Greetings. Welcome to the Reliance Steel & Aluminum Company Fourth Quarter Full Year 2020 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Kim Orlando with ADDO Investor Relations. You may begin.

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's fourth quarter and full year 2020 financial results. I am joined by Jim Hoffman, CEO; Karla Lewis, President; and Arthur Ajemyan, Vice President and CFO. Bill Sales, Executive Vice President, Operations, will also be available during the question-and-answer portion of this call. A recording of this call will be posted on the Investors section of our website at investor.rsac.com. The press release and the information on this call may contain certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors, including the impacts of the COVID-19 pandemic and related economic conditions on our future operations, which may not be under the company's control, which may cause 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.

Good morning, everyone, and thank you for joining us today to discuss our fourth quarter and full year 2020 financial results. Despite the extraordinary challenges 2020 presented on a global scale we are extremely pleased with the strong execution of our team -- that our team has shown, not only in the field, but by all of the employees within the family of companies, who demonstrated the true resiliency of the Reliance business model. I applaud each and every one of you for your tremendous efforts to quickly and nimbly adapt to the changing environments, ensure our customers were always taken care of, and most importantly, maintain your unwavering commitment to health and safety, our most important core value. Since 2017, our SMART Safety program has been focused on embedding our culture of safety across our entire family of companies. Working together as one company, we focused on this initiative in 2020 like never before in response to the new and unique challenges presented by the COVID-19 pandemic. In addition to developing new policies and procedures to prevent the spread of the virus, we improved our safety performance in 2020 with an approximately 23% reduction in our incident rate compared to 2019. While this is a significant milestone, as I've stated in the past, we will not be satisfied until this rate reaches 0. I'd like to thank everyone at Reliance for their commitment to making it personal in 2020 in order to keep our employees, their families, our customers, suppliers and communities safe. I'd like to take a moment to congratulate both Karla Lewis and Arthur Ajemyan for the recently announced well-deserved promotions. Consistent with our Board's strategic executive leadership succession plan, Karla was promoted from CFO to President and was simultaneously appointed to our Board of Directors effective January 15. Karla has demonstrated excellent judgment and leadership in each role she has held since joining Reliance in 1992, and her unique abilities and talents have earned the respect of our employees and shareholders.

Thanks, Jim, and good morning, everyone. I would like to join Jim in thanking everyone in our Reliance family of companies for their truly amazing performance throughout 2020. As an essential business, we were able to continue operating throughout the pandemic, with our 2020 tons sold decreasing only 10.8% compared to 2019.

Thank you Karla, and good morning, everyone. I'll start with our sales discussion. Fourth quarter 2020 sales were down 12.8% from the prior year period as our markets continued to recover following the reopening of the economy. Approximately half of the decline in our sales can be attributed to our businesses supporting the commercial aerospace and energy end markets, as evidenced by the disproportionately higher declines in our sales of aluminum and alloy products. For the full year of 2020, sales were down 19.7% from 2019. Approximately half of the decline in sales was due to lower shipping volumes across all major end markets we sell to, and the remaining half was due to lower average selling prices. However, both recovering demand and pricing from the reopening of the economy in the third and fourth quarters of 2020 helped to mitigate the annual decline in our sales. As Jim and Karla highlighted, we generated a record quarterly gross profit margin of 33% in the fourth quarter of 2020, up 60 basis points from both Q3 2020 and Q4 2019 and a record gross profit margin of 31.5% for the full year of 2020, up 120 basis points from our previous annual record of 30.3% in 2019. Our non-GAAP FIFO gross profit margin in the fourth quarter of 2020 was up 450 basis points from Q4 2019, and for the full year of 2020 was up to 280 basis points from 2019. Please refer to our earnings release, where we provide a reconciliation of LIFO to non-GAAP FIFO gross profit margin for each reported period. We incurred LIFO expense of $15.5 million in the fourth quarter of 2020 due to rapidly increasing mill costs for most of our products. However, for the full year of 2020, we still recognized LIFO income…

Good afternoon. Thank you for taking my questions today. Karla and Arthur, congratulations on the new roles. I had two different questions, please. First, on impact on product mix and price realizations, and secondly, on M&A, please. On product mix I remember last quarter I think you spoke at some length about the impact of weak aerospace while energy volumes weighing on your mix and on ASPs. You're sounding a bit more optimistic now than a few months back. How confident are you in that inflection? And to what extent could we see ASPs, not just in Q1 but going forward, begin to outpace the strength in standard grades? And if I may, a separate question on M&A, please. I think in your prepared remarks you commented on a more broad scope of businesses under consideration for M&A. Can you please give us an update on what that implies in terms of the types of businesses you're looking at going forward? Thank you.

Yes. Hi, Seth, this is Jim. Good to hear from you. I'll talk about your second question first on the M&A front, then I'll flip it over to Karla and Bill, and they can talk about individual products. But from an M&A standpoint the pipeline is full. We've looked at a lot. I believe we've looked at over 100 this year. Now when I say we looked at 100, we didn't do deep dives on 100. We just looked and say this is something we'd be interested in. The ones that we actually did get involved with and took a deeper dive, we just didn't find any that worked the way we would like to. However, there's a lot of interesting companies out there, some adjacent businesses that aren't your traditional service centers. We're expanding our view a little bit there. But we still have a strict criteria. We're very proud of what we've built at Reliance. We're very loyal to our shareholders. We focus on quality of earnings and not just driving our top line up for any reason. But we're -- I'm encouraged. I think there'll be something that will pop this year that we'll be interested in. And but it's part of our DNA. Our acquisitions are alive and well, and we're going to pick the ones that are multiples. And we'll see how all works out that fit our criteria. But I'm enthusiastic about what we're seeing. So we're going to keep that in our quiver, if you will. Now on products themselves, I'm going to ask Karla and Bill to kind of jump in. We're pleasantly surprised on some fronts. Some of them are exactly what we thought they were going to be. But I think -- and Bill can talk to the aerospace. I believe we've bottomed out on that. Hopefully, we have, and we'll be able to have kind of a slow climb out of that. And energy is what it is although energy has shown a little bit of signs of relief at recent. So those are general statements, Seth. And why don't I go to -- I think we'll go to Bill. He can talk about aerospace. Bill?

Yes. Seth, it's Bill. On the aerospace side, as Jim said, we think we bottomed out in Q4 last year. We still know we have a challenging environment on the aerospace side. We look to see a slow gradual recovery on the commercial aerospace side of the business. We've done a lot to right size our business, both in terms of headcount and inventory, and we'll continue to look at that and manage it accordingly. And then as we've said, the other side of the equation is the defense, military and space side of the business continues to be very strong. So that part of it is very positive.

Hey Seth, it's Karla. And I'll just add in a little probably a little more specifically, I think, to your question about the fact that we spent time in the third quarter talking a little more about our product mix and the impact it had on our average sell price because there was a much more significant impact at that time. In Q2, we saw a big downturn in a lot of our products. But aerospace kind of was winding down at a slower pace than some of our other end markets from Q2 to Q3. And then as we saw some other markets coming back more in Q3, it had a bigger impact on the mix. So that's why we spent a lot of time there talking about it. I think Arthur gave some color in his comments about Q4, where we did continue to see some pressure on energy and aerospace during the fourth quarter compared to third quarter. But we think we hit bottom in both of those markets, and that did show up in our aluminum and alloy sales. You could see those down a little more than carbon and stainless in Q4 compared to Q3. We're seeing some activity in Q1 in both aerospace and energy a little more than in Q4, which has been a positive. But nothing really significant that we're anticipating any huge changes in our product mix or average sell price as we go into the quarter.

Very clear. Thank you so much.

And our next question is from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your questions.

Hey, thanks. Good morning. Happy New Year.

Hi, Phil. How are you, buddy?

I'm doing well. CapEx for 2021, should we expect a couple of hundred million this year?

I believe we said in our comments it's about $245 million. And yes, it's like in the past, Phil. It's a pretty good division between growth and maintenance. As we've stated before in the past, we need about $90 million -- $90 million to $100 million a year on what we call maintenance, but it's really not maintenance. I mean, some of it is, but some of it is buying is replacing older equipment, but the equipment that we have that has replaced the older equipment is much better. It's much better technology and tighter tolerances and things that we can actually charge more for. So that's a portion of the CapEx. Then we've got some growth initiatives in there, some innovative programs that we're going to be rolling out, some IT enhancements and what have you. But yes, you can I believe we said $245 million.

Okay. I must have missed -- go ahead, Karla, sorry.

Phil, yes, this is Arthur. And just from a cash spend perspective, we think cash spend will be north of that because there's a lot of delays in 2020 with approved projects due to COVID and what have you. So there's going to be some catch up spend. So I think from a full year 2021 perspective, we could probably be north of $245 million, maybe even closer to $300 million.

Okay. Thank you for that. On the auto side, that business given your tolling, tends to be just in time in a lot of the businesses from what I remember. So with some of these shutdowns, which are just interim base intra-quarter, what are you seeing there? Are they telling you to stage less material while they take this downtime? Or are they still in catch-up mode from last year?

Yes, hey Phil, it's Bill. What we're hearing so far, the mills are continuing to produce. So some of the shutdowns we still think the impact from the chip shortage is going to be minimal to our business. But we are probably storing more material today than before. And we think that they're going to be a bit in catch up mode going forward. But so far, auto remains strong. The outlook remains strong, and we're watching the situation with chips very closely.

Okay. And then my last one here, Bill, is a good segway because you mentioned chips. What's the pipeline look like for you all on the semis side because you're obviously dealing with a lot of new capacity growth and your business tends to favor more of the newbuilds versus the consumables? But what are your customers telling you in terms of how long this cycle is going to last? It looks like just on the surface, it's got some legs. Thanks.

It does, Phil. I agree with that. We -- I think we said that our outlook, we think it was going to be strong for the through the first half. For the first time, I think we could probably go out beyond that based on what our customers are telling us. I'm seeing some forecast where they're looking at double-digit growth for multiple years. So semiconductor is one of those markets, it can really stop on a dime, so we watch it very closely. But this does look like it's got legs and is going to be strong for the foreseeable future.

Thank you.

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

Thank you again to all of you on the call today for your time and attention. While the COVID-19 pandemic continues to have an unprecedented impact on the global economy, I could not be more pleased with our strong financial results and operating performance in 2020. I'd like to thank each and every one of our Reliance employees for their courage, tenacity and resolve they continue to demonstrate through this pandemic and for their relentless focus on each and every day on the health, safety and well-being of themselves, their co-workers, their families and their communities. We'd also like to thank our investors for your continued support and commitment to Reliance. Please stay safe and healthy.

This concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.