Reliance Steel & Aluminum Co. Reports First Quarter 2016 Financial Results

• Sales were $2.16 billion, down 17.3% from $2.61 billion in the first quarter of 2015 and up 6.7% from $2.03 billion in the fourth quarter of 2015.
• Tons sold were down 2.7% from the first quarter of 2015 and up 8.9% from the fourth quarter of 2015, with the average selling price per ton sold down 15.6% from the first quarter of 2015 and down 2.4% from the fourth quarter of 2015.
• Net income attributable to Reliance was $92.2 million, down 9.0% from $101.3 million in the first quarter of 2015 and up 34.4% from $68.6 million in the fourth quarter of 2015.
• Earnings per diluted share were $1.27, down 2.3% from $1.30 in the first quarter of 2015 and up 35.1% from $0.94 in the fourth quarter of 2015.
• Non-GAAP earnings per diluted share were $1.03, down 20.8% from $1.30 in the first quarter of 2015 and up 18.4% from $0.87 in the fourth quarter of 2015.
• Reliance did not record a pre-tax LIFO inventory valuation adjustment in the first quarter, as compared to the first quarter of 2015 where a pre-tax LIFO credit, or income, of $7.5 million, was included in cost of sales, and the fourth quarter of 2015, where a pre-tax LIFO credit, or income, of $42.0 million, was included in cost of sales.
• The effective tax rate was 14.4%, compared to 31.7% in the first quarter of 2015 and 27.1% in the fourth quarter of 2015.  
• Cash flow from operations was $155.4 million in the first quarter of 2016 and net debt-to-total capital was 33.4% at March 31, 2016.
• A quarterly cash dividend of $0.40 per share was declared on April 19, 2016 for stockholders of record as of May 27, 2016 and will be payable on June 17, 2016.

Management Commentary

"We were pleased to see that our positive momentum demonstrated throughout 2015 continued into the first quarter of 2016," said Gregg Mollins, President and Chief Executive Officer of Reliance. "Once again, strong operational execution by our managers in the field contributed to an improved FIFO gross profit margin of 29.4%, marking our fifth consecutive quarter of FIFO gross profit margin expansion. We are very proud of this achievement, particularly considering the challenging metals pricing environment over the past year, coupled with uncertain macroeconomic conditions that have constrained general economic growth. Our strong gross profit margin contributed significantly to our net income which also benefitted from a low tax rate due to the favorable resolution of a tax examination during the first quarter of 2016."

Mr. Mollins continued, "Importantly, for the first time in well over a year, we've begun to experience rising metals pricing for all carbon steel products as well as stainless steel flat-rolled products. We believe this pricing improvement, which accelerated toward the end of the first quarter, is mainly a result of both the recent trade case filings by U.S. steel producers and increasing scrap costs, which contributed to our expanded gross profit margins in the first quarter of 2016. We expect a more meaningful impact on our average selling price per ton sold in the second quarter as the more recent price increases work their way through the market. With respect to customer demand, we experienced a sequential increase in tons sold of 8.9%, once again outperforming the MSCI industry average increase in tons sold of 6.2% for the first quarter of 2016 compared to the fourth quarter of 2015, reflecting Reliance's expanding market share."

Mr. Mollins concluded, "We continue to support our growth through both strategic M&A opportunities, with two acquisitions completed so far in 2016, as well as through organic initiatives by continuing to invest in our existing businesses. Our balance sheet remains strong and has enabled us to return capital to our shareholders through quarterly cash dividends which we have paid consistently now for 57 years. In 2016, we will continue our focus on maximizing our gross profit margin to take advantage of the more favorable pricing environment while also diligently managing operating expenses and inventory levels to drive earnings improvement and cash flow."

End-market Commentary

During the first quarter of 2016, Reliance experienced an increase in demand due to both the normal seasonal increase in shipping volumes compared to the fourth quarter of 2015 and additional volume from the Company's acquisition of Tubular Steel, Inc. on January 1, 2016. The Company expects underlying demand to increase slightly in the second quarter of 2016 as compared to the first quarter of 2016.

• Automotive demand, supported mainly by the Company's toll processing operations in the U.S. and Mexico, remains strong and is expected to continue at current production rates. Reliance has increased its toll processing volume through investments in this business primarily to support incremental processing from the increased usage of aluminum by the automotive industry.
• Aerospace demand was strong in the first quarter of 2016 and is expected to continue at similar levels throughout the year given ongoing healthy "build" rates and a robust backlog. Reliance maintains its positive outlook in this end-market and expects it will continue to grow its market share in aerospace given the various investments and key acquisitions it has made in this space.
• Heavy industry demand remained consistent at low levels. Reliance expects demand in heavy industry, specifically in road equipment, to increase throughout the year as a result of the five year infrastructure bill that was passed in December 2015.
• Non-residential construction demand continues to gradually improve, but remains well below peak levels experienced in 2006 and 2007. Reliance believes that this important end-market will sustain measured, positive growth in the coming quarters and is well positioned to absorb increased demand in this area.
• Energy (oil and gas) demand for the products Reliance sells declined further in the first quarter of 2016 as a result of continued low oil prices and the related reduction in drilling activity. Reliance expects oil prices and related drilling activity levels to remain under pressure for the foreseeable future. 

Balance Sheet & Liquidity

The Company generated cash flow from operations of $155.4 million in the first quarter of 2016, compared to $171.4 million in the first quarter of 2015. Total debt outstanding was $2.13 billion at March 31, 2016, an increase of $205.4 million from December 31, 2015, as the Company funded its purchase of Tubular Steel, Inc. during the quarter with borrowings on its revolving credit facility. As a result, the Company's net debt-to-total capital ratio was 33.4%, compared to 31.8% at December 31, 2015. The Company had $887.1 million available for borrowings on its $1.5 billion revolving credit facility at March 31, 2016.    

"We remain pleased with our overall financial position as we continue to consistently generate cash flow through strong gross profit margins and effective working capital management throughout all market cycles," commented Karla Lewis, Senior Executive Vice President and Chief Financial Officer of Reliance. "Further, our healthy liquidity position afforded us the flexibility and resources to continue investing in the growth of our business, both organically and through M&A opportunities. We funded two acquisitions this year with borrowings on our credit facility and used our cash from operations to fund $34.4 million of capital expenditures as well as to pay $29.0 million of dividends to our valued stockholders in the first quarter of 2016." 

Corporate Developments

On April 19, 2016, the Board of Directors declared a quarterly cash dividend of $0.40 per share of common stock, payable on June 17, 2016 to stockholders of record as of May 27, 2016. The Company has paid regular quarterly dividends for 57 consecutive years and has increased the dividend 22 times since its 1994 IPO.

During the three months ended March 31, 2016, the Company did not repurchase any shares of its common stock under its existing share repurchase program. At March 31, 2016, approximately 8.4 million shares remained available for repurchase under the share repurchase program. The Company expects to opportunistically repurchase shares of its common stock going forward.

As previously announced, Reliance acquired all of the capital stock of Tubular Steel, Inc. ("TSI"), a distributor and processor of carbon, alloy and stainless steel pipe, tubing and bar products on January 1, 2016. Headquartered in St. Louis, Missouri and founded in 1953, TSI stocks and ships custom-cut lengths of pipe, tubing and bar products from its seven service center locations across the United States. TSI also has a fabrication business located in the St. Louis area that supports its diverse customer base. TSI's net sales were approximately $150 million for the twelve months ended December 31, 2015.

Effective April 1, 2016, Reliance acquired all of the capital stock of Best Manufacturing, Inc., a custom sheet metal fabricator of steel and aluminum products on both a direct and toll basis. Best Manufacturing is headquartered in Jonesboro, Arkansas and has been serving its core customer markets since 1990, including trucking, agriculture and energy. The Company provides various precision fabrication services including laser cutting, shearing, CNC punching, CNC forming and rolling, as well as welding, assembly, painting, inventory management and engineering expertise. Best Manufacturing's net sales were approximately $20 million for the twelve months ended December 31, 2015.

James D. Hoffman was promoted to the position of Executive Vice President and Chief Operating Officer from Executive Vice President, Operations on February 29, 2016. Mr. Hoffman's responsibilities have been expanded to include all of Reliance's operating businesses. 

Business Outlook

Reliance management is optimistic about metal pricing in the second quarter of 2016 given recent mill price increases and is confident in the Company's ability to execute well in this environment. Management also expects continued slow growth of the U.S. economy. As a result, Reliance management estimates tons sold to be flat to up 2% in the second quarter of 2016 compared to the first quarter of 2016. Reliance management also expects its average selling price in the second quarter of 2016 will be up approximately 3% to 5% from the first quarter of 2016. As a result, management currently expects Non-GAAP earnings per diluted share to be in the range of $1.15 to $1.25 for the quarter ending June 30, 2016.

Conference Call Details

A conference call and simultaneous webcast to discuss the first quarter 2016 financial results and business outlook will be held today, April 21, 2016 at 11:00 a.m. Eastern Time / 8:00 a.m. Pacific Time. To listen to the live call by telephone, please dial (877) 407-0789 (U.S. and Canada) or (201) 689-8562 (International) approximately 10 minutes prior to the start time and use conference ID: 13633373. The call will also be broadcast live over the Internet hosted on the Investors section of the Company's website at investor.rsac.com.

For those unable to participate during the live broadcast, a replay of the call will also be available beginning that same day at 2:00 p.m. Eastern Time until 11:59 p.m. Eastern Time on Thursday, May 5, 2016 by dialing (877) 870-5176 and entering the conference ID: 13633373. The webcast will remain posted on the Investors section of Reliance's web site at investor.rsac.com for 90 days.

About Reliance Steel & Aluminum Co.

Reliance Steel & Aluminum Co., headquartered in Los Angeles, California, is the largest metals service center company in North America. Through a network of more than 300 locations in 39 states and twelve countries outside of the United States, the Company provides value-added metals processing services and distributes a full line of over 100,000 metal products to more than 125,000 customers in a broad range of industries. Reliance focuses on small orders with quick turnaround and increasing levels of value-added processing. In 2015, Reliance's average order size was $1,660, approximately 47% of orders included value-added processing and approximately 40% of orders were delivered within 24 hours.