Greetings, ladies and gentlemen, and welcome to the Reliance Steel and Aluminum Company's Second 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. Is now my pleasure to introduce your host, Ms. 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 Q2 2020 financial results. I'm joined by Jim Hoffman, our President and CEO and Carlo 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 impacts of the COVID-nineteen pandemic and related economic conditions on our future operations, which may not be under the company's control, which may cause 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 ks for the year ended December 31, 2019, and as updated in the company's quarterly report on Form 10 Q for the quarter ended March 31, 2020, under the caption Risk Factors, disclosure in our press release this morning and other reports filed 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.
Thanks, Brenda. Good morning, everyone, and thank you all for joining us today to discuss our Q2 2020 financial results. 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 0.5% compared to the Q1 of 2020. We maintained a strong gross profit margin of 30.4% on net sales of $2,020,000,000 which combined with reduced operating expenses resulted in pre tax income of $102,000,000 and earnings per diluted share of 1.24 dollars We adjusted our working capital in response to reduced activity levels and generated cash flow from operations of $475,700,000 At the outset, I'd like to sincerely thank each and every one of my Reliance colleagues for their flexibility and hard work in a truly extraordinary environment.
We are the best at what we do because of you, and your effort in this quarter proves it. Our managers in the field did an exceptional job navigating a highly volatile quarter, while remaining focused on employee health and safety, including implementing enhanced practices to mitigate COVID-nineteen. We remain dedicated to keeping our employees, customers, suppliers and communities safe, while providing exceptional customer service across our diversified customer base. The combined efforts of all of our employees, including adherence to our new health and safety protocols by our frontline employees resulted in improved safety performance during the quarter and allowed us to continue supporting our valued customers through these extraordinary comps. I'd also like to highlight the strength of our gross profit margin during the quarter, which once again exceeded our estimated sustainable range of 28% to 30%.
Our strong gross profit margin is a direct result of the exceptional execution of our managers in the field. Our local managers continue to leverage the significant investments we've 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. Now, let's turn to a more detailed discussion of our 2nd quarter performance drivers. As mentioned, our shipments decreased 17.5% compared to the Q1 of 2020 due to decreased demand in nearly all of our end markets as a result of customer shutdowns and project delays attributable to COVID-nineteen. Metal pricing was also better than we anticipate, with our average selling price per ton sold down only 3.5% compared to the Q1 of 2020, driven by declines in pricing across the majority of the commodities we sell.
We reacted quickly to rapidly changing business conditions and reduced our 2nd quarter SG and A expenses by 16.1% compared to the Q1 of 2020. Consistent with our resilient model and actions taken in prior downturns, we reduced expenses by addressing variable costs that fluctuate with shipment levels. As about 65% of our SG and A expenses are people related, We reduced our workforce through temporary layoffs and permanent reductions in force, impacting a total of approximately 2,100 employees by mid July. The majority of these actions were implemented in late March early April in immediate response to significant declines in demand. Fortunately, we have now recalled recalled approximately 900 or over 40 percent of our impacted employees as certain of our businesses have recovered, most notably our toll processing operations servicing the auto industry.
Our decentralized structure allows us to react quickly to market conditions on a local location by location basis. As we move through the Q2, our daily shipment levels began to stabilize at levels which were down about 16% from the Q1 of 2020. If we see further changes in shipment activities, we will take additional action to right size our workforce. In regard to the market conditions in our key end markets, demand in non residential construction, our largest end market, softened during the Q2 as shelter in place orders resulted in the deferral of numerous projects. However, as restrictions began to lift across the country in May, we experienced an increase in activity as customers focused on completing projects that had previously been put on hold.
Quoting activity remains strong for projects related to schools, data centers and warehouse distribution. We have also seen an increase in certain infrastructure projects such as bridges. As such, we remain cautiously optimistic that demand for non residential construction activity will continue to improve in the second half of twenty twenty based on healthy backlog and positive customer sentiment. Demand for the toll processing services we provide the automotive market fell sharply in the Q2 following the mid March closure of many automotive OEMs and steel and aluminum mills due to COVID-nineteen. This resulted in significantly reduced processing volumes at our toll processing operations in both the U.
S. And Mexico. We responded with significant reductions to our workforce at our toll processing operations of almost 50% by the end of the Q1. As automotive OEMs began to reopen and ramp up production in early June, we were very pleased to quickly bring back many of our highly skilled employees back to work. As of today, the majority of our furloughed employees servicing automotive end markets have returned to work on improved activity levels.
Importantly, our toll processing operations support many light truck and SUV programs that are experiencing a strong recovery. We continue to focus on growth and innovation in toll processing, including expansion of our toll processing operations to support increased future demand. Demand in heavy industry, both agriculture and construction equipment, also declined in the Q2 as a result of reduced production schedules and customer shutdowns related to COVID-nineteen. Based on positive feedback from our diverse range of industrial customers, we are cautiously optimistic our businesses servicing the broad industrial market should begin to recover from current levels in the second half of twenty twenty. The semiconductor market remained a bright spot in the 2nd quarter as demand continued to improve steadily compared to the Q1 of 2020.
Our outlook remains positive for both the OEM and project based portions of this market across the various geographies that we serve. Turning to aerospace. Demand in the defense market remained fairly stable at solid levels. However, commercial aerospace demand declined considerably as a direct result of the reduced travel due to COVID-nineteen. In response to reduced commercial airplane build rates, we made significant workforce reductions and closed 2 of our smaller international locations supporting the commercial aerospace market.
We anticipate commercial aerospace demand to soften further in the 3rd quarter, and we will take additional cost reduction actions if and when necessary to ensure the continued long term profitability of these businesses. Our long term outlook for commercial aerospace remains uncertain at this time. Finally, demand in energy, which is mainly oil and natural gas, remains under significant pressure for the 2nd quarter, marking the lowest level of activity we've seen in this market in the past 25 years. In response to these conditions, we've continued to take proactive cost reduction measures, including additional headcount reductions and the closure of 3 of our energy focused businesses in the Q1 of 2020. As a result of these actions, we believe our remaining businesses servicing the energy sector are well positioned to support our future recovery in energy.
Although our outlook for nearly all of our end markets remains challenging and uncertain, we believe our resilient business model and diverse end markets, products and geographies, along with our decentralized operating structure, will continue to serve us well through the recovery that will follow these extraordinary times. We believe customers realize the increased value in Reliance's model during challenging markets as they confidently rely on us to do more for them, often in smaller sizes or on more frequent basis. Turning to capital allocation. Even in this current environment, our long term strategy of appropriately balancing growth and stockholder return priorities has not changed. Since we sell into cyclical markets impacted by pricing and demand volatility, we believe it is critically important to maintain a flexible and opportunistic capital allocation strategy.
Our operations continue to generate cash as a result of our countercyclical cash flow characteristics of our business model. We also continue to right size our inventory to reflect current demand levels through reduced buying activity as well as cross selling inventory within our expansive Reliance network of service centers. Our current 2020 capital expenditure budget of $190,000,000 will be utilized to fund essential needs and certain strategic projects to support our customers through the addition of innovative equipment and advanced technologies to expand and strengthen our value added processing capabilities and to maintain our facilities and equipment to meet our stringent quality and safety standards. As for M and A, we have seen an increase in the number of potential acquisition opportunities in the market compared to the Q1. Though we remain selective and highly disciplined in our approach, we continue to look for targets that meet our strict criteria of profitability, high quality businesses, strong management teams and superior customer service.
Acquisitions must also complement our product and end market diversification strategy and be immediately accretive to our earnings. We are pleased to continue delivering value to our stockholders through the payment of regular quarterly dividends as we have done for 61 consecutive years. We've increased our dividend 27 times since our 1994 IPO, including the most recent increase of 13.6% in the Q1 of 2020. We have never suspended or reduced our quarterly dividend. Although we did not repurchase any shares in the Q2, we did repurchase $300,000,000 of our common stock in the Q1 of 2020.
In summary, I would once again like to thank each and every one of my colleagues in the Reliance family of companies for their perseverance, hard work and flexibility as well as their steadfast commitment to health and safety. It is this dedication to health and safety, combined with the solid execution of our tried and true model of focusing on higher margin business and value added processing that empowers us to operate our business profitably through these unprecedented times. Our solid second quarter results demonstrate the strength and resiliency of our business model and our ability to successfully operate in all environments. In the Q2, our decentralized model provided us with the flexibility to immediately reduce and subsequently ramp up individual operations quickly in response to the rapid changes in demand trends and to restructure profitability. This flexibility, coupled with our strong balance sheet and cash flow, enables us to remain profitable despite extraordinary market challenges, preserved jobs for the significant majority of our employees and provide enhanced solutions to support our customers' changing and growing needs.
Thank you for your time and attention today. I will now turn the call over to Carla to review our Q2 2020 financial results in more detail. Carla?
Thanks, Jim, and good morning, everyone. Net sales of $2,020,000,000 for the Q2 of 2020 decreased 30% from the Q2 of 2019 with our tons sold down 19.6% and our average selling price down 11.7%. Compared to the Q1 of 2020, net sales decreased 21.5 percent with our tons sold down 17.5% and our average selling price per ton sold down 3.5%. I'll now give a bit more color on our shipment trends during the quarter. Our tons sold for our service center businesses, which excludes our toll processing operations, experienced a slight decrease near the end of March.
However, in April, our tons shipped declined more significantly, down 20% compared to our January February average tons shipped per day due to business closures across the country. We saw a slight improvement in May as businesses began to reopen. June daily shipments were consistent with May at levels approximately 16% lower than January February shipment levels. Our toll processing operations followed a slightly different path as approximately 60% of our tolling volume is processed for the automotive market. Our tolling tons per day declined 15% in March compared to January February and fell a further 52% in April before bottoming in May at 62% below January February levels.
Our tolling tons per day in June recovered to about 66% of our January February levels and have continued to improve in July. Our gross profit margin for the Q2 of 2020 was strong at 30.4% and included $5,000,000 of LIFO income. On a non GAAP FIFO basis, which is the best measure of our day to day operations, our gross profit margin of 30.2% increased 140 basis points from 28.8% in the Q2 of 2019. This is a direct result of the outstanding performance by our managers in the field who despite the challenging circumstances continued to maintain pricing discipline by focusing on higher margin orders. Importantly, our gross profit margin improved despite the significant reduction in our tolling volumes I just discussed.
Our toll processing businesses generally operate at higher gross profit margins than our service center businesses, so increasing our gross profit margin despite significantly reduced tolling volumes truly highlights the strength of our gross profit margin and business model. We reported LIFO income of $5,000,000 in the Q2 of 2020 compared to LIFO income of $22,500,000 in the Q2 of 2019 $20,000,000 in the Q1 of 2020. Because overall metal pricing levels held up better than we had anticipated in the Q2 of 2020, we have revised our estimated annual LIFO income to $50,000,000 from our prior estimate of $80,000,000 As a result, we currently expect to record $12,500,000 of LIFO income in the Q3 of 2020. At June 30, our LIFO reserve was $112,600,000 Our 2nd quarter same store non GAAP SG and A expenses decreased 102 $600,000 or 19.3 percent compared to the Q2 of 2019. While certain variable expenses such as plant supplies and freight costs declined as a direct result of our 19.7% reduction in shipments, our most significant reduction was in our average headcount, which was down 16.4% in the 2022nd quarter compared to the 2019 Q2.
Our performance based compensation structure also contributed meaningfully to lower expenses in the 2nd quarter. As Jim noted, we closed 2 of our smaller international locations related to commercial aerospace along with certain other minor restructuring activities, which resulted in an impairment restructuring charge of approximately $5,600,000 in the Q2 of 2020. We also recorded $4,800,000 in non recurring settlement charges related to the termination of multiple small frozen defined benefit plans. We remain solidly profitable in the Q2 of 2020 with non GAAP pre tax income of $112,400,000 and a pre tax margin of 5.6%, which was well above our expectations heading into the quarter given the significant uncertainty regarding the potential impact of the COVID-nineteen pandemic. Our effective income tax rate for the 2nd quarter was 20.9%, down from both 25.0 percent in the Q2 of 2019 and 24.3% in the Q1 of 2020.
Our reduced income levels attributable to the impacts of COVID-nineteen drove our lower tax rate. At this time, we estimate our effective tax rate for the full year of 2020 will be approximately 22.4%. Non GAAP net income attributable to Reliance for the Q2 of 2020 was $88,000,000 resulting in non GAAP earnings per diluted share of $1.36 Our GAAP earnings per diluted share were $1.24 in the Q2 of 2020, down from $2.69 in the Q2 of 2019, mainly due to lower pricing and demand levels. Turning to our balance sheet and cash flow, we generated strong cash flow from operations of $475,700,000 during the Q2 of 2020 due to our continued profitable operations and effective working capital management that generates countercyclical cash flow. In the 2nd quarter, our day sales outstanding increased by only one day to 43 days as cash collections exceeded our expectations amidst the COVID-nineteen pandemic.
However, reduced sales activity lowered our accounts receivable balance, providing cash flow from operations of $136,000,000 Further, our focus on rightsizing our inventory to match reduced shipping activity produced $150,500,000 of cash flow from operations. We appreciate the flexibility of our key supplier partners as we work together through this difficult and rapidly changing business environment. At June 30, 2020, our total debt outstanding was $1,500,000,000 resulting in a net debt to total capital ratio of 20.4% compared to 25.4% in the Q1 of 2020. Our net debt to EBITDA multiple was 1.3 times. Our leverage ratios support our investment grade credit rating and are well within our debt covenant requirement.
As of the end of the second quarter, we had $1,160,000,000 available on our $1,500,000,000 revolving credit facility. We believe we have ample liquidity to continue operating through this challenging environment and remain confident that we could raise additional capital in the credit markets if needed. As Jim explained, despite significant uncertainty in the market, we remain committed to making investments that support the long term growth and sustainability of our company as well as continuing to provide returns to our stockholders. Our 2020 capital expenditure budget of $190,000,000 includes strategic investments to support our customers' needs and drive organic growth. And we continue to pay our regular quarterly dividend and we'll execute on acquisitions and share repurchases if and when we believe attractive opportunities exist.
Turning to our outlook, given the continued macroeconomic uncertainty stemming from the COVID-nineteen pandemic, we will not be providing specific earnings per share guidance for the Q3 of 2020 at this time. We would, however, like to share our thoughts on key trends based on our current expectations and market conditions as of today. We expect overall demand in the Q3 of 2020 to improve slightly compared to the Q2 of 2020. We are cautiously optimistic that demand in the non residential construction market will improve. However, we anticipate this will be offset by continued decline in demand for our aerospace and energy related end markets, specifically oil and gas.
We also anticipate a further offset in shipping volume due to normal seasonal customer shutdowns and vacation schedules typical in the Q3, although we expect the rate of decline to be less than in prior years due to lower than typical shipment levels in the 2nd quarter. As a result, we estimate that tons sold will be flat to up 2% in the Q3 of 2020. In addition, we expect our tolling volume to increase meaningfully from the 2nd quarter to support current automotive production rates. This improvement is not reflected in our outlook for tons sold as tolling tons are not included in this metric. We expect metal pricing in the 3rd quarter will remain generally consistent with current levels.
Given the resiliency of the Reliance business model demonstrated in the Q2 of 2020 and the execution by our managers in the field, we anticipate that our gross profit margin will remain near the high end of our estimated sustainable range of 28% to 30%. While we remain subject to ongoing impacts of COVID-nineteen, we will continue to execute our business model and remain focused on managing those elements of our business that are within our control. In closing, we were very pleased with our 2nd quarter results amid the COVID-nineteen pandemic, which resulted in significant reductions in demand and an overall softer pricing environment. Excellent execution by our managers in the field who continue to focus on higher margin business and effective working capital management resulted in yet another quarter of solid profitability and cash flow, enabling us to support our growth and stockholder return priorities. I echo Jim's gratitude to all of our employees in the Reliance family of companies for their ongoing commitment to health, safety and operational excellence, which we believe is the key to the successful execution of our modeling.
Extraordinary environment in the Q2 highlighted the strength and resiliency of not only our model, but also our people. We look forward to improved conditions in the quarters ahead as we work with our employees, customers, suppliers and communities to mitigate the impact of COVID-nineteen. 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?
Thank Our first question comes from the line of Seth Rosenfeld with Exane BNP Paribas. Please proceed with your question.
Hi. Thank you very much for taking the questions today and congrats on a very strong performance in Q2. If I may, I have a couple of questions with regards to the volume outlook both with regards to market share and also how you view inventories across the space. With regards to market share, can you comment to what extent do you think the Reliance business model actually allowed you to take some market share during the recent months of market volatility? And if looking forward, do you view those as being sustainable or more of a temporary factor with your competitors or perhaps temporarily kind of knocked out of the market?
And then secondly, with regards to the inventory outlook, I believe you could comment in your prepared remarks ongoing efforts to right size inventories. Can you just comment a little bit about where you view your own internal inventory levels? Are they at a level that makes you comfortable versus today's demand environment? Or do you view inventories as being either a bit too low if demand is recovering or perhaps a bit bloated if you view a more gradual recovery through the course of H2? Thank you very
much. Sure. Thanks, Seth. First on market share, we're not a we really don't focus on market share. Now Carla is going to give you some numbers that we have that we get basically from the MSCI.
We focus on the bottom line. We care about our employees. We care about the shareholder return and our execution. The market share kind of comes along with that. Now Carla, you can you've got some numbers in front of you to tell you how we're doing against the MSCI.
Yes, I mean, Seth, if you look at the Reliance, our Q2 tons sold compared to Q1, we fell 17.5% and the MSCI industry shipment was 17.5% and the MSCI industry shipments fell 26.5%. As you're aware and as we mentioned in our comments, our tolling tons, which a lot of that goes into automotive are not included in those in our numbers. But we do believe the MSCI shipments are pretty heavily weighted towards carbon flat rolled, which was we believe more impacted during the quarter on their shipments and hours. With that being said though, we also believe from feedback from the field that we did pick up some business. In challenging times, we typically see service center customers who want smaller order quantities.
They want them delivered more frequently. Maybe they're concerned about their own credit. They want financially stable suppliers supporting them. So, we do believe we did pick up some orders during this type of environment and we're hopeful that the great service our people provide them will keep those customers coming back to us.
And on the inventory side, side, that's always been a key driver, part of our model. Last year, I said I'm sure that we I don't think we did a great job on our inventory. So, we got a nice head start on getting our inventory in line in the Q4 3rd Q4 last year. So, we were well positioned going into this unusual situation we find ourselves. But since then, I'm proud of where we are.
Actually, our turns are actually better than they were last year. The folks in the field, they get it. They understand cash is king. We really focus on several things, but that's one of them. Now, where we stand right now, we think we're well positioned because in my estimation, to get America up and going again, they're going to need reliance.
And we need to be there for them. And our relationships with our domestic suppliers are great. Lead times are very manageable. And overall, I'm glad we're where we are with our inventory. Now, if there's any reliance folks listening in on the call, I always say we have too much inventory, but we will we know where to spend our money.
So, that's we're okay with where we are with our inventory.
Thank you. And if I can just ask one follow-up with regards to that. You commented that obviously you were at a disappointing level of inventory management in 20 19 that must have improved your cash performance subsequently as you brought that down to a manageable level. How does that tie into your expectation for working capital as we look into the second half of the year? Would you expect the recent strong cash performance with working capital to continue on a structural basis?
Or if demand is beginning to recover, you might see some need for actually some rebuilding of working capital in the latter two quarters?
Yes, Seth, it's Carla. As we said, and last year, we had record cash flow for the 2019 year with the strong earnings we had. And then also, as Jim mentioned, our efforts to right size our inventory 2019, which we felt were successful. We continue that, especially reacting to the fall off in shipments with COVID-nineteen. We're in good shape, but we are still focused on our inventory.
Certain of our businesses where our outlook is not as strong, we are continuing to focus to work those down. So, we would expect some inventory release from, for instance, aerospace and other parts of our business. To the extent non res, we think will be more favorable. We may need to we're okay right now with inventory position is. If demand comes back better than we're currently estimating, we may have to rebuild some working capital and we would love to have to do that because that would be very positive for all of us.
But we do typically the second half of the year is a little lighter. We don't expect the same level of cash from operations that we had in the second quarter. But at this time, we would expect to still generate cash with a little working capital release going into the second half with normal seasonal trends.
That's perfect. Thank you.
Thank you. It appears there are no further questions at this time. I would like to turn the floor back to Jim Hoffman.
Thanks very much.
We actually do have a question from Tyler Kenyon with Cowen and Company. Please proceed with your question.
Hey, good morning, Jim and Carlo and Bill, if you're on.
Hey, Kevin. Hello.
Congratulations on the Q2. Just wanted to ask maybe if you could give us a sense for how your volumes have trended into July on a daily basis versus January February levels? And maybe if you could kind of speak to the degree of upside maybe you're experiencing in your toll processing volumes?
Yes. As far as how we're doing now, it's kind of where we expected. It's like we said in our script and earnings release, this is slowly. We saw a sharp downturn, then May started ramping back up. We were able to manage our way through that, finished the quarter fairly strong compared to the 1st part of the quarter.
And going into where we are right now, we're kind of operating around those same around that same level.
Yes. I think Tyler, we're pretty early into July. For the 1st 2 weeks on a daily basis, we have seen tons shipped per day come down a bit. However, the 1st couple of weeks of July typically do that because of the July 4th holiday. It was on a Saturday this year.
So we don't really think that what we've seen there is a good indication for the full month or the quarter yet. But we think generally hanging in with the normal holiday impact that we have is what we've seen so far. And on tolling, Bill can hit that.
Hey, Tyler, it's Bill. As Carlo mentioned earlier, we've seen a rebound on the tolling side. June was up about 66% compared to January February. And then, based on the ramp up, we think we'll see that continue to improve in July.
Yes. And actually the so in June, we processed about 66% of what our processing levels were in January February. So, we were down about 34% from this level. So, we were ramp remember, we were the ramp started in June. So that was for the whole month of June.
So we were at a higher level than the 66% coming into July.
And that should continue in July from
what we're hearing from our customers. And Tali, as you all know, sometimes people think our toll processing is only the automotive industry. It's also appliance as well.
Right. Okay, very helpful. Thank you. And then I was curious if there's been a considerable change just in your value added processing mix in the second quarter, say versus the Q1? And maybe how would you expect that trend moving into the 3rd quarter, given your outlook for various end markets in terms of the trajectory?
Yes. We're not ready to give you the number yet. We're still working on it. As you know, in the past, we've gone from a kind of a historic 40% of what we sell, up towards over 51%. I expect that to go up.
I can't give you the number right now because they haven't given it to me yet. But with our game plan and our model and what we've been doing over the last several years, it should go up. We've spent a lot of money to do all of these different activities and processes that our customers have asked us to do. We spent our money wisely, timed it very nicely. Obviously, nobody saw this coming, but the history has been after a dramatic downturn and you picked a year, but after that happens, our customers come out of it.
They come out of it quickly and they during when they're in the doldrums, they don't spend money. And they have a hard time getting people to come the right people to be at work and they downsize. And when they come out, they need somebody, they need a Reliance to be there for them. And we've spent our money to do that. We've invested money in the new technology is fascinating to me.
We continue to do that. And that helps us with our SG and A line as well because the equipment we've added, it also allows us to do it more efficiently with less people. So saying all that, I would expect that number to continue to go up. That's the plan anyway.
Great. Okay. And that's actually a good segue to another question I had. Just on SG and A progression moving into the Q3, should that track your expectations in terms of the top line trajectory or volume guidance? Or would you expect a bit more upside given you brought back some of the furloughed workforce in the toll processing side?
And if you're expecting some stronger value added mix?
That's an interesting question. I can tell you this. We run our company day to day, week to week, month to month, always have, always will. The way our SG and A line goes, it has everything to do with the activity. As we said, 65% of our SG and A costs are in people.
We know how to ramp up and ramp down the other way when we need to. And we'll just have to see how it goes. We're anticipating a little some sluggish activity, if you will, in aerospace. We'll continue to monitor that and operate accordingly. When business starts coming back up, we'll ramp up according to that as well.
That's just part of our DNA. That's the way we operate our businesses. And what was the second part of your question? More value add was it I forgot what you asked. Yes.
I think I addressed that. Of course, that's what America needs. It needs reliance to be there to rebuild this thing. And the value added processing that we do will be part of that rebuilding.
And Tyler, I would say we're not anticipating the level of workforce reduction activity in Q3 that we had in Q2 based on our shipment and demand outlook based on where we are today. So there were some extra costs in Q2, some severance carrying benefits, which we extended to some of the employees that were laid off and also to the reductions in force. So we will not have those extra costs in Q3 or at least not to the same extent as in Q2. So that would bring SG and A down a bit. However, with activity levels back up, in particular where you commented on the tolling and the fact that we've brought most of those employees back to work, you will see SG and A increase because of that, but we will also have that more than covered by our gross profit that we generate on the tolling ton.
Got it. Thanks very much.
Thanks, Robert. Thank you.
Thank you. Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.
Hey, good morning. Good morning. Question just generally speaking on the non residential construction market, I know that market is very key to you all. Curious in terms of how you saw the quarter progress versus the low points and also where we are now in terms of what you see. I mean, a lot of mixed things in terms of public staying strong, but perhaps new projects on the private side, people taking a pause due to the issues, obviously, we all know of?
Yes. Phil, you know our company very well. Our sweet spot is in these smaller projects, 3 or 4 stories and below. And what's to answer your question, how it went early on when the COVID hit, it kind of froze the market and froze a lot of projects. We didn't have a lot of cancellations, though.
We had a lot of people just deferring to later dates. Thank goodness that they cranked back up, which is good. We were there for them. And the value added play in that market is a really strong one for us. So that was good.
The hot markets right now, as you I'm sure it's your home too, my wife has no problem spending money online and the Amazon guy shows up at our doors, seems like every day. So those distribution centers that are out there are that's a good market for us. And there's plenty of those out there in the middle of being built and plenty on the books, and we're a strong participant there. As I've talked said in the past, our sweet spot really the demographics help our sweet spot. Assisted living facilities, schools, data centers, those are all strong markets for us and those have been carrying the weight for us.
And I just anticipate that to continue to go. I know that I haven't listened, but I've heard some other
of our
good steel partners out there have reported that they're doing well in the non resin, and we can we'll follow that, which is good for us. And also there's some as we mentioned, there's some infrastructure type spend that we put in that nonresidential, for instance, bridges and what have you. And again, I've said in the past, good old fashioned real infrastructure spend bill would be a good thing for the country and a really good thing for Reliance. So we're cautiously optimistic about our the trends
there. Thanks. And Bill, on the semi side, what's the vibes out there? I know it's been good and but it also can be very erratic for your own historical observations.
Yes. It can start and stop quickly. But as we mentioned, it's been a bright spot for
us. And
we the outlook for the balance of the year is still very positive. So we think that market is going to continue to be a good one
for us. Bill, I know you all mentioned that you took a couple of facilities out in what it sounded like Europe for the aerospace side. How are you all, I guess, planning for the next year or 2 or 3 based on what the indications you're getting from the mills and the OEMs at this point?
Yes. Well, as Jim said earlier, we kind of run our business day to day, week to week, month to month. But that whole aerospace, particularly commercial aerospace is a very fluid situation. Our guys have done a great job of looking at where the demand level is, where we think it's going to be and really attacking both the expense side and inventory. But it's going to be a challenge.
We know it's going to be a challenge for the balance of the year and in probably the next year. And we're really just trying to stay abreast of where the market is headed, where the demand is going to be and make those adjustments
as we need to.
The other part of that is the bright spot in our aerospace business is the military and defense side. And so that we continue to see strength there and we think the second half there we're going to continue to see strength. So that's the good news. So that will partially offset some of what we're going to see from a negative standpoint on the commercial aerospace side.
Just sticking to that, just Jim out of curiosity, what's been the company policy in terms of business travel given everything that's been going on now?
Yes. We had 0 business travel for, oh, gosh, I think we listed the business travel July 1, and but that's pretty strict. It has to go way up the food chain to get that approved. And whether That's domestic only. Oh, yes.
There's no international travel at all. And then on technology today, we've gotten pretty good at it. So you really don't need that. But when needed, we'll we've approved a couple of trips that actually need somebody to be on-site to help a customer out or to help somebody through a situation. But basically, it's not wide open, I can tell you that.
And as far as the local driving type travel, once again, it's on a as needed basis. We've got a lot of really strict rules and regulations about coming and going in our operations. I'm real proud of the fact that we jumped on that very quickly. We're using technology to help us with that. We're following a lot of CDC rules, but we also have stricter rules to keep our people safe and healthy.
And just in general, we're all very aware of what's going on out there and we'll continue to be extremely diligent when it comes to keeping our folks and our communities as safe as possible.
Thanks. Good job managing through some weird times. Appreciate it.
Thank you. Thank you. We got a good model and good execution out there.
Thank you. I would like to turn the floor back to Jim Hoffman for closing comments.
All right. Hey, thank you very much for your time today and attention. Before I conclude, I'd like to remind you all that on August 5, we plan to present at the Jefferies Industrial Conference, which will be held virtually and will be webcast live over the Internet. Thanks again for your continued support and commitment to Reliance, and I hope you all stay safe and healthy. Thank you.
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.