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

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

Good morning, everyone, and thank you for joining us today to discuss our second quarter 2023 financial results. Reliance's business model is designed to provide resilient performance throughout economic cycles, including both pricing and end market demand fluctuations present in the metals industry. The unique facets of our business model, highlighted by diversification, small order sizes, quick delivery and increased value-added processing, combined with strong execution by our full Reliance team, support our ability to deliver consistent, profitable results. Overall activity at Reliance has remained healthy, as evidenced by solid volume growth year-over-year. We are excited by the continued onshoring and infrastructure spend activities that are creating new opportunities for us. Turning to our results. Our second quarter net sales of $3.88 billion declined by 2.1% from the first quarter of 2023, with our tons sold down slightly more than anticipated and relatively flat selling prices that remain elevated by historical standards. Overall, customer activity in most of the end markets we serve remained healthy, with solid underlying demand and customer activity levels driven in part by our investments in organic growth. We continue to focus on growing the business organically and through acquisitions while maintaining our pricing and margin discipline. As a result, we delivered diluted earnings per share of $6.49, which was within our expected range. Our strong profitability, along with effective working capital management, produced significant operating cash flow of $295.1 million in the second quarter. Investing for growth remains our top capital allocation priority, with approximately $154.3 million invested in both capital expenditures and M&A in the second quarter. We increased our capital expenditure budget for the full year 2023 from $500 million to a record $520 million, and approximately 2/3 of our CapEx budget is focused on growth projects, including investments in advanced value-added processing…

Thanks, Karla, and good morning, everyone. I'd also like to thank the entire Reliance team for their outstanding individual and collective efforts and unwavering commitment to safety. I'll now turn to our second quarter demand and pricing trends. Our tons sold decreased 2.4% compared to the first quarter of 2023, predominantly due to lower carbon flat-rolled shipments following the first quarter demand pull-forward impact from rising prices. Despite the sequential decline in volume, our Q2 tons sold were up 1.9% from the prior year and up 4.5% from 2022 on a year-to-date basis. This reflects solid underlying demand in key markets, including nonresidential construction, aerospace and certain general manufacturing sectors, along with contributions from our organic growth activities, enabling outperformance of broader service center shipment levels across the majority of our products. Our second quarter average selling price per ton sold of $2,626 was relatively flat compared to the first quarter of 2023 and in line with our expected range of flat to up 2%, as anticipated carbon flat rolled product price increases were offset by a downturn in stainless and aluminum commodity product prices. I'll now turn to a high-level overview of the trends we saw within our products in key end markets. Our 3 largest product groups, carbon steel tubing, plate and structurals represented about 1/3 of our second quarter sales, and all of these products experienced stable or improved shipments compared to the first quarter of 2023 due to strength in the nonresidential construction market. We continue to believe new public infrastructure projects under the Infrastructure Bill and various other federal and state programs will provide continued support for nonresidential construction and infrastructure demand in the medium to long term. Aluminum and stainless products also represented just over 30% of our total second quarter sales, with aluminum…

Thanks, Steve, and good morning, everyone. Our sales of $3.88 billion in the second quarter declined by a modest 2.1% from the first quarter on relatively flat pricing. While carbon flat-rolled products drove the vast majority of the quarterly volume decline, their impact on sales dollars is relatively neutral, as higher selling prices for carbon flat-rolled products offset the impact of volume declines on our revenues. Declines in stainless and common alloy aluminum product sales in the second quarter drove the 2.1% sequential decline in revenues. Our FIFO gross profit margin, which excludes the effects of our LIFO inventory valuation method, remained relatively flat at 30.3% in the second quarter compared to 30.5% in the first quarter. However, the entry point into the second quarter was higher than the exit point due to temporary pressure on margins from declining stainless and aluminum product selling prices. The higher-than-anticipated decline in nonferrous product prices contributed to a revision of our annual LIFO estimate from $60 million of income to $120 million of income. As a result, we recorded LIFO income of $45 million in the second quarter to reflect a revised annual estimate. Our first quarter 2023 results included LIFO income of $15 million, bringing our 6-month total to $60 million of income or half of our current $120 million annual LIFO income estimate. Our reported gross profit margins, which are on a LIFO basis, came in at 31.5% for the second quarter, up from 30.9% in the first quarter. As of June 30, 2023, the $683.8 million LIFO reserve on our balance sheet remains available to mitigate the impact of possible further declines in metal prices and benefit future period operating results. Moving on to expenses. Our second quarter same-store non-GAAP SG&A expenses modestly declined by $6.7 million or 1% compared…

[Operator Instructions]. Our first question comes from the line of Katja Jancic with BMO Capital Markets.

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

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

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

So we actually have 2 new facilities going up in Texas. The smaller of the 2 is operational now. And it's early. It's just ramping up. The larger facility should be operational Q2 of 2024. That's currently in the build phase.

Okay. And maybe just last one. On the M&A, you have a very strong balance sheet. Can you talk about what -- how the pipeline looks like right now? And what size deals you're seeing potentially?

Yes. So we -- yes, sure, Katja, the -- we do continue -- for the last couple years it's been a pretty set, steady stream of opportunities. So we have a lot of different teasers and opportunities to look at. There are -- I mean we really focus on what opportunity is in front of us and do we think that meets our criteria and really fits within the Reliance family. What we buy, many different sized companies. We still will buy smaller companies, although certainly we would rather put our efforts behind some larger efforts that would contribute more to the company, and there are some larger opportunities out there, but we generally wait for the sellers to be ready. It's friendly acquisitions. It's when they're making a decision to exit the business, typically. We do maintain relationships so that we have an opportunity to see those opportunities. We think we're in a good position for that. We've seen a lot of smaller, more fabrication type opportunities. On the teasers, we've seen some smaller service centers. But over the last year to 1.5 years, we've seen some more medium-sized to larger, more traditional type service center companies. As we talked about on prior calls, for a period of time, there was a disconnect, people trying to sell off the peak. And so there were some value differences, but we're seeing that start to come more in line. So we're still excited about the opportunities that are out there. And I think at the same time, we haven't been quite as active on completing acquisitions, although we're still evaluating quite a few. We've also stepped up from historical standards our organic growth, so I think we're kind of hitting it and supplementing growth on a little more balanced approach currently.

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

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

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

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

And then as it relates to M&A, I know you recently got back into the market in the second quarter with Southern Steel. But if I kind of look ahead the next, call it, 2, 3, 4 quarters, you could find yourself in a net cash position even with the CapEx that you're spending pretty aggressively in the back half and maybe into next year. So is there any thought to doing more larger-scale acquisitions? Or do you feel like your internal pipeline is kind of robust enough to cover some of the higher RR projects you're looking at right now?

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

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

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

Yes. Martin, I don't know that we're -- certainly, I think some of our companies who are very focused on certain of those industries and end markets, if you take semiconductor chips, for instance, our people running our businesses selling into those markets are very engaged with their customers there, talking about both the build, but then future capacity. I think again, we serve so many different markets. There are discussions. I think for us, the fact that different mills are ramping up, domestic mills are ramping up capacity, will allow us to better serve the increased volumes that our customers will need in the future. And that's our spot in the supply chain. We continue to have customers asking us to do more for them on a value-added processing standpoint and really partnering with our customers. So there are many different discussions going on. But again, our business, while we and our customers do look at the long term, we're really servicing on a day-to-day basis. And I think we've done a good job of being a leader in investing in increased capabilities for our customers, and that's something that we'll incrementally continue to do to support that future increased demand.

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

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

And ample supply in the supply chain.

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

Yes.

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

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

Alex, we -- you are correct. We have not disclosed that. Yes. And we -- at both of those operations, we're supporting our customers, but also partnering with the mills in doing both toll processing on some of the volume as they request and then also direct sales of the metal. So we're ramping as the mills ramp and it's nothing specific committed, but we certainly will benefit. As the mills continue to ramp and produce more tons, we certainly expect our volumes there to grow with them.

Okay. And then just following up on that. Are you -- I mean are you specifically targeting Mexico as an end market there as the mills are? And I know the mills have commented that Mexico has been very strong recently, right, with AHMSA being out. I don't know if that kind of flows into what you are doing or not?

Yes. So we try to sell metal to people wherever they are if they want metal. So if there is more demand for metal in Mexico, we certainly want to service those markets. We acquired a company back in 2008 that had some very strong toll processing capabilities, 3 locations in Mexico. We've added a fourth and expanded all of those over the years. We're in process of doing further expansions down there because we see growth in that market. We also have some of our U.S. companies selling more metal down into Mexico. One of our on-campus opportunities, I think that mill has directed more metal there. So in support of them, we're pushing some more tons down there, and we continue to look at opportunities to meet our customers' needs, both existing and new customers, as we see opportunities grow down there. So certainly, we look at it as a potential favorable market for growth right now.

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

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

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

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

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