Reliance Steel (NYSE: RS) reported Q2 EPS of $1.36, $0.96 better than the analyst estimate of $0.40. Revenue for the quarter came in at $2.02 billion versus the consensus estimate of $1.97 billion.

• Strong gross profit margin of 30.4%
• EPS of $1.24, non-GAAP EPS of $1.36
• Generated cash flow from operations of $475.7 million
• Declared quarterly dividend of $0.625 per share

Management Commentary

“The strength and resiliency of our business model produced solid results during an extraordinary and extremely challenging quarter. Because we support many customers deemed essential businesses, our tons sold declined only 17.5% compared to the first quarter of 2020,” said Jim Hoffman, President and Chief Executive Officer of Reliance. “We maintained a strong gross profit margin of 30.4% on net sales of $2.02 billion, which, combined with reduced operating expenses, resulted in pretax income of $102.0 million and earnings per diluted share of $1.24. We adjusted our working capital in response to reduced activity levels and generated cash flow from operations of $475.7 million. We implemented enhanced health and safety practices to keep our employees and their families healthy and safe while continuing to provide exceptional customer service across our diversified customer base, which resulted in improved safety performance during the quarter. We sincerely thank our employees for their hard work and flexibility during these difficult times, especially our front-line Reliance employees.”

Mr. Hoffman continued, “Our ability to maintain a strong gross profit margin is the direct result of exceptional execution by our managers in the field. Our local managers continue to leverage the significant investments we have made in recent years to expand our value-added processing capabilities to focus on higher margin business, and appropriately price the value we provide our customers by delivering the highest quality products and services when needed. We reacted quickly to rapidly changing business conditions and reduced our SG&A expense 16.1% to offset the $553.6 million, or 21.5%, decline in sales compared to the prior quarter. We believe our operating performance in this unprecedented environment demonstrates the strength and resiliency of the Reliance model and our ability to successfully operate through all industry cycles.”

Mr. Hoffman concluded, “Although our outlook for nearly all of our end markets remains challenging and uncertain, we believe our diversification of end markets, products and geographies as well as our decentralized operating structure will continue to serve us well through the recovery that will follow these extraordinary times. In the second quarter, our decentralized model provided us the flexibility to ramp up individual operations quickly as demand trends improved and to restructure other businesses that were more severely impacted to ensure long-term profitability. This flexibility, coupled with our strong balance sheet and cash flow, enables us to remain profitable despite extraordinary market challenges, preserve jobs for the significant majority of our employees and provide enhanced solutions to our customers’ changing and growing needs.”

End Market Commentary

Reliance services diverse end markets and provides a wide range of products and processing services, generally in small quantities on a when-needed basis. During the second quarter of 2020, the Company experienced decreased demand in nearly all of the end markets it serves due to customer shut-downs and project delays attributable to COVID-19. As a result, Reliance’s shipments declined 17.5% compared to the first quarter of 2020.

Demand in non-residential construction, Reliance’s largest end market, softened during the second quarter as shelter-in-place orders resulted in the deferral of numerous projects. However, as restrictions began to lift across the country in May, the Company experienced an increase in activity as customers focused on completing projects that had previously been put on hold. Reliance is cautiously optimistic that demand for non-residential construction activity will continue to improve in the second half of 2020 based on healthy backlogs and positive customer sentiment.

Demand for the toll processing services Reliance provides to the automotive market fell sharply in the second quarter following the mid-March closure of many automotive OEMs and steel and aluminum mills due to COVID-19. This resulted in significantly reduced processing volumes at Reliance’s toll processing operations in both the U.S. and Mexico. Demand increased following the reopening of automotive OEM’s in early June, and the Company was very pleased to recall the majority of its furloughed workforce servicing the automotive market. Reliance continues to focus on growth and innovation in toll processing, including expansion of its toll processing operations to support increased future demand.

While demand in the aerospace defense market remained fairly stable at solid levels during the second quarter of 2020, commercial aerospace demand declined considerably as a direct result of reduced air travel due to COVID-19. In response to reduced commercial airplane build rates, Reliance made significant workforce reductions and closed two of its smaller international locations supporting the commercial aerospace market. As Reliance’s outlook for the commercial aerospace market remains uncertain, the Company will continue to assess the health of its remaining businesses and take appropriate cost reduction actions if and when necessary to ensure the continued long-term profitability of these businesses.

Demand in heavy industry for both agricultural and construction equipment declined in the second quarter due to reduced production schedules and customer shutdowns related to COVID-19. Reliance is cautiously optimistic that demand should begin to recover in the second half of 2020 from current levels based on positive feedback from its diverse range of customers.

Demand in the energy (oil and gas) market remains under significant pressure with the second quarter marking the lowest level of activity the Company has seen in the past 25 years. In response to these conditions, Reliance continues to take proactive cost reduction measures including additional headcount reductions and closing three of its energy focused businesses in 2020. The Company believes its remaining businesses servicing the energy sector are well positioned to support any future recovery in energy.

Semiconductor demand in the second quarter of 2020 continued to improve steadily compared to the first quarter of 2020. Reliance remains cautiously optimistic that demand will remain strong in the second half of 2020.

Business Outlook

Given the continued macroeconomic uncertainty stemming from the COVID-19 pandemic, the Company will not be providing specific earnings per share guidance for the third quarter of 2020 at this time. However, the Company does anticipate the following trends based on current expectations and market conditions as of today, July 23, 2020. Reliance management expects overall demand in the third quarter of 2020 to improve slightly compared to the second quarter of 2020. Managements’ expectations are based on a cautiously optimistic demand outlook in its non-residential construction end market, which will be partially offset by continued declines in demand for its aerospace and energy (oil and gas)-related end markets. The Company also anticipates a further offset in shipping volume due to normal seasonal customer shutdowns and vacation schedules typical in the third quarter; although, the rate of decline is expected to be less than in prior years. As a result, the Company estimates that tons sold will be flat to up 2% in the third quarter of 2020. In addition, Reliance management also expects its tolling volumes to increase meaningfully from second quarter levels to support current automotive production rates. This improvement is not reflected in the Company’s outlook for tons sold as tolling tons are not included in this metric. Further, the Company expects overall metals pricing in the third quarter will remain generally consistent with current levels. Given the resiliency of Reliance’s business model demonstrated in the second quarter of 2020 and the execution of its managers in the field, the Company anticipates that its gross profit margin will remain near the high end of its estimated sustainable range of 28% to 30%. While the magnitude and duration of the COVID-19 pandemic, including its impact on the Company’s operations, supply chain and customers remains fluid, management is continuing to focus on elements within its control as well as monitor the impact of the virus on its operations and financial condition.

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