Greetings, and welcome to the Reliance Steel & Aluminum Company Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, 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 2022 financial results. I’m joined by Jim Hoffman, CEO; Karla Lewis, President; and Arthur Ajemyan, Senior Vice President and CFO. Steve Koch, Executive Vice President and Chief Operating Officer will also be available during the question-and-answer portion of today’s 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 inflation, geopolitics and the COVID-19 pandemic and related economic conditions on our future operations, which may not be under the Company’s control and 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, 2021, under the caption Risk Factors, disclosure in our press release this morning, and other documents Reliance files or furnishes with the Securities and Exchange Commission. The press release and the information on this call speak only as of today’s date and the Company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Jim Hoffman, CEO of Reliance.

Thanks Kim. Good morning, everyone. And thank you for joining us today to discuss our second quarter 2022 financial results. I will begin with an overview of our performance and capital allocation activities. Karla will then speak to our operating results and demand trends by end market. And Arthur will conclude with a review of our financials. Reliance delivered an exceptional second quarter with record setting financial performance and outstanding operational execution. We achieved all-time high quarterly net sales of $4.68 billion, which combined with an enhanced gross profit margin of 31.9% and continued strong operational leverage resulted in record quarterly earnings per share of $9.15 cents as well as significant cash flow to fuel our growth and stockholder return priorities. These results were supported by ongoing healthy demand in most of the end markets we serve and continued elevated pricing levels for the majority of the products we sell. Our earnings for the first half 2022 of $17.49 per share were near the record annual earnings per share of $21.97 we attained in 2021 and we are on pace to achieve another year of record profitability. Our model continues to prove resilient amidst challenging macroeconomic circumstances bolstered by our diverse array of products, end markets, geographies, as well as consistent support of our domestic suppliers to secure ample inventory for our customers. Our commitment to customer service has solidified our position as a partner of choice. With our deep rooted relationships driving approximately 97% of our orders from repeat customers and 50% of our orders, including value added processing. Our broad geographic footprint of approximately 315 service centers strategically located in close proximity to our end customers provides us a unique competitive advantage by enabling quick turnaround with approximately 40% of our orders delivered within 24 hours. In addition,…

Thanks, Jim, and good morning, everyone. Before I begin, I’d like to acknowledge the outstanding efforts of my colleagues throughout the Reliance family of companies that led to another record setting quarter. Our performance would not have been possible without your unwavering commitment and dedication to safety and operational excellence. Our safety performance improved in the quarter. Thanks to your re-energized focus while continuing to manage through COVID and other labor disruptions. Thank you. I’d also like to congratulate both Steve Koch and Mike Hynes on their well deserved promotions and thank Mike Shanley for all of his contributions over the years. Now, I’ll turn to our second quarter operational performance. Our tons sold were up 2.7% over the first quarter, surpassing our guidance range of flat to up 2%. As Jim highlighted, strength in underlying demand remained healthy throughout Q2 and our shipments increased quarter-over-quarter. We believe our first quarter shipments were somewhat held back by COVID issues in the beginning of the quarter, and then increased significantly in March when the Ukraine crisis spurred a bit of panic in the industry with prices for many metals spiking and customers buying heavier volumes. Shipments during the second quarter leveled off at healthy levels and we believe could have been stronger if not for labor shortages and other supply chain disruptions. Given the elevated pricing levels at the beginning of the second quarter that moderated for many products in the latter part of the quarter, our average selling price was a record $3,240 per ton sold. This reflects a 1.7% increase in our average selling price compared to the first quarter of 2022, and was at the high end of our outlook a flat to up 2%. Prices for the majority of our products peaked in May and began to…

Thanks, Karla. Good morning, everyone and thank you for joining us today. We set new records for our financial performance during the second quarter from our record quarterly top line net sales of $4.68 billion to our bottom line earnings per share of $9.15. As Jim and Karla mentioned positive demand and pricing conditions supported our record financial results during the second quarter. While we are seeing declining pricing trends for many of our product into the third quarter, we believe our unique model, specifically the rich diversity of our product, end market and geographies along with strong pricing discipline and operating leverage will help mitigate the impact to our bottom line. More on our third quarter outlook later. Turning to margins. Our non-GAAP gross profit margin trended up 80 basis points from the first quarter supported by higher selling prices and lower LIFO expense. In June, we began to experience declining metal cost trends and selling prices for many of the products we sell, which resulted in a reduction of our annual LIFO expense estimate from $150 million to $100 million. Consistent with our accounting policy, we allocate our annual LIFO estimate on a pro rata basis each reporting period, which resulted in LIFO expense of $12.5 million in the second quarter, the true up to our new annual estimate through June 30, 2022. Based on our revised estimate, our current projection for LIFO expense in the third quarter of 2022 is $25 million. As in prior years, we will revise our expectations each quarter based on our inventory costs and metal pricing trends. As of June 30, 2022, the LIFO reserve on our balance sheet was $870.4 million, which will be available to benefit future period operating results and mitigate the impact of potential declines in metal prices…

Thank you. Our first question comes from the line of Emily Chieng with Goldman Sachs. Please proceed with your question.

Good morning, Jim, Karla and Arthur. And thank you for the update today. My first question is just around getting perhaps some additional color around the non-residential construction and market there. Perhaps are you able to share what sub-sectors within that or what sort of components are seeing more of the strength versus others where maybe activity levels could be plateauing? How are activity levels trending currently in July from that strength that you noted in June as well?

Yes. Hi, Emily. Good morning. So for the non-res sector, as we commented on, our shipments were very healthy at good levels during the second quarter. But in particular in June we saw increased activity in bookings. We do service many different types of projects. If you recall, we typically are on projects that are like four to five story buildings or lower. We continue to see strength in like data centers, schools, hospitals, there’s airport work going on. So just a lot of various types of structures. And we had seen the Northeast and the East Coast had been a little stronger in the first quarter with the West Coast lagging a bit, but we saw the West Coast also start to pick up a bit more in the second quarter compared to the first quarter. So again, smaller projects with a variety of different types of projects in there.

Great. That’s really helpful color. I appreciate the color there. And then maybe my second question is just around realized pricing expectations for 3Q and I appreciate that. Part of that it is product mix shift as some of the higher value products start to see some demand strengths. But is there any sort of color you could provide as to what some of the price differentials could look like just to help us paint a picture of what that could go – look like on a go forward basis as well?

Yes. And I think Emily, again, our product breadth is so diverse, which is part of the strategy and the design. So it’s a little difficult to comment on. But I think a lot of times as much as we try to remind people, we have a limited exposure to carbon flat-rolled, especially hot-rolled coil, which is where you saw the most kind of price destruction during the quarter with prices falling back down to where they had been prior to the Russ-Ukraine crisis. And so we have limited exposure to that. So I think our Q2 price held up better than maybe a lot of people expected. A lot of the other carbon steel products, maintained pricing levels or came down a bit. There were some downward revisions in scrap, but not all the carbon products follow that. We think partly because we do have healthy demand out there. There was a decrease again today for carbon steel plate, which we’ve got decent exposure to. But overall the pricing levels are – we think still good compared to historical standards. Within aluminum we’ve got some common alloy exposure where we’ve seen prices trend down. But we also on the heat treat aerospace products, there’s continued strength in those prices. Also, on the stainless side, again, we’ve seen some decline, but not too significant at this point. So we think pricing levels are still good. But do anticipate that they could soften a bit next quarter. But we think a lot of the price correction has already occurred for most of the products that we carry.

Great. Thank you.

Thank you. Our next question comes from the line a Seth Rosenfeld with BNP Paribas. Please proceed your question.

Good morning. Thanks for taking our questions today. First is going to be a follow-up to Emily’s question on the product mix, in fact, on ASP. When you think about aerospace, energy and semis, can you just remind us kind of what portion of mix those three segments currently represent? And how that compares to past up cycles? The words to continuation of these demand trends, how much further could that run? That’s still a benefit to mix say into 2023.

Yes. Hi, Seth. So, aerospace and energy in kind of prior normal to strong cycles for them had represented about 10% of our sales dollars. But if you recall in early 2020, we did some restructuring to our energy businesses. And so energy now is typically about 3% to 4% of our total sales dollars. And then aerospace, like I said, had generally been closer to 10%. That’s come down kind of in the 6% to 8% range now. But as we continue to recover that could trend up again, especially it’s hard to sales dollars and with carbon steel prices being much higher than they had been historically that shifted a little more of our sales dollars into some of those products and away from energy and aerospace. Semiconductor, we’re not sure exactly what that percent is, but probably, somewhere in between energy and aerospace currently. Yes, and we see those three markets continuing to recover. We talked about through the third quarter, we didn’t give a lot more guidance beyond that, except that aerospace, we think based on build rates by the airplane manufacturers, if those hold that we’ll continue to see recovery through 2023 as well.

Perfect. Thank you very much. And the second question, please, with regard to cost inflation. Can you give us a quick reminder of the cost elements between logistics, labor, and energy by how much have you seen those increase year-over-year and in your prepared remarks, you touched on some of the mitigating factors for logistics of trucking, but can you walk through any other mitigating factors to be aware of for labor and energy as well, please?

Yes, hi, Seth. This is Arthur. Good question. So we commented on our sequential SG&A increase. It was about $35 million that it went up sequentially. And about a third of that was inflationary, I would say, due to title transportation costs higher, we had record high levels of fuel prices and partly, and then we say that that impact was somewhat mitigated by our own fleet of trucks where we’re not necessarily exposed as much to increased transportation costs. So yes, I mean, when you look at our own fleet and the rental costs that we pay for our trucks and trailers, the wages for our drivers, et cetera, those don’t necessarily move up with inflationary factors, just general, freight, right. So that kind of mitigates the impact of higher transportation costs on our P&L. And just to give you an idea about 18% to 20% of our total SG&A costs, our transportation related and a good chunk of that little over half is our own internal fleet cost. So I hope that gives you some color.

That’s great. Maybe any other comments on just general wage inflation, you’re saying not just on the transport side, but within your warehouses and processing centers as well.

Yes. Hi, Seth. It’s Karla. So at Reliance, we give annual increases. We’ve done that consistently over the years, typically our increases were about 3% a year in a normal year. This year, they were up a bit more in kind of a 4% to 5% range. So I mean, certainly there are some crazy numbers being talked about out there, but overall we boosted the wages a bit, but nothing too significant.

Yes. For us…

Thank you very much.

Yes. It’s been mainly incentive based compensation driving the increase in SG&A, that’s tied to record profitability levels.

Great. Thank you so much.

Thank you. Our next question comes from line of Timna Tanners with Wolfe Research. Please proceed with your question.

Hey, good morning guys. Hope you’re doing well.

Hey, Timna.

Hello. Wanted to follow up on the pricing question, just to clarify. So when you talk about the change in your LIFO outlook and the 5% to 7% decline in average selling prices, is that a snapshot of what you’re seeing today, because you also said that you think a lot of the price correction is already occurred. So the quarter of a quarter is more to reflect the exit Q2 or what you’re seeing today in July?

Yes. It’s kind of a combination, Timna. So as we said, we do think that we could see some more decreases on some of the products, but not to the extent that we saw the corrections in the second quarter.

Yes. And when it comes to LIFO, Timna, as you know, there’s a lag there, right. For current prices to be reflected in your inventory costs that takes about a full turn. So let’s say three months at a minimum, right to the three months. So LIFO going in a way is a bit tricky because you kind of have to focus on what costs are going to be on hand at the end of the year and not so much your selling prices. So, I mean, when we’re guiding to declining prices in a quarter and have LIFO expense, we certainly understand that create some confusion, but that’s just part of the accounting convention where you’re booking your annual estimate on a pro rata basis, but LIFO will make much more sense on an annual basis when you have your actual LIFO income for a year. And then it’ll basically adjust for pricing, inventory gains, losses, so to speak on an annual basis.

No, I got that, what I was trying to figure out. So if it’s an annualized assumption of a $100 million versus $150 million, is that a snapshot based on June – end of June of the quarter, or is that a snapshot that’s already, including also your assumption into Q3? Like could it actually shrink further as the year progresses given assuming prices continue to slip a bit?

No, we look at the forward curve where prices are headed and then look at our cost and where the forward curve is, and estimate as best as we can where we think our costs will end up at the end of the year.

Got it. Okay. Thank you. And then my other question was really about working capital on how to think about that unwind. We’ve talked over the years about the advantage in the falling price environment of in the past, at least pretty big working capital unwind. So obviously raises the question of how you see that cadence and then any updated thoughts on uses of cash, M&A attractiveness, et cetera.

Yes. So working capital, Timna, I think, you saw Q3 inventories came in a little higher than expected. Some of that is just a factor of overall kind of supply chain and mills catching up. But I think on the Q3 guidance, it’s just typical seasonality. So really in terms of trending working capital, it should sort of trend with historical seasonal patterns. I mean, when you have pricing decline, your receivables, et cetera, trend down and basically level off to current price levels, but nothing out of the ordinary in terms of substantial working capital releases outside of seasonal patterns.

Yes. Hey Timna, this is Jim. Yes, about M&A, we continue to do what we’ve always done. There’s a target rich environment out there, really fine companies. And we will continue to look at those. And we find a good one we will buy them. So that, if you’re asking how that is looking right now, it really doesn’t change much for Reliance. We buy good companies and there’s plenty of them out there.

And on cash use, we think we continued to buy good companies during the quarter with our share repurchases of buying back our Reliance stock. So you saw a little increased activity in that for the quarter. So we were glad to be able to take advantage of that.

Okay, great. Thanks everyone.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Hoffman for any final comments.

Yes. Thank you. Thanks again to all of you for your time and attention today. Before we close out the call, I’d like to sincerely thank all of my colleagues throughout the Reliance family of companies for their fantastic second quarter performance, which led to record financial results. You all continue to inspire me through your commitments to superior customer service, operational excellence, including preserving our highest core value of safety in the workplace. Thank you all for your continued support of end commitment to Reliance.

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