Release Date: April 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Q & A Highlights
Q: You mentioned the short-term gross margin pressures in the second quarter from some of the higher cost inventory that you'll have to let -- are you expecting or should we expect, assuming that prices generally level out for the product that you sell that FIFO gross margins will begin to improve in the third quarter.
A: Yes. So as has been consistent in our business for decades in the service center business, we have to manage through different pricing fluctuations, and it's part of what we do. Prices deteriorated a little more than we anticipated in the first quarter, but early in the quarter for certain products, there were some price hikes. So just with the normal lag we have to work through as we receive the higher priced material. And if selling prices continue to decline. And so that just takes a little bit for a correction, but we do expect it to be temporary, as you stated.
Q: And then when I look at operating expenses, they were a little bit higher than what we were anticipating. Do you have -- do you have contractual resets or labor renegotiations that you do every January 1? Or is there insurance picking up or something along those lines? Or is it more of this -- more of the same relative to the fourth quarter, where you talked about the fact that you do have some infrastructure in the form of new plants, which are not contributing to revenue quite yet. I'm just trying to understand that.
A: Yes. So we have different timing on kind of wage increases throughout the year. But GM1 is probably about half of our companies probably increased wages at that time. It's a little more broad-based. Our volumes were up, so more expense comes along with increased volume, just packaging supplies, various warehouse expenses, trucking, delivering more. So it was a little broad-based. I don't think there was anything in particular, but your point is right too, Phil, that we commented before. We do have some greenfields and some expansions in process where it does take a little time to ramp up. So the expense load could be a little heavy. So there is a little bit of that.
Q: What were the same-store volumes in 2Q and 3Q of last year? I think you reported them again this quarter. I think it might have gone a couple of quarters where it wasn't reported or perhaps they didn't differ from the reported tons sold.
A: Martin, probably only had one relatively small acquisition last year and so -- and another one [product], they're not sort of story-changing numbers, at least the 2 completed ones that would affect the same-store numbers. I don't have that number handy. But if you go to our public filings, you'll see it.
Q: For the repurchase -- no repurchases in the quarter, was this mostly due because of the acquisition opportunities and any other color you can provide on the acquisition pipeline?
A: Yes. So I think kind of 2 things in there in that question, Martin. So from a repurchase standpoint, we continue to monitor the market and opportunistically repurchase our shares. The fact that we acquired acquisitions, that we did complete some acquisitions in the first quarter didn't impact our repurchase activity. Our balance sheet is strong enough that as we've said for the last couple of years, we're able to execute on all 4 of our capital allocation buckets at the same time. So we just -- we're not in the market for repurchases in Q1, but we will continue to opportunistically repurchase our shares. Again, irrespective of what we have going on, on the acquisition side. We were very happy to welcome Cooksey, American Alloy and Mid-West materials to the Reliance family. So far this year in 2024, we've seen good activity. We continue to see good activity opportunities out there in the acquisition market. So we expect to continue to be active there as well.
Q: I wanted to follow up with the second quarter outlook and kind of ask what drives the low end versus the high end of how you're looking at the guidance?
A: Timna, Yes. I mean, in general, it's kind of with our business model, we think, and we do our best to generally anticipate both volumes and pricing dynamics. And we never know with our broad product mix, our next-day orders. So it's really just that combination of within that range of shipments, within that range of pricing. How much pressure is there on margins. Margin is a big driver, getting down to the EPS line as well as pricing. So we just try to give a little room in there for those different variables.
Q: Yes. My follow-up was based largely on what you're seeing in both the aerospace and defense side. I know you've got kind of a balanced mix within your portfolio. I think we're trying to parse through all the headlines on the commercial aerospace volatility with Boeing, but also trying to recognize the strength in the defense market. So just curious in terms of what your -- what your forward expectations are, what you're seeing? I know you're serving some specific programs as well. So just curious.
A: Yes, Phil, on the aerospace side, our Q1 sales, aerospace represented about 9% of that. About half of that commercial, about half defense and space. On the defense and space side, space is a little smaller, but it's strong and growing. The defense continues to be strong. We're seeing increased demand, whether they're specifically our aerospace business in that 9% where we're participating on several key programs, both the U.S. and internationally, and we see order activity picking up there, but not included in the 9%.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
