Greetings, and welcome to the Reliance Steel & Aluminum Company Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Kim Orlando, with ADDO Investor Relations.

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss our fourth quarter and full year 2019 financial results. I am 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. Please note that on February 24, we will be launching our updated website. 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 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, 2018 under the caption Risk Factors and other reports filed with 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 inherent. I will now turn the call over to Jim Hoffman, President and CEO of Reliance.

Thank you. Good morning, everyone and thanks for joining us. Following a record year in 2018, we challenged ourselves to drive continuous improvement in our business in 2019, and we are extremely pleased with the outcome of our performance once again achieving many all-time highs. Before getting into the numbers, I would like to focus on safety, our most important core value at Reliance. We take the health and safety of our employee's, customers, suppliers and communities very seriously. Since 2017, our SMART Safety program has been focused on embedding our culture of safety across our entire family of companies. I am very proud to say, our efforts resulted in an incident rate improvement of 15% year-over-year in 2019, meaning fewer people were injured and fewer lives were impacted. While I congratulate my Reliance colleagues on this important achievement, we will not be satisfied until our incident rate goes to zero. I would like to thank each and everyone of my colleagues for their commitment to making safety a priority and for making it personal in 2020. Turning to our financial performance, our unique business model enabled us to execute our strategy and achieve record earning levels, despite both demand and pricing pressure on our top line. Our 2019, net sales of $11 billion declined 4.9% year-over-year largely due to lower shipments and pricing pressure on many carbon steel products. Thanks to the hard work and strong execution of our managers in the field, we achieved a record annual gross profit margin of 30.3% that drove, record annual gross profit dollars of $3.3 billion, record pre-tax income of $929.3 million, record net income of $701.5 million and record earnings per diluted share of $10.34. Our strong profitability and focus on working capital management generated record cash flow from operations of…

Thanks, Jim, and good morning, everyone. Excellent operational execution in 2019 overcame declines in both pricing and shipment volumes and resulted in strong financial results, which I'm pleased to discuss with you today. Net sales of $2.45 billion for the fourth quarter of 2019 decreased 8.9% from the third quarter due to a combination of lower shipments related to the typical fourth quarter seasonal trend we experienced as a result of customer holiday-related closures and fewer shipping days along with some downward pricing pressure. Our tons sold declined 6.8% compared to the third quarter consistent with our guidance of down 4% to 7% and outperformed the industry decline of 8.5% reported by the MSCI. Our average selling price per ton sold, declined 2.4% in the fourth quarter also in line with our guidance of down 2% to 3%. For the full year 2019, our net sales of $10.97 billion were down 4.9% compared to 2018. Our average selling price was down 1.3% and tons sold were down 4.1% year-over-year again outperforming industry shipments, which were down 7.2% per the MSCI. Despite these reductions in pricing and tons shipped, our strong operating performance generated several records, which I will address in a moment after I address our higher than anticipated earnings in the fourth quarter. Our fourth quarter gross profit margin of 32.4% benefited significantly from our use of the LIFO inventory valuation method as we estimate the amount of our annual LIFO adjustment at the end of each quarter during the year and then true-up to our actual LIFO calculation as of December 31, based on the cost of our inventory on hand at that time. Also, because we had rightsized our inventory by the end of the third quarter of 2019, we purchased inventory in the fourth quarter at…

Thank you. [Operator Instructions] The first question comes from the line of Martin Englert of Jefferies.

Hi. Good morning, everyone.

Good morning.

The sequential volume guide I believe suggests that the volumes will still be trending down about 1% to 3% year-on-year but we've seen some growth in the January industry volumes versus a year ago. Maybe if you could discuss and touch on what you're seeing thus far with January to February volumes to-date versus last year? And why you'd expect to see continued declines?

Yes. So, -- hi Martin, really looking at how we've performed so far in January we think overall business levels are good. We're seeing some good strong pockets, but overall, if we look at our January shipments per day, we are down a little bit from January 2019. So, our volume estimates right now reflect that. Our volume guidance of up 6% to 8% from Q4 is really assuming business levels remain fairly steady with where we saw them towards the end of last year. So, we did not bake in any upside but certainly there could be upside that comes from some of the markets that we serve.

Okay. And for what you're seeing thus far in February? Has anything changed? Are you still seeing daily volumes comparing negative year-on-year?

They're okay. They're steady. They're kind of what we anticipated. There's been a little movement we think in pricing which we're anxiously awaiting to see how they go. And if they go in a positive direction, that's good for us. But we're kind of in line with where we thought.

Okay. Thanks. That's helpful. And given non-residential construction is your largest end markets and end market there and understanding it's been a milder winter what are you seeing there with current demand trends? And maybe what are you expecting for the year as far as growth?

Yes, that's a good market for us. It has been for a long period of time. It's our largest market by far. We've spent a lot of money in the value-added end of that. Our customers continue to ask us to do different things that we can add value to. And I said it before it's been -- 2009 was tough. And ever since then the adjustments have been positive. It's kind of a slow burn up. And once again, 2019 was good. We continue to grow in that. Certain ends of that market are better than others which is great because we can adjust to any of those markets. Distribution end of that market with the campuses and what have you, distribution campus is really is in -- really nice shape. We've got orders coming and our customers are looking forward to 2020. So, we don't anticipate anything other than positive. But once again, we don't speculate on that. We listen to what our customers tell us and we adjust to that. We have close relationships with our suppliers who give us an idea of their order books and what they see and it all seems positive to us.

Yes, we are seeing good activity in the non-res market so far in 2020.

Great. Thanks. That's helpful for understanding. And congratulations on another record year and increasing your gross margin assumptions and the sustainable range there.

Thank you.

Thank you.

Our next question comes from the line of Seth Rosenfeld of Exane BP. Please proceed with your question.

Good morning. Thank you for taking the questions.

Good morning.

Hi Seth.

Thank you. If I can ask two please. First on working capital and secondly on the digitalization. When it comes to working capital, obviously, 2019 was a very positive year either by market conditions and also your internal measures. Assuming that demand does begin to normalize upwards 2020 with the end of the destock and also perhaps more stable pricing, can you give us some sense of what we should expect with regard -- in the coming full year? And then secondly please when it comes to digitalization, can you give us a bit more color on what drove your decision to launch this FastMetals e-commerce platform? If I remember back in the past you've sounded a bit more skeptical about digital sales. Is there any concern that this sort of large scale platform ultimately increases price transparency, makes it more difficult for you to generate very strong margins from your customers and if they have a better sense of spot pricing across the market? And how will that change your inventory management strategy as well? Thank you.

Seth, on the working capital question we did as we mentioned reduced inventories. We had to focus on that in 2019 and we had talked about throughout 2019 that at Reliance along with we believe many other service centers during 2018, when Section 232 was announced, there was a bit of a run so to speak on buying and so we bought a little heavier than we maybe needed to for where demand ended up throughout the remainder of 2018. So we came into 2019, a little heavy had a focus on reducing inventories. We think our folks did a great job of responding to that. So we added about $212 million to cash flow. Just from our inventory reduction. So while we don't anticipate that because we think our inventories are in good shape coming into 2020, we still because of our higher earnings levels, we do expect good cash flow throughout the year. Typically, we use cash from operations in the first and second quarters of the year and then we throw off a lot of cash in the third and fourth quarters. However, with the higher earnings level, and then also with the way we are managing our inventory throughout the year, I think that we probably could have slightly positive earnings from cash flow in the first half of the year. And then at the end of the year, again we would expect to throw off a little more because shipping volumes are down because of fewer shipping days, but overall not at the levels of this year. I think we feel very comfortable with probably about a $600 million cash flow from operations. Working capital, we think will be pretty consistent this year.

Yeah. And Seth I'll address the digitalization in the FastMetals. But that's just the continuation of our strong support of innovation looking into the future. It's nothing new to us really. And we've had the ability and many of our customers out there are family companies out there, who can do business online. We're not in the business of telling our customers how they should buy from us. We're in the business of listening to them and creating a format that makes it easy to buy from us. So this was that, our customers asked for. We put it together. We're anxious to see how it goes. It's more of a catalog-type organization versus some of our other companies have been doing business online for a long period of time. That's more specialized very customer specific. This is a kind of a generic catalog sales, but the interesting thing is it connects with all of our Reliance companies. So if you're a particular kind of customers, I think we'll use that. And again, we're very interested in what our customers need. And when they ask us to do things we do everything we can to give them the tools that they need to help their companies.

But we believe our traditional sales model with the way that we do business is interact with our customers the way we've done it historically, which is a non-catalog pricing method will continue to be by far the majority of our business. And like Jim said, this is just hitting one portion of customers with a different model. But we're not worried that our entire business model was changing. We still think it's very sound and will continue.

Right now, I mean, it's still the same. Our customers appreciate relationships. Customers like to talk to people. They like the fact that our sales people are expert. They can give them metallurgical insight they can give them all kind of different ideas and value added. And that's the way, the majority of our customers like to buy, but there certainly is an opportunity for people to buy with different tools. So again, that's what we're doing. Q - Seth Rosenfeld Thank you. Sorry. Just a follow-up please to make sure I heard you right. When it comes to working capital apart from organic cash from operation is your assumption that I heard you right that working capital will be broadly stable on a 12-month view? And then lastly, just with regards to FastMetals broader digital sales. By comparison what should we expect of the higher-margin sales by volume? Is it going to be the traditional sales model or the digital channel?

So on the working capital, Seth, yeah, with our current outlook of pricing up a little bit by the end of the year volumes probably were a little below last year at this point. But we would expect little change in our working capital levels this year. And then on the…

Yeah, as on the FastMetals side, yeah, this again is a very small part of the business. We don't see it impacting the rest of our business really at all. It's kind of a market that we haven't been a supplier to. These are smaller specialized end users catalog-based, no minimum or quantity. So in reference to impact the margin and things like that I think that would be insignificant.

It's really targeted a little more to like the retail-type users which is a small market.

Got it. Thank you very much.

Our next question is from the line of Timna Tanners of Bank of America Merrill Lynch. Please proceed with your question.

Hey, good morning guys. Hope, you are doing well.

Good morning.

Hey, Timna.

Hey. I just wanted to ask a little bit more about your overhead. I thought Karla explained pretty nicely that you contained it this year in the past, SG&A has grown every year or most years. But this year despite better results we had a more stable SG&A. So I just wonder if you could give us a little bit more thoughts on what you can do with that in 2020 keeping in mind of course, it will depend on some of your compensation and so on? But if you could give us a little bit more -- are there more cost-cutting efforts that you can do there? Or what are you planning to do with SG&A into 2020?

Yes. Well, we're -- you know us fairly well, Timna. We run the business day-to-day, week-to-week, month-to-month, we look at every operation we have and we look for continuous improvement. How can you do it better faster, cheaper and provide more value to our customer base? So we continue to do that. We have a lot of programs in place that on the innovation side that will help us with the SG&A. Certainly, we've proven in the past, where markets adjust we tried to adjust before. We have a knack for kind of know what's going to happen. I think I believe in my script or Karla's we talked about the 737 issue at Boeing. We saw it coming, we decided to get our inventory in line, which we have tended to always do headcount reduction. We knew that there was going to be an issue before that company even guided. The energy market has been kind of under siege of technology over a period of time, and we continue to look for opportunities to right-size and do the right things for our customers. So that -- there's no reason to change though. This is an operating company that happens known in a lot of different companies. Every one of them has bought in to our model and our kind of direction on continuous improvement. And if you do that, you do come to work every day trying to do the best thing for your -- to keep your people safe, to keep your margins high and to keep your inventories correct. So if you do all those things, pretty good chance your SG&A will come in line too.

Okay. If you had any more specifics on like a flat down that would be great, but I appreciate that color. I guess, the other thing I wanted to address was that you alluded to on the aerospace side. So, yeah, you did take action in advance of that. Aerospace is a pretty high-margin product for your end market for you. So just was wondering and we've been hearing that the channel is a little oversupplied and that there were some concerns there. Could you provide a little bit more color on what you're seeing there maybe not directly with Boeing but more broadly? And if you – obviously, you'll be monitoring, but if you see any further repercussions? And along those same lines if you could comment on the other hot button topic of the China impact? I know your presence there is not that large, but any observations there would be great. Thanks a lot.

Hey, Timna, it's Bill. On the aerospace side, I think we've seen, on the supplier side for the most part I think they all know what the impact of the 737 will have to them. And I think all are outworking to try to replace any impact on volume. Fortunately, we're seeing defense really strong. And I think that's been a nice offset for some of the mills. We're also seeing the general engineering plate and semiconductor plate market is strong. And so that's been a nice offset to the mills to replace some of that lost volume. So I think they're all working with same lead times that they've stayed pretty steady, but maybe shortening just a bit. But so far I think our outlook on aerospace is still strong. We know there's going to be some impact from the 737 but there's an offset to that in these other markets. So that part of it has been strong. The question on the coronavirus, we do have a couple of operations in China. The majority of the impact there has been the extension of the Chinese New Year. So we saw some additional downtime there. We've got a couple of those operations that the government still has -- have us in a closed mode and we do have some employees that are in a quarantined state. But fortunately all of our employees are okay. We don't have any that have been impacted by that other than just the quarantined part of it. So when we look at the impact for the specific operations in China, it's just the impact of having fewer days because of the extended holiday and some extended shutdown time.

And but those operations sales levels are very small as a component of overall Reliance. So no, nothing in any way material impacting us from that.

Got you. Okay. Thanks again.

[Operator Instructions] Our next questions come from the line of Phil Gibbs of KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning.

Hi, Phil.

The value-added investments you've made and are making I'd assume they are deep in this 2020 budget. Any thoughts on where some of those investments are targeted? And I guess why keep the pedal -- your pedal down amid all the macro uncertainty?

Well, we will keep our pedal down that's our model. Our -- the customers continue to ask us to do different things. I don't see that changing in the future. It does make sense for us to do it versus for them to buy that kind of equipment. The technology out there is really impressive and expensive. And our model says, hey we'll -- let us put that in and let us do the work, take the work out of your shop, put it in our shop but we're going to charge for the value-added parts. So it has been a good model. I don't anticipate it to continue to spend at the levels we've been spending. But certainly in 2020 we're spending a nice, it was $250 million. Let's not jump change. That's money. We anticipate getting a return on there. Where is it going? It's kind of across the board. There's everything from building expansion, greenfield start-ups. There's a lot of different equipment, equipment in laser, technology continues to change and continues to get better. The standard prec, saws, hones, scribers all kind of different equipment to add value. And so it's kind of across the board, geographically by market by equipment. And it's just the nature of our business and the fact that we actually do listen to our customers. And you have to always remember we're going to be in that $90 million to $100 million of what we call maintenance just to keep this big machine running. So that's a significant number in itself. But the rest of it is kind of -- is targeted towards growth and additional value-added process that our customers have.

Yeah, and we've also got -- still a couple of -- as we've done in the last few years, we've got a couple of pieces of property where we're operating where we were previously leasing that we've been able to buy out those. So that's a chunk of the CapEx. And we're also as we have been continuing to make investments within our IT organization, certainly to improve the security of all of our systems as well as along the lines of innovation and continuous improvement creating some more efficient tools for -- throughout the company to us.

And you know Phil we have a real strong focus on the efficiency of cash utilization. The CapEx spend is certainly part -- one part of that. And like I said, I don't anticipate spending at this level. Well, $250 million is a lot of money. But then my -- it is my anticipation that it will curtail somewhat because of the fact that the lease buildings, once we buy all the buildings, we're pretty much taking that money out. But again, that's -- the CapEx spend is just one part of the efficient use of cash. And we have a good problem in that we would generate a lot of cash, and we're able to move it into the buckets that we think is the right thing to do at the time. But CapEx will always be a part of our spend as acquisitions and dividends and stock buybacks, and all the things we do to efficiently use our cash.

I wanted to talk just a little bit about the semiconductor market you said that's coming back. Obviously a lot of that is the region-specific. In terms of Asia, there's a lot of demand pull that goes on from that just in terms of where the equipment is made. And with CV risk out there, particularly for the first half, does that push anything out for you? Or is that more or less would be more of a push out I guess for your customers? I'm just trying to understand: one, how that impacts your outlook? And then two, I know you had made a heavy investment in that semiconductor landscape in 2018 internally in a Greenfield, you were probably able to get the returns out of that last year given the macro, but I would think that you're looking to pull some of that out this year in 2020. So, any thoughts there would be helpful.

Yeah, Phil it's Bill. So as you know semiconductor is one of those markets that can kind of ramp-up really fast and stop really fast. And we went through about nine months where we were on the ramp down. And so, it's been really positive to see things improve and the outlook continues to be very positive even for our operations in Asia. Our operation in Korea specifically is doing really well. The outlook there is positive. Will there be some impact from CV on our China business? Yes, there will be. But as Karla mentioned, that's smaller and we think that overall particularly when you compare it with the impact of the overall Reliance, it's really insignificant. So our outlook in terms of both what we do on the chamber side of the business and on the plate side of the business for semiconductor is still very positive. And the U.S. is still very strong.

If I could ask one more strategic question. The electric vehicles have obviously caught a lot of pandemonium here the last couple of years to put it mildly. And some of that I would imagine is within metals you already play in some of that is within metals that you don't or you might -- how are you leveraged right now to participate in a bigger market there? And are you being asked to participate in terms of any supply chain management?

Yeah. We're actually involved. We do -- I'm not going to name the companies, but we are involved in electric vehicles in a nice way. That will continue to grow. Our toll processing operations that carried to the automotive market are doing quite well. We'll continue to invest. And part of that investment is exactly what you're talking about, whether their use in gas, engines, electric, diesel, that's their decision. But we're there to support them. They still need metal whether it's high-strength carbon or aluminum or Lord knows what other kind of product, they're going to put into the thing. So we're ready for them. And we actually have visibility into the future and it looks bright. Yeah. So those are markets that we're excited about. And just to remind you our customers are not the automotive guy. Those are people we do the work. We ship product to our customers who are actually the producers of the mill. We don't have any inventory on hand for that. But it's a really good business for us. And whether they're gas engines or electric, we're already involved in the electric and as these companies seem to be planning for the future, we'll be there for them to -- through their thought process.

Karla I just had one clarification question. I appreciate that Jim. One clarification before I hop off. So this year I think you did around $1.3 billion in cash from operations. Net working capital was a positive of about $300 million, so call it core cash from operations of about $1 billion. Did you say that you expected cash from operations in 2020 to be at a minimum $600 million? Or did you say free cash flow because that's just a big difference and I wanted to make sure we weren't missing anything on that?

Yes. We were talking -- I was talking cash flow from operations and again I think that's probably a minimum level.

Thank you.

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

Hi, good morning and let me add my congratulations on the record results last year. I actually -- sorry I actually had the same question on working capital $600 million seems kind of low like you're I guess your profit guidance for 1Q of $200 million to $210 million is around $140 million. Add back DD&A and you're around kind of $200 million a quarter of cash flow from operations assuming the working capital impact. So I guess that -- question is that $600 million very conservative because it seems conservative? Thanks.

Yes. So as I just clarified with Phil and emphasized minimum. So I think you know is Alex we're typically fairly conservative on our guidance. We also are generally because of the nature of our business with a quick turnaround, limited backlog and limited pricing visibility, we're typically only guiding out a quarter. So we take a fairly conservative approach when talking about the year. So...

I got it. Appreciate the time. Thanks.

We have reached the end of the question-and-answer session. I will now turn the call back over to Jim Hoffman for any closing remarks.

Yes, thank you everybody for participating on the call and the continued support and commitment to Reliance. So I hope you realize we are really happy with our 2019 return and we're looking forward to 2020. And I'd like to remind you all that next week Tuesday, February 25 we'll be in Hollywood Florida presenting at the BMO's Global Metals & Mining Conference and we hope to see you all there. So have a good day and thanks again.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.