Greetings, and welcome to Reliance Steel & Aluminum Company's Second Quarter 2023 Earnings Call. This conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with Addo Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's second quarter 2023 financial results. I am joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website. Please read the forward-looking statement disclosures included in our earnings release issued this morning and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance.

Good morning, everyone, and thank you for joining us today to discuss our second quarter 2023 financial results. Reliance's business model is designed to provide resilient performance throughout economic cycles, including pricing and end market demand fluctuations present in the metals industry. The unique facets of our business model, highlighted by diversification, small order sizes, quick delivery, and increased value-added processing, combined with strong execution by our full Reliance team, support our ability to deliver consistent and profitable results. Overall activity at Reliance has remained healthy, as evidenced by solid volume growth year-over-year. We are excited by the continued onshoring and infrastructure spending activities that are creating new opportunities for us. Turning to our results, our second quarter net sales of $3.88 billion declined by 2.1% from the first quarter of 2023, with our tons sold down slightly more than anticipated and relatively flat selling prices that remain elevated by historical standards. Overall, customer activity in most of the end markets we serve remained healthy, with solid underlying demand and customer activity levels driven in part by our investments in organic growth. We continue to focus on growing the business organically and through acquisitions while maintaining our pricing and margin discipline. As a result, we delivered diluted earnings per share of $6.49, which was within our expected range. Our strong profitability, along with effective working capital management, produced significant operating cash flow of $295.1 million in the second quarter. Investing for growth remains our top capital allocation priority, with approximately $154.3 million invested in both capital expenditures and M&A in the second quarter. We increased our capital expenditure budget for the full year 2023 from $500 million to a record $520 million, and approximately two-thirds of our CapEx budget is focused on growth projects, including investments in advanced value-added processing capabilities, facility upgrades to enhance safety and efficiencies, and expansion into new markets. Our expected total cash outlay for capital expenditures in 2023 is approximately $425 million to $475 million. We completed the acquisition of Southern Steel Supply, LLC on May 1, increasing the total number of businesses we have acquired since our 1994 IPO to 72. Southern Steel is a highly regarded 60-plus-year-old metal service center in Memphis, Tennessee that expands our geographic reach in the Southern U.S. and extends our value-added processing services. Our M&A pipeline remains healthy, and we continue to evaluate various prospective opportunities. Our strong balance sheet and cash generation position us well to pursue acquisitions that meet our disciplined criteria for high-quality growth. Our cash flow also continues to fuel our strategy of returning capital to our stockholders. During the second quarter, we returned $132.5 million to our stockholders through dividends and share repurchases. Since 2018, we have invested nearly $2.2 billion in organic growth and acquisitions and returned $2.9 billion to our stockholders through dividends and share repurchases. In summary, we are very pleased with the continued strong operating performance of our entire Reliance team to execute Reliance's consistent and resilient strategy on a day-to-day basis, operating safely and producing profitable results through all operating environments. Importantly, we remain in a position of strength to continue investing in and profitably growing our company, including new opportunities that include spending from the Infrastructure Bill, the CHIPS Act, the Inflation Reduction Act, and onshoring activities. Thank you all for your time today. I'll now turn the call over to Steve, who will review our second quarter demand and pricing trends.

Thanks, Karla, and good morning, everyone. I'd also like to thank the entire Reliance team for their outstanding individual and collective efforts and unwavering commitment to safety. I'll now turn to our second quarter demand and pricing trends. Our tons sold decreased 2.4% compared to the first quarter of 2023, predominantly due to lower carbon flat-rolled shipments following the first quarter demand pull-forward impact from rising prices. Despite the sequential decline in volume, our Q2 tons sold were up 1.9% from the prior year and up 4.5% from 2022 on a year-to-date basis. This reflects solid underlying demand in key markets, including nonresidential construction, aerospace, and certain general manufacturing sectors, along with contributions from our organic growth activities, enabling outperformance of broader service center shipment levels across the majority of our products. Our second quarter average selling price per ton sold of $2,626 was relatively flat compared to the first quarter of 2023 and in line with our expected range of flat to up 2%, as anticipated carbon flat-rolled product price increases were offset by a downturn in stainless and aluminum commodity product prices. I'll now turn to a high-level overview of the trends we saw within our products in key end markets. Our three largest product groups, carbon steel tubing, plate, and structurals represented about one-third of our second quarter sales, and all of these products experienced stable or improved shipments compared to the first quarter of 2023 due to strength in the nonresidential construction market. We continue to believe new public infrastructure projects under the Infrastructure Bill and various other federal and state programs will provide continued support for nonresidential construction and infrastructure demand in the medium to long term. Aluminum and stainless products also represented just over 30% of our total second quarter sales, with aluminum and stainless aerospace products comprising approximately 9%. Although common alloy aluminum and stainless shipments and pricing fell in the second quarter, aerospace product demand and pricing remained robust. We primarily service the automotive market through our toll processing operations, which, as a reminder, are not reflected in our accounts sold. Our tolling business in the second quarter of 2023 improved both year-over-year and sequentially on increased processing demand from the automotive market. Within the general manufacturing market, we sell a diverse set of products to a diverse group of sectors. Shipments fell sequentially, partly due to the carbon flat-rolled demand pull-forward impacting the first quarter of 2023, but nevertheless, were up from the second quarter of 2022. While sales to the semiconductor industry declined both sequentially and year-over-year, our long-term outlook for this market remains positive as a result of the CHIPS Act and active reshoring. We continue to make investments to increase Reliance's capacity in the semiconductor space to support this anticipated growth. Please refer to our earnings release for additional commentary on our end markets and product diversification. Overall, we expect that end market demand will remain healthy in the third quarter of 2023. I will now turn the call over to Arthur to review our financial results and outlook.

Thanks, Steve, and good morning, everyone. Our sales of $3.88 billion in the second quarter declined by a modest 2.1% from the first quarter on relatively flat pricing. While carbon flat-rolled products drove the vast majority of the quarterly volume decline, their impact on sales dollars is relatively neutral, as higher selling prices for carbon flat-rolled products offset the impact of volume declines on our revenues. Declines in stainless and common alloy aluminum product sales in the second quarter drove the 2.1% sequential decline in revenues. Our FIFO gross profit margin, which excludes the effects of our LIFO inventory valuation method, remained relatively flat at 30.3% in the second quarter compared to 30.5% in the first quarter. However, the entry point into the second quarter was higher than the exit point due to temporary pressure on margins from declining stainless and aluminum product selling prices. The higher-than-anticipated decline in nonferrous product prices contributed to a revision of our annual LIFO estimate from $60 million of income to $120 million of income. As a result, we recorded LIFO income of $45 million in the second quarter to reflect a revised annual estimate. Our first quarter 2023 results included LIFO income of $15 million, bringing our six-month total to $60 million of income or half of our current $120 million annual LIFO income estimate. Our reported gross profit margins, which are on a LIFO basis, came in at 31.5% for the second quarter, up from 30.9% in the first quarter. As of June 30, 2023, the $683.8 million LIFO reserve on our balance sheet remains available to mitigate the impact of possible further declines in metal prices and benefit future period operating results. Moving on to expenses. Our second quarter same-store non-GAAP SG&A expenses modestly declined by $6.7 million or 1% compared to the first quarter from lower variable costs associated with lower tons shipped. On a year-over-year basis, our expenses were relatively consistent as incremental variable costs associated with higher tons shipped and inflationary wage adjustments were mostly offset by lower incentive-based compensation resulting from lower FIFO profitability. Overall, our second quarter pretax income of $510.9 million and pretax income margin of 13.2% were consistent with our first quarter results, and our diluted earnings per share of $6.49 for the second quarter were in line with our guidance of $6.40 to $6.60 per share. Turning to our balance sheet and cash flow. We generated cash flow from operations of $295.1 million, down from $384.6 million for the first quarter, mainly due to the timing of estimated income tax payment. For the six-month period ended June 30, 2023, our operating cash flow of $679.7 million was consistent with the same six-month period in 2022, as the impact of lower profitability was offset by lower working capital investments in 2023. Our inventory churn rate based on tons improved to 4.8x or 2.5 months on hand in 2023 compared to 4.4x in the same six-month period in 2022. Overall, operating cash flow generation remains strong, and our working capital management metrics are at healthy levels. Our operating cash flow for the six-month period in 2023 and cash on hand funded $257.2 million of growth initiatives in the form of capital expenditures and acquisitions, the return of $233.4 million to our stockholders in the form of $120.6 million of cash dividends and $112.8 million of share repurchases, and the repayment of $500 million of senior notes. Approximately $568 million remained available on our $1 billion share repurchase authorization as of June 30, 2023. I'll now turn to our third quarter outlook. While we anticipate underlying demand will remain healthy in the third quarter of 2023, we expect our tons sold will be down 2% to 4% compared to the second quarter due to normal seasonal patterns, including a decline in shipping volumes resulting from planned customer shutdowns and vacation schedules, along with one less shipping day. However, compared to the third quarter of 2022, this guidance implies growth in tons sold of 1.5% to 3.5%. In addition, we expect our average selling price per ton sold for the third quarter to be down 2% to 4% compared to the second quarter, primarily driven by declining prices for flat-rolled products across our major commodities, along with carbon steel tubing products, which selectively represent about 35% of our sales. We also anticipate temporary downward pressure on our gross profit margin from these declining price trends. Based on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $4.90 to $5.10 for the third quarter of 2023. Thank you, and we'll now open the call up to questions.

Our first question comes from the line of Katja Jancic with BMO Capital Markets.

Karla, in your prepared remarks, I think you mentioned that some of your growth CapEx is dedicated to expanding into new markets. Can you elaborate on that, please?

Yes. Katja, so Reliance, I think we've talked about many times before where we've been very active in growing our businesses across our whole portfolio of companies. A lot of times, we're adding processing capabilities or expanding existing locations. Part of the growth in new markets can be a new geographic market, it can be, like I said, adding processing equipment, etc. A couple of things we have going on in particular when we talked about this fourth quarter is we're currently experiencing the ramp-up of our flat-rolled operations that we have put on campus with some of the mills as they ramp. We're seeing some good growth there. We had acquired some facilities in the Michigan area for a lot of our toll processing companies a few years ago. But now we're in the process of installing some new lines in there. So in addition to their storage services, they'll be generating revenue off of their processing capabilities there like they do in their other locations. Geographically, we've opened up a small facility in Iowa recently, where we've got some expansions going on. In the Atlanta area and Houston area, we expanded some facilities. So there's a little going on everywhere. One of our bigger CapEx projects currently in the works that we've talked about before is our one company that focuses on the semiconductor industry. With all of the build going on to expand capacity in the U.S., we are building a new facility in Texas so that company can support the new chip manufacturing facilities being constructed in the U.S. We've got a very specialty type company participating in that. But we also have some of our more nonresidential construction-type businesses that are benefiting from the more foundational traditional build of those facilities. So a lot of different activity going on throughout the company.

And can you just remind us, when is the semiconductor facility expected to be completed?

So we actually have two new facilities going up in Texas. The smaller of the two is operational now. And it's early; it's just ramping up. The larger facility should be operational in Q2 of 2024. That's currently in the build phase.

Okay. And maybe just one last question. Regarding M&A, you have a very strong balance sheet. Can you discuss what the current pipeline looks like and the size of deals you are potentially seeing?

Yes, we have continued to find a steady stream of opportunities over the past few years. We are looking at a variety of possibilities and focusing on which ones align with our criteria and fit within the Reliance family. We consider companies of various sizes, still interested in acquiring smaller firms, but we prefer to invest our efforts in larger opportunities that bring more value to the company. We typically wait for sellers to be ready, which leads to friendly acquisitions when they decide to exit the business. We maintain relationships that allow us to identify these opportunities, and we believe we're well-positioned for that. Recently, we've seen numerous smaller fabrication-related opportunities and some smaller service centers. Over the last year to a year and a half, we've noticed medium-sized to larger, more traditional service center companies becoming available. There was previously a disconnect as sellers attempted to sell at peak value, but we're seeing those valuations start to align. While we are excited about the available opportunities, we haven't been as active in closing acquisitions, though we are actively evaluating several options. In addition, we have increased our organic growth compared to historical levels, leading to a more balanced growth approach at this time.

Our next question comes from the line of Phil Gibbs with KeyBanc.

Just regarding some of the public and federal infrastructure projects that are likely to hit the books later this year in '24, '25. Do you have any visibility to those projects happening within some of the things that you're working on? And when you fabricate certain things for beams and plate and maybe even tubular, do you know what specific projects it's going into? Just curious if you have that level of visibility. Anything that you could share would be helpful.

Phil, so I would say at a high level, kind of from a corporate view, we don't have a significant amount of visibility. But certainly, our companies out in the field who are servicing their customers on these projects, they have a much better feel. As we've talked about in the past, Reliance is not usually involved in the largest projects with the largest tons, but we're engaged in many projects, some as the primary provider and some as fill-ins with certain products and processing services. Our folks in the field generally know where the product is going, but it's hard for us to keep track of it. The beauty when we talk to our people in the field is that we're involved in many different types of projects, making it difficult to aggregate that into something to discuss. But I think Steve can give you more visibility on that.

Yes. Just when we did a channel check with a lot of our companies that service the non-residential and infrastructure throughout the United States, they're seeing a lot of activity in the bridge space, rail, ports, and many airport projects going on. An ongoing project has been the onshore infrastructure to support the planned offshore farms that are going up and down the East Coast.

And then as it relates to M&A, I know you recently got back into the market in the second quarter with Southern Steel. But if I look ahead the next two, three, four quarters, you could find yourself in a net cash position even with the CapEx that you're spending pretty aggressively in the back half and maybe into next year. So is there any thought to doing more larger-scale acquisitions? Or do you feel like your internal pipeline is robust enough to cover some of the higher-rate return projects you're considering right now?

Yes. So we're always ready to do larger-scale acquisitions if it's the right company and we can make it work. So that hasn't changed, as I mentioned earlier. We look at opportunities of all sizes. It just depends what's actionable at the time. That appetite has not changed even before we were in the cash position as we are right now. We're continuing to actively consider and look at any of those opportunities we see. If we find the right company, we would love to execute on that. At the same time, we have always been a growth company. As I mentioned earlier, we're a little more aggressive on the organic growth side for the last several years. I think we've also been a little more active on a more consistent basis on shareholder return activities. We expect to continue to deploy our capital wisely in all those areas. We don't think it's the worst thing to have a strong balance sheet and be prepared for whatever may come.

Our next question comes from the line of Martin Englert with Seaport Research Partners.

Looking beyond the construction of facilities related to onshoring, what are the customers discussing with you regarding their future metals needs once these facilities are ramped in future years here, if you're having any discussions around that just yet?

Yes, Martin, I believe some of our companies that are focused on specific industries, such as semiconductor chips, are actively engaging with their customers about both current production and future capacity. We serve a variety of markets, and there are ongoing discussions about how different mills are increasing domestic capacity, which will enable us to meet the higher volumes that customers will require in the future. This reflects our role within the supply chain. Customers are also asking us to enhance our value-added processing and collaborate more closely. There are many conversations taking place. While both we and our customers are considering long-term strategies, our operations are focused on daily service. I think we've effectively positioned ourselves as leaders by investing in greater capabilities for our customers, and we will continue to do so to support future demand growth.

Appreciate it. And I believe you called out common alloy sheet as a point of weakness in the press release. Is there any color that you could offer there to what's happening in the market?

Well, I think from a common alloy standpoint, our comments were focused on some pricing erosion that you've seen. That product follows the LME a bit, and we've just seen a little downward pricing pressure on those products.

And ample supply in the supply chain.

Okay. So really, from a price perspective, it's more a function of the surcharge as opposed to like a base price erosion or something along those lines, yes?

Yes.

Our next question comes from the line of Alex Hacking with Citi.

Yes. So I guess the first question, I'm not sure if you've disclosed this, but how many tons are you co-locating at the new mill in Texas?

You are correct. We have not disclosed that. At both operations, we are supporting our customers while partnering with the mills for toll processing of some of the volume as they request, as well as direct sales of the metal. We are ramping up as the mills ramp up, and while there are no specific commitments, we certainly anticipate benefiting as the mills continue to increase production. We expect our volumes to grow alongside them.

Okay. Following up on that, are you specifically targeting Mexico as an end market like the mills are? I know the mills have mentioned that Mexico has been very strong recently, especially with AHMSA being out. I'm curious if that aligns with what you are doing.

Yes. So we try to sell metal to people wherever they are if they want metal. If there is more demand for metal in Mexico, we certainly want to service those markets. We acquired a company back in 2008 that had some very strong toll processing capabilities, three locations in Mexico. We've added a fourth and expanded all of those over the years. We're in the process of doing further expansions down there because we see growth in that market. We also have some of our U.S. companies selling more metal down into Mexico. One of our on-campus opportunities, I think that mill has directed more metal there. In support of them, we're pushing some more tons down there, and we continue to look at opportunities to meet our customers' needs, both existing and new customers, as we see opportunities grow down there. We look at it as a potential favorable market for growth right now.

Okay. And then just one final one, if I may. I think you previously have mentioned that a skilled labor shortage is a challenge. Both you and your customers and a lot of companies continue to report that. Obviously, it's a lot less acute or it's less acute now than it was. Could you maybe discuss whether you are being constrained by lack of skilled labor or if it's manageable now?

Yes. I think you're right; it's not as acute at most of our operations now, Alex. I think we've been more successful in probably having more people available. I think where we've done a really good job is retaining our existing employees. We appreciate those employees being with us. Some of them have had to work a little harder and a little longer hours than maybe they had historically due to some of those issues. We've also had to invest more in training, especially from a safety perspective, so a little more effort is being put there. Still some constraints exist, I think for us, but we've seen more with certain customers, which does impact some of the shipment flow; end demand is still there, but how fast can you fill that. Thus, I still see it as a factor, not as much as it was. That also has been an opportunity for Reliance, where as our customers may struggle with being able to get the skilled labor, they're asking us to support them more, which has given us the opportunity to do additional value-added processing for them. We try to service them well so that we make it easy for them, and they want to continue to retain that business with us. We've certainly seen success in that area over the past few years.

There are no further questions in queue. I'd like to hand the call back to management for closing remarks.

Thank you. And thanks again to all of you for your time and attention joining our call today and for your continued support of Reliance, and we look forward to speaking with you again on our third quarter call in October. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.