Reliance, Inc. Q4 FY2024 Earnings Call

Greetings, and welcome to the Reliance Steel & Aluminum Co. Fourth Quarter and Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. If anyone requires operator assistance, as a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kimberly Orlando, with ADDO Investor Relations.

Good morning, and thanks to all of you for joining our conference call to discuss Reliance Steel & Aluminum Co.'s fourth quarter and full year 2024 financial results.

I am joined by Karla Lewis, President and Chief Executive Officer; Stephen 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 at investors.reliance.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday and note that they apply to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP schedules. I will now turn the call over to Karla Lewis, President and CEO of Reliance Steel & Aluminum Co.

Thanks, Kim. Good morning, everyone, and thank you all for joining us today to discuss our fourth quarter and full year 2024 results. Collectively, the Reliance Steel & Aluminum Co. businesses demonstrate strong execution of our model and strategy, once again fueling solid financial results in a challenging market. Through our emphasis on smart, profitable growth, we grew our same-store tons well above industry shipment levels, bolstering our earnings in a falling price environment. Importantly, we were able to grow our tons shipped while also delivering a strong full-year gross profit margin of 29.7%, squarely within our sustainable annual range. Additionally, we successfully acquired and integrated four companies in 2024, adding approximately $400 million of net sales on an annualized basis and broadening our geographic footprint and processing capabilities in both new and existing markets. Our 2024 non-GAAP earnings per share of $15.92 reflected the benefit of our targeted growth strategies, diverse end markets served, strong pricing discipline, and expanded value-added processing capabilities, which collectively helped mitigate the impact of declining metal prices. Our profitability and effective working capital management led to the third-highest annual cash flow from operations in Reliance Steel & Aluminum Co.'s history of $1.43 billion. I'd like to thank our amazing teams across our entire family of companies who did an incredible job delivering more value to our customers in 2024 while, most importantly, keeping each other safe. We maintained our balanced and disciplined approach to capital deployment in 2024, investing $430 million in capital expenditures, $365 million in acquisitions, a record $1.1 billion in share repurchases resulting in a 6% year-over-year reduction of outstanding shares, and returning $250 million in dividends to our stockholders. Our capital expenditure budget for the 2025 calendar year is $325 million, with an expected total cash outlay of approximately $375 million to $400 million, inclusive of carryover projects from prior years. As I mentioned, we acquired four businesses in 2024, bringing us to 76 acquisitions completed since our 1994 IPO, and our acquisition pipeline remains robust and active. Before I conclude, I'd like to highlight a few corporate developments we announced yesterday. Brenda Miyamoto was promoted to Senior Vice President of Strategic Planning and Programs on February 18, 2025. Brenda has been with Reliance Steel & Aluminum Co. for 23 years, having served in various roles of increasing responsibility, most recently as our Vice President of Corporate Initiatives. In addition, Scott Ramsbottom was appointed Vice President and Chief Information Officer of Reliance Steel & Aluminum Co., effective November 8, 2024. Scott is a veteran industrial distribution CIO with more than 25 years of experience, and we wish them both the best in their new roles. As we look ahead to 2025, our priorities are centered on striving to keep our people safe every day, increasing our volumes through our smart, profitable growth strategy, maintaining an annualized gross profit margin within our estimated sustainable range of 29% to 31%, enhancing our value-added processing capabilities, effectively managing expenses and working capital, maintaining our balanced and disciplined capital deployment strategy, promoting both growth and stockholder returns, and promoting increased collaboration and sharing of best practices throughout our family of companies. While macroeconomic uncertainty persists, we're excited about 2025 and well-positioned to continue to grow our business and have both the capacity and the capability to participate in any improvement in end-market demand across our broad and diverse network, arising from the many potential opportunities that exist, including infrastructure, military, data center, electrical grid, general manufacturing, and many other markets that we serve. Thank you all for your time today. I'll now turn the call over to Stephen Koch, who will review our demand and pricing trends.

Thanks, Karla, and good morning, everyone. I'd like to begin by expressing my gratitude to the entire Reliance Steel & Aluminum Co. team for a strong finish to the year and for their ongoing commitments to safety and operational excellence. I'll now turn to our demand and pricing trends. Our fourth-quarter tons sold decreased 5.1% compared to the third quarter of 2024, surpassing our outlook of down 6% to 8%. However, fourth-quarter tons sold increased 6.7%, or 2.8% on a same-store basis, compared to the fourth quarter of 2023, significantly outperforming the service center industry's year-over-year decrease of 3.6% as reported by the MSCI. For the full year, our tons sold increased 4%, 1% on a same-store basis, surpassing the MSCI industry-wide decrease of 2%. Underlying demand remains solid in several key end markets, including non-residential construction, certain manufacturing sectors, aerospace, and automotive. We are pleased with the market share gains we made across nearly every product group while maintaining industry-leading profitability in a challenging year, driven by our diversified business model, relentless customer service, and contribution from our strategic investments in organic growth and acquisitions. Our fourth-quarter average selling price per ton of $1,170 declined 3.4% compared to the third quarter of 2024, within our expectation of a 1.5% to 3.5% decline. Carbon steel product prices remain under pressure, but we saw aluminum and stainless steel prices start to stabilize in the fourth quarter. Next, I will turn to an overview of notable trends within our key end markets and products, beginning with non-residential construction. Carbon steel tubing, plate, and structural products, which we mainly sell into the non-residential construction market, represented roughly one-third of our sales in Q4 2024. All three products had significant year-over-year shipment growth and substantially outperformed industry shipments compared to both the fourth quarter of 2023 and the full year of 2023, which mitigated some of the impact on sales of lower average selling prices. Our diversified exposure to the non-residential construction market, including heightened data center construction, related energy infrastructure projects, as well as publicly funded infrastructure projects, supported solid demand for our products and did benefit from our recent acquisitions. Our general manufacturing business also represented roughly one-third of our total sales in Q4 2024. It is highly diversified across geographies, products, and industries. Shipments increased compared to the fourth quarter of 2023, and industrial machinery, military, shipbuilding, and rail remained strong in 2024. Consumer products demand declined year-over-year but showed improvement in the fourth quarter. Heavy equipment, particularly in the agricultural sector, experienced weaker demand through 2024. Our outperformance across key product groups shipping to general manufacturing applications highlights the advantage of our diversified business model in a dynamic and uncertain demand environment. Aerospace products comprised approximately 10% of our Q4 2024 sales. Demand for commercial aerospace was stable compared to both the fourth quarter and full year of 2023, despite short-term production and supply chain challenges. Demand in defense-related aerospace and space programs remained stable at strong levels. We primarily service the automotive market for our toll processing operations, which are not included in our tons sold. Our tolling business, which represented approximately 5% of our Q4 2024 sales, saw processed tons increase 5.8% from the fourth quarter and 3.1% from the full year of 2023 due to healthy demand in both the U.S. and Mexico and our ongoing investments to increase capacity. Semiconductor industry shipments remained restrained in the fourth quarter with excess inventories in the supply chain. On the whole, demand remained relatively steady with strength in certain key end markets and market share gains counterbalancing pressures in subdued markets. We continue to monitor the dynamic trade policy landscape. I remain confident that our proven and resilient business model positions Reliance Steel & Aluminum Co. to excel through market cycles. Please refer to our earnings release for additional commentary on our end market and product diversification. We are very proud of our team's extraordinary execution, which enables our continued industry-leading performance. Reliance Steel & Aluminum Co.'s unrivaled scale and strong balance sheet make us a highly attractive partner to our mill suppliers in all market conditions. We continue to win new business from new and existing customers who value the breadth and depth of our product offerings, value-added processing capabilities, and recognize the quality and reliability of our service. I will now turn the call over to Arthur Ajemyan to review our financial results and outlook.

Thanks, Steve, and thanks, everyone, for joining today's call. Our underlying operating performance for the fourth quarter was stronger than anticipated due to better-than-expected shipment levels and an improved gross profit margin when excluding the impact of nonrecurring items along with year-end LIFO reserve and income tax rate adjustments. Our fourth-quarter non-GAAP earnings per diluted share of $2.22 included an unfavorable year-end LIFO true-up impact of $0.74 per share net of an income tax rate true-up compared to the assumptions used in our non-GAAP earnings per diluted share guidance of $2.65 to $2.85. More on that shortly. While fourth-quarter average selling price declined sequentially, our tons sold were better than we anticipated, leading us to once again outperform industry shipment levels on a same-store basis across nearly all products. On a non-GAAP FIFO basis, which is how we measure our day-to-day operating performance, our gross profit margin improved sequentially from 27.9% in the third quarter to 28.8% in the fourth quarter, reflecting better alignment of replacement costs and inventory on hand. As Karla mentioned, our full-year gross profit margin of 29.7% was within our sustainable annual range. Our strong pricing discipline and value-added processing capabilities, which warrant a consistent premium irrespective of the underlying price of metal, bolstered our gross profit margin and stemmed the impact of a declining pricing environment on our gross profit margin and bottom line. For the full year of 2024, we performed value-added processing on approximately 50% of our orders. We were able to keep this metric relatively consistent year over year as we grew our business on both the processing and distribution sides. More specifically, we grew our same-store tons sold with processing by 3.6% in 2023 and a further 1.3% in 2024. Our fourth-quarter gross profit margin declined to 28.3% from 29.4% in the third quarter, largely due to the recognition of $5.6 million of LIFO expense as compared to our $50 million of LIFO income estimate. This resulted in 2024 annual LIFO income of $144.4 million compared to the original $100 million annual income estimate. As discussed in our last earnings call, our LIFO adjustment for the fourth quarter proves up our interim annual LIFO estimate based on year-end inventory levels and factors such as inventory cost per ton trend and changes in product mix. These impacts were heightened in the fourth quarter by the receipt of certain long lead time, high-value specialty stainless steel and alloy products, which will ultimately shift LIFO income from 2024 into 2025. Accordingly, for the full year of 2025, we estimate LIFO income of approximately $60 million. It's important to note that this estimate reflects the carryover and normalization of specialty product inventory from 2024 rather than an expectation of declining metals pricing in 2025. As of December 31, 2024, the LIFO reserve on our balance sheet was $435 million, which remains available to benefit future period operating results by recognizing LIFO income and therefore mitigating the impact of potential further declines in metal prices. On the expense side, our fourth-quarter same-store non-GAAP SG&A expense increased a modest $8 million, or 1.3% year over year, due mainly to general wage inflation, offset by lower incentive compensation consistent with lower profitability. As a reminder, our model inherently normalizes expenses by rightsizing incentives as profits trend down. Sequentially, our same-store non-GAAP SG&A expense was down $3 million, or less than 1%. We also incurred impairment charges of $11.7 million in Q4 associated with the consolidation of one of our operations into existing facilities to streamline operating efficiencies. I'll now address our balance sheet and cash flow. We continue to generate strong cash flow from operations in both the fourth quarter and full year at $473.3 million and $1.43 billion, respectively. While lower relative to 2023 levels, higher working capital release helped offset declines in our profitability. This cash enabled us to put capital to work in the fourth quarter through $110.9 million in capital expenditures, $61.2 million in dividends paid to stockholders, and $142.4 million in share repurchases at an average cost of $271 per share. Year to date, in 2025, we have repurchased an additional $203 million of our shares at an average cost of $273 per share, resulting in a cumulative 7.5% reduction in our total shares outstanding since December 31, 2023. We have $1.15 billion remaining for a share repurchase plan that we recently refreshed in October 2024. Our leverage position also remains favorable, with a net debt to EBITDA ratio of less than one, providing significant liquidity to continue executing our capital allocation priorities. I'd now like to spend a few moments discussing our outlook for the first quarter of 2025. We anticipate demand across the majority of our end markets to improve modestly in the first quarter despite continued uncertainty about domestic and international policy. We estimate our tons sold will be up 6% to 8% in the first quarter compared to the fourth quarter of 2024, consistent with seasonal trends, and up 3% to 5% from the first quarter of 2024, with half to 2.5% attributable to same-store growth. On the pricing side, we expect our average selling price per ton sold to be relatively flat compared to the fourth quarter. We anticipate our FIFO gross profit margin will continue to improve in the first quarter of 2025 as the alignment of replacement costs and inventory costs on hand continues to improve. Importantly, this outlook assumes no significant trade policy disruption, either positive or negative, to carbon steel, stainless steel, and aluminum product market demand and pricing. Based on these expectations, we anticipate non-GAAP earnings per diluted share in the range of $3.30 to $3.50 for the first quarter of 2025. This concludes our prepared remarks. Thank you again for your time and participation. We will now open the call for your questions.

Thank you. We will now be conducting a question-and-answer session. Please press star one to join the queue. One moment, please, while we poll for questions. Our first question is coming from Martin Englert from Seaport Research Partners. Your line is now live.

Hello. Good morning, everyone. I appreciate the time. I wanted to dig in a little bit on demand activity, and it seems like metals are picking up in recent weeks. I would be curious to hear your thoughts on how much you would attribute to seasonal gains quarter on quarter, potential demand pull forward due to tariffs and possibly rising prices versus an organic cyclical recovery in U.S. steel and metals.

Hi, Martin. We can't really speak to what's happening at other companies, but at Reliance Steel & Aluminum Co., overall, our volumes were pretty steady through 2024 in most of our major end markets. We were looking for growth, and our people performed very well, as we commented in our remarks. We were growing at a higher rate than the industry, in particular in non-residential construction. We saw good activity there, generally maintaining levels consistent with seasonal trends. We look for that to continue in Q1. We think there's momentum as we move further into 2025 for some other markets to pick up a little more. But overall, I think we've seen pretty steady demand.

In addition to that, Martin, our January activity was pretty strong, and that's even in spite of some bad weather countrywide. As far as pull forward goes with the impending tariffs in March, we have seen a little bit of customer activity trying to make sure that they get their material in before potential price increases. So we're pretty optimistic about the first quarter.

Your comment in that response about expected momentum potentially developing as you're moving into or through 2025. What specific end markets may you be anticipating that for?

It's more from an overall standpoint, Martin, but there does continue to be uncertainty, as you referenced and Steve commented. Maybe a little extra right now because of the potential tariffs. Once there's final news on that and everyone understands the playing field, we'll see people buying on a more regular basis again. We think different parts of the general manufacturing sector will improve. Hopefully, infrastructure starts to flow, especially if permitting and funding become more streamlined, we could start to see some of the infrastructure money moving. Certainly, data centers, everything related to the electrical grid—there's a lot of strength there, and many different Reliance Steel & Aluminum Co. companies touch that type of business in many different ways through many different products. So we're pretty positive about 2025.

Okay. Appreciate that. I'm curious. Maybe there's a couple of parts to this question, and you had alluded to policy and tariffs. If you could walk through some of the positive and negative factors that could evolve for the company, and then also I'd like to understand what you're seeing out there in today's market. I understand you're a large domestic buyer and often probably at the front of the line when you're buying from upstream metals and steel producers. But what are you seeing in the overall supply side of the environment in the U.S. in recent weeks and anything changing with lead times or reduced availability?

As you mentioned, Martin, we have been a very long-time domestic buyer. We prefer to support our mills here in the U.S. It also helps us manage our inventory well, turning our inventory, which is what we look to do. Historically, when there have been tariffs or different trade policies enacted and it reduces the amount of import material coming into the U.S., we generally see prices increase in the U.S., which has been positive for us. We currently anticipate that could be the impact again, but until we start operating in that environment, we won't know for certain. We do see potential upside on the pricing front. We've already seen, especially on the aluminum side, some movement upwards. You've seen some pricing movement upwards on some of the carbon steel products as well, which we view positively.

Okay. Appreciate all the color, and congratulations on strong underlying results exiting the year.

Thank you. Next question is coming from Katja Jancic from BMO Capital Markets. Your line is now live.

Hi. Thank you for taking my question. Karla, you mentioned initially that one of the things you will be focusing on in 2025 is increasing volume. Is that going to be more driven by organic growth, or does that include also some acquisitions?

It would be both. In 2024, a little more than half of our growth was from the four acquisitions we completed in the year, but we also grew our same-store tons. When we talk about smart, profitable growth, the goal is to go after more volume while also maintaining margins. Don't take every order, but take those that will be accretive at pretax income dollars. Our people have executed extremely well. On the organic side, going out and getting a little more volume, especially with the declining price environment that we had in 2024, those additional earnings off of the increased volume were very helpful in adding to our earnings.

And maybe on the value-added processing, I think when we saw what happened during COVID the interest in value-added processing increased. Could this environment where you have increasing protectionist policies drive another higher interest in domestic value-added processing?

It potentially could, certainly if there's less of that being done offshore. That's part of the reshoring we've seen the last few years. Even before reshoring, we've seen a change with many customers where they reviewed what they're doing internally to drive cost out and be more efficient, and they realized that because Reliance Steel & Aluminum Co. companies serve many different customers, we're often able to do the same type of processing more cost-effectively than customers doing it in-house. So we had already seen a trend from our customers, and with reshoring trends, that could drive activity higher. We did increase the number of tons and orders we did processing on in 2024, but we also grew the distribution side of our business, especially with some of our acquisitions. We are ready to continue to invest in whatever our customers need us to do for them on a profitable basis and expect to see more of that activity.

And, Katja, I would add that in general our sales into the general manufacturing end market naturally lend themselves to value-added processing at a much higher rate than other products. So as general manufacturing activity picks up, we should see a pickup in our value-added processing sales as well.

Great. Thank you. I'll call back into the queue.

Thank you. Next question today is coming from Philip Gibbs from KeyBanc Capital Markets. Your line is now live.

Hey. Good morning. I'm looking at operating expenses up 4% year on year. You had a 4% uplift in volumes tolling, but you did have a decline in your FIFO gross profit. So not a ton of leverage relative to some historical years. That suggests there may still be some excess cost in your supply chain or inflation within the business is pretty sticky. Any opportunities to lean that out, or are they just going to be through operations you'll have to grow into?

Hi, Phil. Costs are up due to wage inflation, and we continue to want to pay good, fair wages to our employees. Some of our incentive compensation is down because of the lower FIFO profitability that you referenced. We are always looking for ways to reduce costs, but we also need to retain well-trained employees who work safely. We're reacting the best we can, but there has been some inflationary increase.

At a high level, we've been able to keep our operating cost per ton pretty steady the last three years in the roughly $440 to $450 per ton range. As part of our smart, profitable growth initiative, we're trying to grow into the cost structure. As we bring additional business, we're working to get more efficient and not increase our expenses proportionally. We've gotten good traction on that front and plan to continue with that strategy.

Thank you. And can you speak to cash CapEx in 2025?

We're estimating that our current year budget for new projects is $325 million, but we still have carryover from some projects. So we're estimating $375 million to $400 million of cash outlay this year.

Thanks, Karla. And then, Arthur, you talked about semiconductor activity and historically I've thought about you guys as having more semiconductor-related infrastructure exposure. There's still build-out occurring. The comments seem to be more about semiconductor production. Maybe qualify what you're seeing there and what you'd expect over the next few years.

Long term, we're still bullish on the semiconductor industry, especially the infrastructure side where we participate as companies build new plants. Activity has been pretty choppy. Different semiconductor manufacturing projects have varied due to permitting, workforce, and internal issues. One project will be busy and then slow, then another will heat up. It hasn't been as smooth or steady of a build, but we are participating in the projects that are active. Alright. Thanks, sir.

Thank you. Next question today is coming from Mike Harris from Goldman Sachs. Your line is now live.

Yes. Thank you. I wanted a bit more clarification around the first quarter guide for tons being up 6% to 8% but pricing roughly flat. I was a little surprised you're not more optimistic around pricing all considered. Is that because there's maybe an unfavorable mix in that 6% to 8% or are you just being conservative at this point?

Mike, we're not baking in anything from the potential tariffs at this point. We think tariffs could be positive for pricing. We typically take a conservative view. There have been some price increase announcements on certain products, but it sometimes takes time for those to be effective in the market. That's how we guided for the quarter, and there may be upside to that.

Okay. That's fair. For the first quarter, how should we think about working capital and your expectation for inventory days on hand?

Mike, you can look at typical seasonality in our business by reviewing the last two to three years. Historically, going into Q1, with higher shipment levels typically in Q1, you often build some working capital. The typical pattern is building working capital in Q1 and Q2 and then having releases in Q3 and Q4. We would expect seasonality to be consistent with those historical patterns.

Okay. Thanks for that additional color.

You're welcome.

Thank you. Next question is coming from Alex Hacking from Citi. Your line is now live.

Thanks for the call. Turning back to tariffs again. You mentioned higher pricing is generally good for you. Can you remind us, do you have any exposure to material coming across the border from Canada or Mexico?

We have locations in the U.S., Canada, and Mexico. Locations typically buy domestically and generally ship within about a 150-mile radius. Our toll processing operation in Mexico does have a license to import metal for its customers, so there could be some impact there. Overall, international is a fairly small part of our business, and most locations are within the U.S., so we don't anticipate a significant impact, though there could be some disruptions in cross-border flows.

Since we are 95% to 96% domestically sourced, we think that an overall strong U.S. steel market with higher prices supports Reliance Steel & Aluminum Co. and supports the companies investing in infrastructure. We'll deal with disruptions on a case-by-case basis, but overall we're very positive.

Okay. Thanks. Just to clarify, you said about 95% plus of your business is domestic. Did I hear that correctly?

Domestically sourced. Yes.

And on the accounting side, you mentioned that FIFO gross margin should continue to move in the right direction in Q1. If metals prices generally rise, that creates a LIFO headwind for the first quarter that's baked into guidance?

We guided to LIFO income and, as noted in our remarks, some of the 2024 LIFO impact was timing related to specialty stainless and alloy products. The gross profit margin improvement is more about cost alignment—costs on hand getting better aligned with replacement costs. To the extent there's any average selling price uplift, that would also provide margin pickup. We're not necessarily expecting prices to decline for the remainder of the year; some of the LIFO timing shifted income from 2024 into 2025.

Okay. Thank you very much.

You got it.

Thank you. Next is a follow-up from Philip Gibbs from KeyBanc Capital Markets. Your line is now live.

Hey. Thank you. Arthur, maybe you can explain a little bit more about the LIFO credit for the benefit of the investment community. You referenced the specialty stainless inventory and longer lead times. Mechanically, what does that imply within the business?

LIFO is affected by mix and cost-per-ton changes. In the specialty stainless case, longer lead times create a lag between selling prices and cost on hand. That was atypical this year because lead times were extended, so inventory that would normally have flowed through remained on our books. Effectively, some LIFO income that would have been recognized in 2024 was pushed into 2025. So the $60 million LIFO income estimate for 2025 is largely timing-related rather than a reflection of expected price declines. If you remove that component from the LIFO guidance, the near-term expectation is broadly flat LIFO versus current levels.

Related to that longer lead time inventory, I would imagine you have a good bit of that in places like aerospace and maybe defense. Within that pocket of inventory specifically, is the implication that you'll have less of that material on hand at the end of 2025 versus the beginning, or is the expectation that pricing for that falls? What's more of the embedded expectation?

You're correct. We would expect to have less of that inventory by the end of this year as those long lead-time items move through the system.

For those specialty products, the mills caught up on some production lead times and started shipping more to us at the end of the year. At the same time, aerospace build rates have had disruptions. As build rates increase on airplanes, we should see that inventory move from our inventory into customer supply chains.

Thanks so much.

We reached the end of our question-and-answer session. I would like to turn the floor back over to Karla for any further or closing comments.

Alright. Thanks again to all of you for joining our call today and for your continued support of Reliance Steel & Aluminum Co. Before we close out the call, I'd like to remind everyone that we'll be presenting at a few upcoming conferences: BMO's Global Metals, Mining and Critical Materials Conference in Hollywood, Florida, and JPMorgan's 2025 Industrials Conference in New York City. We hope to meet with many of you there. Once again, we'd like to thank all of our Reliance Steel & Aluminum Co. employees for everything they do every day. Please keep each other safe out there. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.