'll utilize the remaining proceeds for general corporate purposes. Additionally, in early September, we entered into an amended and restated $1.5 billion five-year unsecured revolving credit facility that replaced our previous credit agreement and includes an increase option for up to an additional $1 billion. The facility amendment combined with the proceeds from the notes offering have significantly enhanced our liquidity position and extended our debt maturity profile. At September 30, 2020, our total debt outstanding was $1.66 billion, resulting in a net debt to total capital ratio of 17.3%. Our net debt to EBITDA multiple was 1.1 times. As of the end of the third quarter, no borrowings were outstanding on our $1.5 billion revolving credit facility. In regard to capital allocation, our increased 2020 capital expenditure budget of $270 million includes additional strategic investments to address our customers' needs and drive organic growth. We will continue to pay our regular quarterly dividend and selectively execute attractive acquisition and share repurchase opportunities. In the third quarter of 2020, we invested $38.2 million in capital expenditures and returned $41.2 million to our stockholders through dividends and share repurchases. Turning to our outlook, while macroeconomic uncertainty stemming from the COVID-19 pandemic continues, based on current expectations and market conditions, we anticipate that overall demand will continue to slowly improve in the fourth quarter of 2020. We expect shipping volumes will decline in the fourth quarter due to normal seasonal factors, including customer holiday-related shutdowns and fewer shipping days in the fourth quarter compared to the third quarter. But we believe the impact of seasonal factors in the fourth quarter may be less significant than in prior years. As a result, we estimate our tons sold will be down 4% to 6% in the fourth quarter of 2020 compared to the third quarter of 2020. We anticipate metals pricing, primarily for carbon steel products, will improve due to mill price increases. However, similar to the drivers behind our average selling price decline in the third quarter, we believe the impact of these price increases will be partially offset by our diverse product mix and declining sales in certain markets such as aerospace, which typically involves higher-priced products. As a result, we expect our average selling price in the fourth quarter of 2020 will be flat to up 2% compared to the third quarter of 2020. Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $1.30 to $1.40 for the fourth quarter of 2020. Looking ahead, we will continue to execute our business model and remain focused on managing the elements of our business that are within our control. In closing, we are very pleased with our third quarter results amid the broader macroeconomic uncertainty the pandemic has caused. Our managers in the field delivered excellent execution as demand began to slowly recover throughout the quarter, maintaining their strategic focus on high levels of customer service and value-added processing. This combined with our emphasis on expense control and our ability to respond quickly to market conditions resulted in yet another quarter of solid profitability and cash flow enabling us to support our growth and stockholder return priorities. I'd also like to echo Jim's sentiment and extend my thanks and gratitude to all of our employees and the Reliance family of companies for their ongoing commitment to health, safety, and operational excellence in this unprecedented time. We believe our people along with our proven business model are the keys to the strength and resiliency of our business. We look forward to improved conditions in the quarters ahead as we work with our employees, customers, suppliers, and communities to mitigate the ongoing 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.

Our first question comes from Seth Rosenfeld with Exane BNP. Please proceed with your question.

Hi Karla and Jim and congrats on a very strong quarter. If I can please kick off with a question on the outlook for margin please. Thank you first of all for providing some color in your prepared remarks on the drivers of particularly robust margins in Q3. Looking forward to Q4 your guidance seems to imply a pretty sizable reduction in gross margins quarter-over-quarter. Can you walk us through which of the key drivers that you would view as perhaps deteriorating on a quarter-over-quarter basis? And how we should expect that I guess settling out going into 2021 as we expect demand to continue to recover in line with your guidance? I'll start there please.

Hi Seth, it's Karla. So from a Q4 perspective we're very, very pleased with the performance we've had in the gross profit margin that our folks have been able to achieve. We did build into the comments with the rebound from COVID there's still uncertainty out there. We're seeing some changes in product mix. So we did try to highlight some of the impact both on average sell price and on gross profit margin from those. While certainly we think we will solidly perform at the high end of our estimated sustainable gross profit margin range of 28% to 30% going forward, we are a little cautious on achieving the record performance we had in the third quarter. There are carbon steel price increases on certain products including on flat-rolled which were pretty sizable at the end of the third quarter going into the fourth quarter which are very positive for Reliance as that allows us to make more gross profit dollars and helps us. But as the metal cost increases, our gross profit margin percent that we saw from our flat-rolled business in Q3 as a percent could go down a bit. So we're okay with higher prices at slightly lower gross profit margin. We did benefit quite a bit from our improved toll processing operations in Q3. As we've talked about that has a positive impact on our gross profit margin and that is sustainable. However, we think that the impact going from Q2 to Q3 was probably a little inflated just because of some of the cost-saving measures we took when we were hit hard for COVID. We're a little cautious on being somewhere between that high end of our sustainable range and what we saw in Q3. But again very confident maintaining a very strong gross profit margin recognizing we had some temporary boost in the third quarter.

That's very clear. And just to confirm your last comment was you'd expect to be somewhere between the high end of that sustainable range and the Q3 performance in Q4? Did I hear that right?

We expect to be able to stay at the top of the sustainable range yes.

Thank you. Regarding aerospace, which seems to be a growing challenge for the company, could you explain the expected further decline in volume? Do you believe that the figures you reported for Q3 already reflect a significant reduction in production rates among those customers?

Yes. Seth this is Bill. How are you? We think when you look at it from an end-market perspective that we'll be at the bottom. We're at/or close to the bottom now. As we look into next year we think we will slowly start to see some improvement. Our guys have done a really good job of attacking the expense side and really getting in the inventory side hard. So if you look at the outlook as we head into Q4 there may still be a little bit of downside on the performance side, but we're close to the bottom. And we'd love to see some improvement as we move into next year.

And just to clarify that a little bit. With what Bill talked about we were seeing kind of continuing declines through the third quarter. So really from where we ended at the third quarter we think we were near the bottom. But there was a decline throughout the quarter.

And I think we have done most of the heavy lifting from an expense and headcount reduction point of view. But we're going to stay close to the market and see what happens. And if we need to make more adjustments our guys will be ready to do that.

That’s very fair. Thank you so much.

Thanks Seth.

Our next question comes from Alex Hacking with Citi. Please proceed with your question.

Yes, good morning Jim and Karla. And thanks for the call. I guess my first question was just around the auto tolling volumes or the auto tolling business. Could you quantify where those volumes are at versus normalized levels as you exited the third quarter? And then just on the new facility in Texas is it possible to quantify the tonnage that you would be looking at there? And would it be safe to assume that's going to be co-located at the new flat-rolled mill that's being built in Texas? Thanks.

Alex, I'll address the first part regarding auto tolling volume. As we mentioned in the script, overall tolling volumes in Q3 saw an increase of 81.5% compared to the second quarter. Approximately 60% of this volume is auto-related, with appliances making up the next largest share, along with some miscellaneous items. The ramp-up was quite swift, beginning at the end of the second quarter and continuing into the third quarter. For this quarter, we were roughly 9% to 10% below pre-COVID levels, and we have observed a slight improvement since then. We estimate that we are now operating at about 90% to 95% of pre-COVID levels.

Yes. Regarding our new operation in Texas, I can't really quantify the volume yet, but I hope it will be significant. Opening a Greenfield site takes time to get fully operational. I assume the company has already announced its capacity and plans to operate at a high level. If that is the case, then we will as well, and we are looking forward to it.

Yeah. And then, in addition to that we also part of Jim's remarks were that we also are in the process of opening the fourth quarter another new greenfield expansion for tolling in Kentucky as well.

Okay. Thanks for that. And then, I guess just on the capital structure. Net debt now is down to around $1 billion-ish like one times EBITDA. I mean, how do you think about that, going forward? I mean it seems relatively conservative, given the margin stability that you guys have very successfully achieved through the cycle. I mean, arguably so how should we think about that capital structure going forward?

Well, I'll let Karla answer that before anyone suggests we have a lazy balance sheet. We like having all that cash. Karla, what do we plan to do with it?

Yeah. I mean, I think, Alex, certainly we are very comfortable with where we are from a leverage standpoint. We continue to be able to execute on all of our capital allocation priorities. As I think you know from knowing us for a while we try to be very opportunistic and flexible, in all those areas. Coming through the pandemic, the company has performed very well. But I think being a little comfortable with our financial position has not been a bad thing, as we've gone through this uncertainty. We are very confident with the model and the way we've performed. We've been ready to execute. As Jim mentioned in his comments, we see a lot of M&A activity. We continue to look at organic growth. As you saw in our notes we just increased our CapEx for this year. We're working on our CapEx for next year, but we continue to see organic growth opportunities. We pay a healthy dividend and want to continue to periodically increase that as we've done for many years. Also, jump into repurchase shares. So we're anxious for good opportunities to put our balance sheet to work a little harder.

Perfect. Thank you.

Thanks, Alex.

Our next question is from Chris Terry with Deutsche Bank. Please proceed with your question.

Congratulations on a strong quarter. My first question is about the guidance for the fourth quarter. It seems like you're indicating that your gross profit margin will be at the higher end of the 28% to 30% sustainable range. Regarding volumes, seasonally there’s typically a 5% to 7% increase, but you’re suggesting it may not be as bad, predicting a decline of 4% to 6%. Do you think this is a conservative estimate considering that the post-COVID recovery might be much stronger than usual seasonal trends?

Yes, Chris, it is conservative, but that’s our approach. We focus on managing what we can control. We can't influence demand or pricing, so we prioritize efforts that deliver the most value to our shareholders, executing consistently year after year. I believe we've navigated the COVID situation quite effectively. In September, we noticed a recovery happening faster than anticipated. October seems to be steady, but we are still analyzing these figures. So, yes, it's conservative. We strive to predict the future as accurately as possible and aim to meet or exceed those expectations, just as we have in the past.

And Chris just as a reminder, last year our fourth quarter volumes were down just under 7% from the third quarter. So this guide is a little better than that, but as Jim said, on the conservative side because there's still a lot of uncertainty out there.

And the other thing to keep in mind is that while Reliance is an essential business, not all of our customers are in the same position. We're uncertain about what the future holds. Some customers might emerge from COVID in a stronger position, while others might not. There could also be changes in the products they're producing. Our customer base is large, with 125,000 customers, and there are many smaller ones who increasingly depend on Reliance for our value-added services. Job shops operate from one project to another and often do not know what their next month or quarter looks like. Many of these factors are beyond our control, but we will approach it with a cautious perspective. We will strive to manage through it effectively.

Thanks, Jim and Karla. That all makes sense, just a follow-up question on the CapEx, so $270 million for 2020, appreciate it's probably too early to fully talk about 2021, but just trying to get a gauge of the toll project or the investment in Texas and also Kentucky. Is there an amount of that that carries forward into 2021 that we can think about on top of the normal sustaining level for how 2021 CapEx might shape up? Thanks.

Yeah. So Chris, the way we do our CapEx budget, the full amount of the spend for both the Kentucky and Texas expansions are in the updated $270 million 2020 budget. It's possible some of that cash could trail in to be paid during 2021. But we've got the full amount of that loaded. As I mentioned, we're working on our 2021 budget now. We don't have that final number yet. But we do see continued opportunities throughout all of our companies servicing all the different markets that we work with.

Yes, Chris, as Karla mentioned, we are currently in the midst of that process. We expect another substantial capital expenditure as our customers continue to request various services and enhancements. There’s no indication that these requests will diminish, and I assure you that we will be ready to meet their needs. Consequently, we anticipate a strong spending year in 2021.

Okay. That’s clear. Thanks. That’s all for me.

Thanks, Chris.

Thanks, Chris.

Our next question comes from Timna Tanners with Bank of America. Please proceed with your question.

Hey, good morning guys.

Good morning, Timna.

Hi, Timna.

I wanted to drill down again on that gross margin number, because I know your guidance is 28% to 30%. I know you're conservative. But we haven't even been in that range now for a while I guess since Q2 of last year. And I'm just wondering, I mean, if you look at Q3 yes there was a bit of LIFO. But despite the buyers and despite the uncertainty despite all the things that may or may not have affected you, it's a pretty phenomenal result even on a FIFO basis. So I'm just wondering like is it time to start thinking about a higher guidance because it makes such a big difference in forecasting for you? What would it take to see you dip actually below that 30% going forward? And then just whatever you can provide would be helpful.

Well, Timna, it is time to start thinking about them. As you know, we think about it all the time. It's just – and you – a key point of your question was the word uncertainty. Once we're certain that we can get there and we can sustain that we'll say it. This COVID thing was the – was a son of a gun. And we were able to respond in typical Reliance fashion because of our model. But again I really – it's tough going into this fourth quarter to say it. But we have to believe it before we say it. So we'll – we hear you and we're with you. When we say it you can count on the fact that it will be sustainable. That's the best answer I can give you right now. I wish I could tell you everything I'm thinking but we'll see.

And just to clarify too, Timna. The 28% to 30% is on a LIFO basis. And LIFO does help lessen some of the volatility there. So just to point that out. And as Jim said – and we've been asked by many of you about raising that and we are very proud of the results we've had and that we've been consistently at the top end for a little while. But things like the – and it was to the positive side our product mix impact on our margin in the third quarter. That could potentially go the other way a little bit too. So that's some of that uncertainty. Things are changing as we recover from the COVID hit. So we're watching that. Hopefully – I mean I think we're confident and I did say earlier in my remarks, we think at least through Q4 we can stay at the high end. We do think there are a lot of really good things that have happened that have driven our sustainable margin to the high end. We'll continue to monitor that.

Yes. And as you well know, Timna, the mix has a lot to do with it. The flat-rolled business as that starts going up that's at a lower margin than some of the other things that might be going in the other direction. Another thing just anticipating the next question from maybe not you or somebody is going to ask about the fact we went from a traditional 40% of our product being – having added value to it to 51% and we really haven't reported where that number is now. When that does go up, there's not a direct correlation between those two. It's part of our strategy to get that going north. You'd have to really drill down to find out what kind of value-added things we're doing. There's value added that we can charge for that's not as high value added as other types of things we can do. This quarter it was nice that we – or we – some of this technology out there that's available to us from an equipment standpoint, it's pretty fascinating really. We're able to offer our customers new and different things, and they're willing to pay for it. It never ceases to surprise me what they come up with. They deal with this COVID thing differently. When they come out they have different needs and they have different desires. We're a solution provider. We listen to what they need and we partner up with some equipment manufacturers that can come up with a solution for them. To – I – we hope that number continues to drive up, get better. I don't know how high it's going to be or how high it can be, but there's a lot of things that go into those numbers too.

And just because we're not ready to increase that range yet doesn't mean you can't put something higher in your model.

All right. Thanks for the permission there. That's great. The only question I wanted to drill down into and then granted you just said there's a lot of components and it's complicated but if I could. The aerospace business, obviously under some pressure and could be for a while; energy as well. But on this auto tolling opportunity with this last quarter and with the growth is that enough to offset those loss conceptually? Is that enough to balance out maybe the lost opportunity in or the dormant opportunity maybe in energy and aerospace? Or how do you think about that?

I think from a profit standpoint when we're fully ramped, which is not going to be for a while yet, I mean it can certainly have a meaningful offset if you assume aerospace and energy stay where they are currently. But we're hopeful we'll see some improvements in those markets too by the time we get fully ramped on our auto tolling businesses.

All right. And Timna, this is Bill. In addition to the two new Greenfield, we've got some new opportunities to grow our market share through our existing tolling operations. So our plan is we're going to see that continue to have a positive impact obviously.

In the aerospace, the defense end of the aerospace and the space end of the aerospace, that's good business. There're a lot of opportunities for us in that and we anticipate participating. That just by design is high value-added activity. We see some opportunities there too. So that's kind of a bright spot.

We do definitely.

Okay. Great, guys. Thanks again.

Thanks, Timna.

Thank you.

Our next question comes from Chris Olin with Tier4 Research. Please proceed with your question.

Well, Karla I should probably ask then can we also put our estimate higher than the guidance?

You're different. You could put your stock price target higher.

Okay. All right. Fair enough. I just know – I know you're getting a lot of aerospace question but I just want to make sure I understand the numbers. And I don't have any slides in front of me but I used to ask – and it was always like 8% to 10% of total revenues. And I just want to make sure I understand how you talk about it now. Half of that was commercial aerospace, half was other aerospace. Now commercial what they get cut in half? So your business is about seven – 2% at risk? The rest is stable? Is that how I think about it?

Yes. With an acquisition we completed around 2014, our aerospace segment has contributed approximately 10% to 12% of our revenue in recent years. However, due to COVID, that percentage has decreased slightly, bringing us just below the lower end of the 10% range. The revenue is fairly evenly divided between commercial and defense aerospace markets, making up the other half.

Correct. Yes. Mostly, aluminum. There is some aerospace steel and titanium products. But when you look at the commercial side it's for us it's a much bigger play on aluminum.

Yes. Especially, on the heat-treated plays. Our average sell price fluctuation and things, I mean, the 10% to 12% is based on sales dollars. Again, these are our higher-priced products. So the tons would be a smaller percent of our total tons but because of the high-priced product.

Do we need to think about contract rollovers for 2021? I don't know, if I may ask that yet. I remember it being a nice boost from last year. Is that reversed going forward?

Yes, but only on the defense side definitely. The JSF contract that has been extended. So that's a big program for us.

Pricing on commercial aerospace has that stepped down now in relation to the demand numbers?

Yes. So far pricing has been pretty stable on the commercial aerospace side. So I think even with the drop in demand the mills have been very disciplined in their pricing approach there. So pricing is I would say stable.

Great. That’s all I have. Thank you.

Thanks, Chris.

Hi. Good morning.

Hi, Phil.

Good morning.

My question is regarding the non-residential side. I would like to know what you're observing regionally in the different markets you serve, particularly across the country and in Canada. What insights can we gather from a regional perspective?

Yes, that's a good question, Phil. The good news for us is that the improvements are quite widespread. The Northeast has been performing steadily for several quarters. In the Southeast, due to the recent weather issues, business has really picked up, although it may take some time for conditions to stabilize for the residents there. We are seeing an increase in equipment for rebuilding roads, bridges, water treatment plants, and the electrical grid. Out West, demand remains strong, particularly driven by larger big-box warehouse developments and assisted living facilities, which cater to the elderly population present everywhere. We anticipate ongoing infrastructure spending, especially in the Southeast, and regions like Texas, Oklahoma, and Arizona are doing well. Additionally, the renewable energy sector is another promising area for us, and we expect that to improve further. Overall, the widespread growth is beneficial for us, and as I mentioned before, this gradual growth trend has been ongoing since 2009. If this trend continues, we expect the fourth quarter to remain strong.

Are you seeing any constraints in trucking availability right now in the U.S.? I know you have some of your own. But any constraints that you're either seeing or you're noticing out there? Or a sub part are you starting to see increased pressure on freight rate?

No, we're not experiencing any issues. We're in that business and can ramp up as needed. We have many of our own trucks for that reason. We view our truck drivers and those who work in that area as team members who are also sales representatives because they represent our brand. They care about our customer service, which is integral to our model. If we encounter a problem, we would simply increase our fleet. However, we have not seen any issues so far. A significant amount of our product is transported from mills to our operations by rail, and that process is functioning well. We are closely monitoring the situation and know we can increase capacity if necessary. There was a previous instance, which I don’t recall exactly when, where a driver shortage was anticipated, and we made adjustments accordingly. Currently, I haven't heard of any concerns that would cause us to be worried.

Bill, if there is a change in administration and defense spending policy, how long does it typically take for that to impact existing projects? I know many of these initiatives receive substantial funding from the Senate and require their approval. What insights can you share on this? People are starting to consider the potential implications of a change and how long those changes might remain effective.

Yes. Good question, Phil. It sounds like that regardless of who wins that defense spending is still going to be a priority. As you say a lot of what we're seeing is already in play. It will take some time if there is a change. But when you look at the major programs that we're on, we're not seeing or believing that there's going to be a significant change there over the long haul. We still are very positive on the outlook from a defense standpoint.

Isn't there Bill a lot of that that also goes to some foreign buyers?

Exactly. Yes. You've likely noticed that many legacy fighter programs are being transferred to other countries, and we are strong supporters of those initiatives. That aspect of the business has been very beneficial for us as well, and we believe it will continue to thrive.

Thanks everyone. Talk soon.

Thanks, Phil.

Ladies and gentlemen, we have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Jim Hoffman, President and CEO for concluding remarks.

Thanks, again to all of you on the call for your time and attention today. Before I conclude, I'd like to remind you all that in November we plan to present at the Goldman Sachs Metals and Mining Conference and the Citi Basic Materials Conference which will be held virtually and webcast live over the Internet. Thanks, again for your continued support and commitment to Reliance and stay healthy.

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