Greetings and welcome to Reliance Steel & Aluminum Co.'s Third Quarter 2020 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] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Brenda Miyamoto. Thank you. You may begin..

Thank you, operator. Good morning and thanks to all of you for joining our conference call to discuss our third quarter 2020 financial results. I'm 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.

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 impact of the COVID-19 pandemic and related economic conditions on our future operation, 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, 2019, and then updated in the company's quarterly report on Form 10-Q for the quarter ended March 31, 2020, and the company's quarterly report on Form 10-Q for the quarter ended June 30, 2020, under the caption Risk Factors, disclosed 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, President and CEO of Reliance..

strong pricing discipline; diligent expense control when needed; inventory management and leveraging our investments in organic growth and innovation. We believe customers realize increased value in our model during challenging markets as they confidently rely on us to do more for them often in smaller sizes or on a more frequent basis.

As Reliance continues to evolve as a leading diversified metal solution provider, we will leverage both the knowledge we have acquired while navigating the pandemic and our commitment to continuous improvement and innovation to provide enhanced solutions to our customers and drive stockholder value through increased efficiencies and profitability.

America is going to need Reliance to rebuild. Thank you very much for your time today. I'll now turn the call over to Karla to review our third quarter 2020 financial results in more detail.

Karla?.

Thanks Jim and good morning everyone. Our net sales of $2.09 billion for the third quarter of 2020 decreased 22.4% from the third quarter of 2019 with our tons sold down 13.1% and our average selling price down 11%.

Compared to the second quarter of 2020, net sales increased 3.3% with our tons sold up 5.9% and our average selling price per ton sold down 4.3%. Our tons sold exceeded our expectations of flat to up 2% from the prior quarter as demand in many of our end markets improved with the most notable strength in non-residential construction.

Although not included in our tons sold metric, the significant rebound in our toll processing operations contributed meaningfully to our increased sales with toll processing volumes up 81.5% from the lows experienced in the second quarter of 2020. And our average selling price per ton sold declined 4.3% compared to the second quarter.

Our lower average selling price in the third quarter was mainly due to shifts in our product mix rather than overall metal pricing trends.

The most significant shift was a 14.9% decrease in our aerospace tons sold in the third quarter the majority of which was heat-treated aluminum and titanium products, which represent some of the higher-priced products we sell.

Meanwhile our shipments of flat-rolled carbon steel, which are among our lowest-priced products, increased as a percent of our total shipments which also reduced our average selling price. And lastly, our alloy sales now represent a lower portion of our total tons shipped due to the closure of certain of our energy businesses.

Our gross profit margin for the third quarter of 2020 was a record at 32.4% and well above our estimated sustainable range of 28% to 30%. This ties our record gross profit margin set in the fourth quarter of 2019 when we recorded LIFO income of $81 million compared to LIFO income of $12.5 million in the current quarter.

On a non-GAAP FIFO basis, which we believe is the best measure of our day-to-day operations, our gross profit margin of 31.8% increased 300 basis points from 28.8% in the third quarter of 2019 and increased 160 basis points from 30.2% in the second quarter of 2020.

As Jim highlighted, this is a direct result of the outstanding performance by our managers in the field who despite challenging circumstances maintained pricing discipline by focusing on higher-margin orders and providing more value to our customers through our expanded value-added processing capabilities.

And these actions are the key drivers behind our ability to increase and sustain our strong gross profit margin. During the third quarter, certain other factors contributed to our increased gross profit margin the impacts of which we believe may be more temporary.

First, a significant rebound in our toll processing volumes drove a meaningful increase in our gross profit margin as our tolling businesses operate at higher margins than our company-wide average.

Second, changes in our product mix contributed as our lower-margin contractual commercial aerospace sales declined while shipments of lower-priced carbon flat-rolled products increased. Given a lower average overall selling price, value-added charges are a larger component of our sales which has a positive impact on our gross profit margin.

And third, we were able to enhance our gross profit margin for certain of our carbon steel products as mills announced price increases late in the third quarter.

We recorded LIFO income of $12.5 million or $0.15 of earnings per diluted share in the third quarter of 2020 compared to LIFO income of $40 million or $0.44 of earnings per share in the third quarter of 2019 and LIFO income of $5 million or $0.06 of earnings per share in the second quarter of 2020.

And given our current estimate of $50 million of annual LIFO income in 2020, we expect to record $12.5 million of LIFO income in the fourth quarter of 2020. As a reminder, we will true-up to our actual LIFO adjustment at December 31st. And our LIFO reserve was $100.1 million at September 30th.

Our third quarter non-GAAP SG&A expenses decreased $75.2 million or 14.5% compared to the third quarter of 2019 on a 13.1% reduction in shipments.

The decline in SG&A expense was mainly due to reduced variable expenses such as plant supplies and freight costs along with lower average headcount which was down 13.8%; as well as lower performance-based compensation.

When compared to the second quarter of 2020, our non-GAAP SG&A expenses increased only 2.6% on a 5.9% increase in our tons shipped demonstrating the efficiencies gained through our state-of-the-art processing equipment along with our continuous improvement and innovation initiative.

During the third quarter of 2020, we recorded impairment and restructuring charges of $14.6 million as we continued to close or merge a few of our smaller locations and wrote off certain intangibles due to our outlook for a more challenging environment in certain markets.

We recorded an additional $14.6 million in non-recurring charges comprised of settlement charges related to the termination of multiple small Frozen Defined Benefit Plan and settlement of an obligation in our SERP plan.

We also recorded $1.8 million in debt restructuring charges related to our financing activities in the quarter for total non-recurring charges of $31 million in the third quarter of 2020. We remain solidly profitable in the third quarter of 2020 with non-GAAP pre-tax income of $158 million and a non-GAAP pre-tax margin of 7.6%.

Our effective income tax rate for the third quarter was 22.6%, down from 25% in the third quarter of 2019 and up from 20.9% in the second quarter of 2020. Our lower tax rate was driven by reduced income levels in 2020 attributable to the impacts of COVID-19.

And at this time, we estimate our effective tax rate for the full year of 2020 will be approximately 22.5%.

Non-GAAP net income attributable to Reliance for the third quarter of 2020 was $120.9 million, resulting non-GAAP earnings per diluted share of $1.87, down from $2.39 in the third quarter of 2019, mainly due to lower pricing demand levels; and up from $1.36 in the second quarter of 2020 due to our strong gross profit margin and recovering demand.

On a GAAP basis, our earnings per diluted share were $1.51 in the third quarter 2020.

Turning to our balance sheet cash flow, we generated strong cash flow from operations of $296.3 million during the third quarter and $942.8 million during the first nine months of 2020 due to our continued profitable operations and effective working capital management, including a continued focus on right-sizing our inventory levels, which resulted in achieving our inventory turn goal of 4.7 times.

During the quarter, we issued $400 million of 1.3% five-year senior notes and $500 million of 2.15% 10-year senior notes through a public offering.

We used a portion of the proceeds to repay all of our outstanding indebtedness under our unsecured revolving credit facility and term loan, and we'll utilize the remaining proceeds for general corporate purposes.

Additionally, in early September, we entered into an amended and restated $1.5 billion five-year unsecured revolving credit facility that replaced our previous credit agreement and includes an increase option for up to an additional $1 billion.

The facility amendment combined with the proceeds from the notes offering, have significantly enhanced our liquidity position and extended our debt maturity profile. At September 30, 2020, our total debt outstanding was $1.66 billion, resulting in a net debt to total capital ratio of 17.3%. Our net debt to EBITDA multiple was 1.1 times.

And as of the end of the third quarter, no borrowings were outstanding on our $1.5 billion revolving credit facility. In regard to capital allocation, our increased 2020 capital expenditure budget of $270 million includes additional strategic investments to address our customers' needs and drive organic growth.

We will continue to pay our regular quarterly dividend and selectively execute attractive acquisition and share repurchase opportunities. In the third quarter of 2020, we invested $38.2 million in capital expenditures and returned $41.2 million to our stockholders through dividends and share repurchases.

Turning to our outlook, while macroeconomic uncertainty stemming from the COVID-19 pandemic continues, based on current expectations and market conditions, we anticipate that overall demand will continue to slowly improve in the fourth quarter of 2020.

We expect shipping volumes will decline in the fourth quarter due to normal seasonal factors, including customer holiday-related shutdowns and fewer shipping days in the fourth quarter compared to the third quarter. But we believe the impact of seasonal factors in the fourth quarter maybe less significant than in prior years.

As a result, we estimate our tons sold will be down 4% to 6% in the fourth quarter of 2020 compared to the third quarter of 2020. We anticipate metals pricing, primarily for carbon steel products, will improve due to mill price increases.

However, similar to the drivers behind our average selling price decline in the third quarter, we believe the impact of these price increases will be partially offset by our diverse product mix and declining sales in certain markets such as aerospace, which typically involves higher-priced products.

As a result, we expect our average selling price in the fourth quarter of 2020 will be flat to up 2% compared to the third quarter of 2020. Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $1.30 to $1.40 for the fourth quarter of 2020.

Looking ahead, we will continue to execute our business model and remain focused on managing the elements of our business that are within our control. In closing, we are very pleased with our third quarter results amid the broader macroeconomic uncertainty the pandemic has caused.

Our managers in the field, delivered excellent execution as demand began to slowly recover throughout the quarter, maintaining their strategic focus on high levels of customer service and value-added processing.

This combined with our emphasis on expense control and our ability to respond quickly to market conditions resulted in yet another quarter of solid profitability and cash flow enabling us to support our growth and stockholder return priorities.

I'd also like to echo Jim's sentiment and extend my thanks and gratitude to all of our employees and the Reliance family of companies for their ongoing commitment to health, safety and operational excellence in this unprecedented time.

We believe our people along with our proven business model are the keys to the strength and resiliency of our business. We look forward to improved conditions in the quarters ahead as we work with our employees, customers, suppliers and communities to mitigate the ongoing impact of COVID-19. That concludes our prepared remarks.

Thank you for your attention. And at this time we would like to open the call up to questions.

Operator?.

[Operator Instructions] Our first question comes from Seth Rosenfeld with Exane BNP. Please proceed with your question..

Hi Karla and Jim and congrats on a very strong quarter..

Thanks Seth..

If I can please kick off with a question on the outlook for margin please. Thank you first of all for providing some color in your prepared remarks on the drivers of particularly robust margins in Q3. Looking forward to Q4 your guidance seems to imply a pretty sizable reduction in gross margins quarter-over-quarter.

Can you walk us through which of the key drivers that you would view as perhaps deteriorating on a quarter-over-quarter basis? And how we should expect that I guess settling out going into 2021 as we expect demand to continue to recover in line with your guidance? I'll start there please..

Hi Seth, it's Karla. So from a Q4 perspective we're very, very pleased with the performance we've had in the gross profit margin that our folks have been able to achieve. We did build into the comments with the rebound from COVID there's still uncertainty out there. We're seeing some changes in product mix.

So we did try to highlight some of the impact both on average sell price and on gross profit margin from those. And while certainly we think we will solidly perform at the high end of our estimated sustainable gross profit margin range of 28% to 30% going forward.

We are a little cautious on achieving the record performance we had in the third quarter.

There are carbon steel price increases on certain products including on flat-rolled which were pretty sizable at the end of the third quarter going into the fourth quarter which are very positive for Reliance as that allows us to make more gross profit dollars and helps us.

But as the metal price -- the metal cost increases, our gross profit margin percent that we saw from our flat-rolled business in Q3 as a percent could go down a bit. So we're okay with higher prices at slightly lower gross profit margin. And we did benefit quite a bit from our improved toll processing operations in Q3.

As we've talked about that has a positive impact on our gross profit margin and that is sustainable. However, we think that the impact going from Q2 to Q3 was probably a little inflated just because of some of the cost-saving measures we took when we were hit hard for COVID.

So we're a little cautious on being somewhere between that high end of our sustainable range and what we saw in Q3. But again very confident maintaining a very strong gross profit margin but recognizing we had some temporary boost in the third quarter..

That's very clear.

And just to confirm your last comment was you'd expect to be somewhere between the high end of that sustainable range and the Q3 performance in Q4? Did I hear that right?.

We expect to be able to stay at the top of the sustainable range yes..

Okay. Thank you. And the second question just on aerospace given it seems to be perhaps a growing challenge for the company.

Can you walk us through to what extent you'd expect further sequential volume weakness here? Or do you think that in the number you recognized in Q3 you're already kind of recognizing the -- a large step-down in production rates amongst those customers?.

Yes. Seth this is Bill. How are you? We think when you look at it from an end-market perspective that we'll be at the bottom. We're at/or close to the bottom now. And as we look into next year we think we will slowly start to see some improvement.

Our guys have done a really good job of attacking the expense side and really getting in the inventory side hard. So if you look at the outlook as we head into Q4 there may still be a little bit of downside on the performance side, but we're close to the bottom. And we'd love to see some improvement as we move into next year..

And just to clarify that a little bit. With what Bill talked about we were seeing kind of continuing declines through the third quarter. So really from where we ended at the third quarter we think we were near the bottom. But there was a decline throughout the quarter..

And I think we have done most of the heavy lifting from an expense and headcount reduction point of view. But we're going to stay close to the market and see what happens. And if we need to make more adjustments our guys will be ready to do that..

That’s very fair. Thank you so much..

Thanks Seth..

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

Yes, good morning Jim and Karla. And thanks for the call. I guess my first question was just around the auto tolling volumes or the auto tolling business.

Could you quantify where those volumes are at versus normalized levels as you exited the third quarter? And then just on the new facility in Texas is it possible to quantify the tonnage that you would be looking at there? And would it be safe to assume that's going to be co-located at the new flat-rolled mill that's being built in Texas? Thanks..

Alex, I'll take the first part of that on the auto tolling volume. So as we commented on in the script Q3 tolling -- overall tolling volumes which about 60% of that is auto-related appliance would be the next biggest portion of that and then some miscellaneous. Our Q3 volumes were up 81.5% compared to the second quarter.

As I'm sure you're aware that ramp was pretty quick. That was a B that started at the end of the second quarter and continued into the third quarter. So for the quarter we were probably about 9%-ish -- 9% to 10% below pre-COVID levels. And we continue to see a slight improvement from that coming out of the quarter.

So we think we're probably at about 90% to 95% pre-COVID levels now..

Yes. And Alex as far as the -- our new operation in Texas I can't really quantify what the tons will be. I hope it's a lot. But when they open a Greenfield site like that, it there's -- it takes a while to get it up and running. And my guess is that, that company has probably released what their capacity is. And they intend to run at a high level.

And if that's true, then we will to -- so we're looking forward to that..

Yeah. And then, in addition to that, we also part of Jim's remarks were that we also are in the process of opening the fourth quarter, another new greenfield expansion for tolling in Kentucky as well..

Okay. Thanks for that. And then, I guess just on the capital structure. Net debt now is down to around $1 billion-ish like one times EBITDA. I mean, how do you think about that, going forward? I mean it seems relatively conservative, given the margin stability that you guys have very successfully achieved through the cycle.

I mean, arguably so how should we think about that capital structure going forward?.

Well, I'll let Karla answer that, before anybody says, we have a lazy balance sheet. But we kind of like having all that cash.

But Karla will -- Karla sorry, what will we do with all of that?.

Yeah. I mean, I think, Alex, certainly we are very comfortable with, where we are from a leverage standpoint. We continue to be able to execute, on all of our capital allocation priorities. As I think, you know from knowing us for a while we try to be very opportunistic and flexible, in all those areas.

Coming through the pandemic, the company has performed very well. But I think, being a little comfortable with our financial position has not been a bad thing, as we've gone through this uncertainty. But we are very confident with the model and the way we've performed. We've been ready to execute.

As Jim mentioned in his comments, we see a lot of M&A activity. We continue to look at organic growth. And as you saw in our notes we just increased our CapEx for this year. We're working on our CapEx for next year, but we continue to see organic growth opportunities. We pay a healthy dividend.

And want to continue to periodically increase that, as we've done for many years. And also jump into repurchase shares. So we're anxious for good opportunities to put our balance sheet to work a little harder..

Perfect. Thank you..

Thanks, Alex..

Our next question is from Chris Terry with Deutsche Bank. Please proceed with your question..

Well-done on a solid quarter, just had this -- my first question on the guidance for 4Q specifically. I think you're basically saying that, your gross profit margin will be on the high end of the 28% to 30% sustainable range. In terms of the volumes, I think, when we look at it seasonally you normally get 5% to 7%.

And you're saying, maybe seasonally it won't be so bad, but you saw it 4% to 6% down.

Is that potentially conservative, when you consider that the COVID recovery is probably a lot stronger than the normal seasonal impact?.

Yeah. Chris, it is conservative. But that's kind of what we do. Where we control this -- we manage the things we can control. And we can't control the demand or the price. So we look at the things that will provide the most value to our shareholders. And execute as we've done year, after year, after-year.

The COVID situation, I think we've done a really damn -- a really good job coming through that. In September, we saw things coming back a little quicker than we've thought. And October right now is kind of flattish to that if you will. But we're still looking at those kinds of numbers. So, yeah, it's conservative. Sure, it's conservative.

But we want to be able to do the best -- we do the best job we can in predicting the future but we hope to be able to get there and beyond, as we have in the past..

Yeah. And Chris just as a reminder, last year our fourth quarter volumes were down just under 7% from the third quarter. So, this guide is a little better than that, but, as Jim said, on the conservative side because there's still a lot of uncertainty out there..

And the other thing Chris remember too, just because Reliance is an essential business, it doesn't mean all of our customers are that way. So we're not really sure, what we're going to see. Then perhaps there's some customers that will be coming out of COVID stronger, but some may not. There may be a shift, in the products they're making.

Remember our customer base 125,000 strong. There are -- there's a lot of smaller customers out there who continue to need Reliance more and more, because of our value-added play. And depending on -- if it's a job shop, they call them a job shop for a reason. They go from job to job.

They're not really sure, what they're going to do the next month or next quarter. So, a lot of those things are really out of our control. But we kind of look at it through a lens that -- or experience that the -- had the guesswork involved and things like that. So and -- but we're just conservative by nature. And we'll try to manage through it..

Thanks, Jim and Karla. That all makes sense, just a follow-up question on the CapEx, so $270 million for 2020, appreciate it's probably too early to fully talk about 2021, but just trying to get a gauge of the toll project or the investment in Texas and also Kentucky.

Is there an amount of that that carries forward into 2021 that we can think about on top of the normal sustaining level for how 2021 CapEx might shape up? Thanks..

Yeah. So Chris the way we do our CapEx budget, the full amount of the, spend for both the Kentucky and Texas. Expansions are in the updated $270 million, 2020 budget. It's possible some of that cash could trail in to be paid, during 2021. But we've got the full amount of that loaded. As I mentioned, we're working on our 2021 budget now.

We don't have that final number yet. But we do see continued opportunities throughout all of our companies servicing all the different markets that we work with..

Yeah. Chris we -- as Karla said, we're kind of in the middle of that right now. We anticipate another robust CapEx spend, where our customers continue to do -- ask us to do different and more things. And there's no reason to think they're not going to continue or ask to do that. And I can tell you we'll be there for them.

So it should be another good spend for us in 2021..

Okay. That’s clear. Thanks. That’s all for me..

Thanks, Chris..

Thanks, Chris..

Our next question comes from Timna Tanners with Bank of America. Please proceed with your question..

Hey, good morning guys..

Good morning, Timna..

Hi, Timna..

I wanted to drill down again on that gross margin number, because I know your guidance is 28% to 30%. I know you're conservative. But we haven't even been in that range now for a while I guess since Q2 of last year. And I'm just wondering, I mean, if you look at Q3 yes there was a bit of LIFO.

But despite the buyers and despite the uncertainty despite all the things that may or may not have affected you at it's a pretty phenomenal result even on a FIFO basis.

So I'm just wondering like is it time to start thinking about a higher guidance because it makes such a big difference in forecasting for you? Like what would it take to see you dip actually below that 30% going forward? And then just whatever you can provide would be helpful..

Well, Timna, it is time to start thinking about them. As you know, we think about it all the time. It's just – and you – a key point of your question was the word uncertainty. Once we're certain that we can get there and we can sustain that we'll say it. This COVID thing was the – was a son of a gun.

And we were able to respond in typical Reliance fashion because of our model. But again I really – it's tough going into this fourth quarter to say it. And – but we have to believe it before we say it. So we'll – we hear you and we're with you. And when we say it you can count on the fact that it will be sustainable.

So that's the best answer I can give you right now. I wish I could tell you everything I'm thinking but we'll see..

And just to clarify too, Timna. So the 28% to 30% is on a LIFO basis. And LIFO does help lessen some of the volatility there. So just to point that out. And as Jim said – and we've been asked by many of you about raising that and we are very proud of the results we've had and that we've been consistently at the top end for a little while.

But things like the – and it was to the positive side our product mix impact on our margin in the third quarter. That could potentially go the other way a little bit too. So that's some of that uncertainty. Things are changing as we recover from the COVID hit. So we're watching that. And hopefully – I mean I think we're confident.

And I did say earlier in my remarks, we think at least through Q4, we can stay at the high end. We do think there are a lot of really good things that has happened that have driven our sustainable margin to the high end. And we'll continue to monitor that..

Yes. And as you well know, Timna, the mix has a lot to do with it. The flat-rolled business as that starts going up that's at a lower margin than some of the other things that might be going in the other direction.

Another thing just anticipating the next question from maybe not you or somebody is going to ask about the fact we went from a traditional 40% of our product being – having added value to it to 51% and we really haven't reported where that number is now. And when that does go up, there's not a direct correlation between those two.

It's part of our strategy to get that going north. But you'd have to really drill down to find out what kind of value-added things we're doing. There's value added that we can charge for that's not as high value added as other type things we can do. So this is the type of value added that we're able to get.

This quarter it was nice that we – or we – some of this technology out there that's available to us from a equipment standpoint, it's pretty fascinating really. And we're able to offer our customers new and different things and they're willing to pay for it. And it never ceases to surprise me what they come up with.

Because they deal with this COVID thing differently. And when they come out they have different needs and they have different desires. And we're a solution provider. So we listen to what they need and we partner up with some equipment manufacturers that can come up with a solution for them.

So to – I – we hope that number continues to drive up, get better. And I don't know how high it's going to be or how high it can be but there's a lot of things that go into those numbers too..

And just because we're not ready to increase that range yet doesn't mean you can't put something higher in your model..

All right. Thanks for the permission there. That's great..

I was going to say "That was nice of you Karla.".

Yes. That's very nice. All right. The only question I wanted sort of to drill down into and then granted you just said there's a lot of components and it's complicated but if I could. The aerospace business, obviously under some pressure and could be for a while; energy as well.

But on this auto tolling opportunity with this last quarter and with the growth is that enough to offset those loss conceptually? Is that enough to balance out maybe the lost opportunity in – or the dormant opportunity maybe in energy and aerospace? Or how do you think about that?.

I think from a profit standpoint when we're fully ramped, which is not going to be for a while yet, I mean it can certainly have a meaningful offset if you assume aerospace and energy stay where they are currently. But we're hopeful we'll see some improvements in those markets too by the time we get fully ramped on our auto tolling businesses..

All right. And Timna, this is Bill. In addition to the two new Greenfield, we've got some new opportunities to grow our market share through our existing tolling operations. So our plan is we're going to see that continue to have a positive impact obviously..

And in the aerospace – the defense end of the aerospace in the space end of the aerospace that's good business. That's – well there's a lot of opportunities for us in that and we anticipate participating. And that just by design is high value-added activity. And we see some opportunities there too. So that's kind of a bright spot..

We do definitely..

Okay. Great, guys. Thanks again..

Thanks, Timna..

Thank you..

Our next question comes from Chris Olin with Tier4 Research. Please proceed with your question..

Well, Karla I should probably ask then can we also put our estimate higher than the guidance?.

You're different. You could put your stock price target higher..

Okay. All right. Fair enough. I just know – I know you're getting a lot of aerospace question but I just want to make sure I understand the numbers. And I don't have any slides in front of me but I used to ask – and it was always like 8% to 10% of total revenues. And I just want to make sure I understand how you talk about it now.

Half of that was commercial aerospace, half was other aerospace. Now commercial what they get cut in half.

So your business is about seven – 2% at risk? The rest is stable? Is that how I think about it?.

Yes. So we're – with an acquisition we have done back in about 2014, our aerospace over the last few years has been about 12 – 10% to 12% of our revenue dollars. With COVID that's come down a bit. So we're a little under the bottom end of that 10% range.

And it is about half-and-half maybe split between commercial and then defense space et cetera making up the other half..

And then most of commercial would be aluminum-related products? At -- I think it isn't really moving you that much in terms of toll rates?.

Correct. Yes. Mostly, aluminum. There is some aerospace steel and titanium products. But when you look at the commercial side it's -- for us it's a much bigger play on aluminum..

Yes. Especially, on the heat-treated plays. And so -- and we did talk about with our average sell price fluctuation and things, I mean, the 10% to 12% is based on sales dollars. And again, these are our higher-priced products. So the tons would be a smaller percent of our total tons but -- because of the high-priced product..

Do we need to think about contract rollovers for 2021? I don't know, if I may ask that yet. And I remember it being a nice boost from last year.

Is that reversed going forward?.

Yes, but only on the defense side definitely. The JSF contract that has been extended. So that's a big program for us..

Pricing on commercial aerospace has that stepped down now in relation to the demand numbers?.

Yes. So far pricing has been pretty stable on the commercial aerospace side. So I think even with the drop in demand the mills have been very disciplined in their pricing approach there. And so pricing is I would say is stable..

Great. That’s all I have. Thank you..

Thanks, Chris..

Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question..

Hi. Good morning..

Hi, Phil.

Good morning..

My question is just on the non-res side. And I know -- excuse me. I have a little something in the throat just in terms of where -- what you're seeing regionally out there in the different markets that you serve. Because obviously, you've got a view of the country and in some cases even Canada.

So what should we take away regionally?.

Yes. That's a good question, Phil. The good news for us is it's kind of widespread, if you will. Northeast has kind of been chugging along at a good pace for several quarters. Now the Southeast with -- unfortunately with the weather issues that business has really picked up.

And unfortunately for the people who live there it probably won't subside for a while. So we've seen a nice pickup in equipment going into rebuilding roads and bridges and water treatment plants and those type of things electrical grid.

Out West, it's been strong and it continues to be so based on the larger big-box warehouse campuses or electric motors widespread as far as assisted living facilities. That's -- there's -- elderly people live everywhere. So that's a good business for us.

And like so we seem to be -- I believe, I said in my comments or Karla did one that we've seen some infrastructure spend that I said was related to the Southeast. And then down in the Texas, Oklahoma this is pretty good; Arizona they're doing pretty good. There's -- like I mentioned the renewable energy business is our -- a nice spot for us.

We anticipate that to continue to get a little better. So just across -- anything widespread for us is a good thing. So that's what we're seeing. And I've said this comment for a lot of you long time since 2009 now. This slow burnup continues and we seem to be in the right spot for that.

And if it continues to do that then we anticipate fourth quarter to keep going. So....

Are you seeing any constraints in trucking availability right now in the U.S.? I know you have some of your own.

But any constraints that you're either seeing or you're noticing out there? Or a sub part are you starting to see increased pressure on freight rate?.

No, we're not. We -- but we're in -- we were in that business. So we can ramp up. And then we have a lot of our own trucks for that reason. We like -- we've and they're our employees. We consider our truck drivers and folks who do that as team members who are actually salespeople as well because they're out there with flying the colors.

And they care about the service of our customers because that's part of our model. So if we did see the -- a problem we would just -- we would build away. We'd get more trucks on. So we have not seen that. And a lot of our product has moved around from mills into our operations go by rail and that seems to be going well.

So we've got a good -- we've got our finger on that Phil pretty well. We knew we can ramp up when -- if there's an issue. There's a time -- I don't remember how many quarters ago where there was a driver shortage that we saw coming. So we've adjusted to that. So I don't -- I haven't heard of anything that we're worried about. I can tell you that..

And last question just for Bill. Bill if there is a change in administration and then -- and there is a change in defense spending policy, how long does that based on your history take to influence what's already out there? Because I know that a lot of these things are seriously well funded by the Senate and takes their blessing.

So any thoughts maybe you can give around that? Because -- and I would think people are starting to at least ponder the possibility that if there is a change what's still good? And how long is it good for?.

Yes. Good question, Phil. It sounds like that regardless of who wins that defense spending is still going to be a priority. And as you say a lot of what we're seeing is already in play. And so it will take some time if there is a change.

But when you look at the major programs that we're on we're not seeing or believing that there's going to be a significant change there over the long-haul. So we still are very positive on the outlook from a defense standpoint..

And isn't there Bill a lot of that that also goes to some foreign buyers?.

Exactly. Yes. Even -- you've probably seen a lot of the legacy fighter programs that are going to other countries now and we're a big supporter of those programs. So that side of the business has been very positive for us also and we think that will continue..

Thanks everyone. Talk soon..

Thanks, Phil..

Our next question is from Tyler Kenyon with Cowen & Company. Please proceed with your question..

Hi, Jim, Karla and Bill. I hope you're all doing well. Question is just on the volume guidance of down 4% to 6% sequentially. Wondering, if you could break that out between the various product categories; carbon, aluminum, stainless and alloy, or maybe just provide us a sense as to how to think about each one of these categories.

I think it would just help in light of some of the recent shifts in mix?.

Yeah. I think Tyler as we said earlier, we're hopeful that on the conservative end that there is a normal seasonality. With everything that's happened with COVID this year I think there are different schools of thought and our customers may react differently.

The schools of thought being it's going to be stronger in Q4 because people are catching up from slowdowns in Q2 and have been coming out of that. The other school of thought is it's been ugly. Some of our customers as Jim said are nonessential and are still struggling may shut down for even longer over the holiday period.

So that's a bit of the unknown that keeps us on the more cautious side towards what we've seen as a normal seasonal downturn. But the 4% to 6% is a little better. We did comment we've got good backlog and quoting activity in non-res and infrastructure. So we're probably more positive. That's more of your carbon type products.

We talked about aerospace being weak. That's more of your aluminum products. Our stainless especially on the flat-rolled side it's held in better than the other products. So that's been doing pretty well for us. Alloy we commented our sales there are lighter because of some of the energy closures in that industry. We expect to remain under pressure.

So that's kind of at a high-level guidance..

And the only thing I'd add Tyler, we put a lot of effort into our inventory management. If you know that we don't -- we call it as-needed inventory versus just-in-time. I'm not sure what just-in-time means but as-needed is that's when the customers need it. So we have a basket of a companies.

In certain companies their first quarter is their best quarter; some companies their second quarter and third and fourth. So we look at all of those companies differently and we flex up and flex down and make sure that they're -- that we're spending our inventory dollars properly.

And if your slowest quarter is the fourth quarter then you don't need inventory in the third quarter just for that. So there's a lot of analysis that goes into that. So it's really difficult to go product-by-product. Like Karla said we're very aware of what our history has told us.

And if you look at it really without this COVID thing you would -- we'd probably get rewarded because we're projecting a better fourth quarter than we have in the past. But because -- I guess because we've done so well during the pandemic, I guess the expectations are somewhat different. And I get it. I understand it.

When we -- when you continue to perform and your -- you got a resilient model we expect to perform. But we also are conservative and we understand our history. So it might work..

Thanks for all the context. Maybe Karla wondering if you can help us just kind of about the trajectory of SG&A moving into the fourth quarter. I know you've called some folks back as activity levels have improved.

And should we expect the dollars to kind of follow the volume trend from third quarter to fourth quarter? Or should we expect more of a flattish trend as some of the costs come back?.

Yes. So I think, Tyler, probably looking I think Q3 percent of sales is probably a decent way to look at it. Overall the -- even though it's lighter shipping volume part of that's because we're we have fewer shipping days which affects our volume. But most of those are holidays when we're still paying wages.

So I wouldn't necessarily bring it down in line with volume. So I think if you look pretty consistently with Q3 dollars is probably the best guide that we can give you at this point..

Great. Thanks for that. And then just one last one if I could. Just wanted to take your temperature on what you're seeing in the competitive landscape out there.

What are you seeing among some of your customer -- or excuse me your competitors? And maybe if you could just provide us an update on what you're seeing in the M&A environment currently? Thanks..

Yeah. I'll -- I don't know. Our competitors -- we're not even seeing how our competitors are nowadays. So I don't -- we don't -- they're doing whatever they're doing. And God bless them. I hope it all works out for them. I hope they're all safe -- have to stay healthy. How's that? But I don't know.

They're nothing's really -- I don't think anything's really changed on that horizon. But again, we don't spend a lot of time wondering what they're doing. We kind of wonder what we're doing. And as far as the M&A I had mentioned it earlier. It's a target-rich environment. We got a lot of activity.

I mean there's not a -- I mean sometimes, its daily; sometimes it's a couple of times a day; sometimes it's skip a week. But we were -- we've looked at a lot of companies. And the problem is we -- that's not a problem. It's just what we choose to do. The criteria is very stringent. We don't -- we haven't changed that at all.

There's just a lot of little things that go into -- we're very selective on who would like to join our family of companies because it's important that they fit in. And I mentioned a few of the criterion and those haven't changed.

Now, the good news is, there's some out there, but a lot of what we're looking at seems -- there's some things that will eliminate you pretty quickly. If you're very small that's really nothing we can -- we really want to sync or keep them because there's a lot of effort that goes into that.

If it's a company that's for sale that forces us to compete with our customers, we back out. If there's -- if it's like a potential acquisition that forces us to compete with our suppliers, we don't do that. We're -- we want to be everybody's best customer not just the biggest customer. So, we'll eliminate some of those types of things.

But then there's companies that just kind of are fire sal-ing because they didn't do very well during the COVID. And we're -- we don't -- we're not -- we don't do fixer-uppers. And again, it all kind of rolls into the fact that we've got a good problem, we have cash. And there's different ways to use your cash.

And Karla had -- as always did a wonderful job explaining on them -- explaining what we do with our cash. And M&A is still one of them. It's just a matter of what pops up and what our appetite is. But our -- I think our appetite hasn't changed. And we've got plenty of money to participate when the right ones come along.

And we'll -- that's not going to -- that is not going to change. So, suffice to say, if the good ones come along and we could work things out, we'll jump in..

Yes. Tyler, this is Bill. Just jumping back to the competition, I mean, we do have obviously competitors out there. But as we've said, I mean in this kind of market where customers are generally looking at smaller orders, faster delivery time and needing more value-added processing.

That really fits our model well, so, it kind of plays right to our hand in this kind of environment..

Thanks again..

Thanks, Tyler..

Thanks, Tyler..

Ladies and gentlemen, we have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Jim Hoffman, President and CEO for concluding remarks..

Thanks, again to all of you on the call for your time and attention today. Before I conclude, I'd like to remind you all that in November we plan to present at the Goldman Sachs Metals and Mining Conference and the Citi Basic Materials Conference which will be held virtually and webcast live over the Internet.

Thanks, again for your continued support and commitment to Reliance and stay healthy..

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation..