Greetings, and welcome to Reliance Steel and Aluminum Company's First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brenda Miyamoto.
Please go ahead.
Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss our Q1 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, 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 COVID-nineteen and related economic conditions on our future operations, 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 ks for the year ended December 31, 2019, 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.
Good morning, everyone, and thank you for joining us to discuss our Q1 2020 results and our response to the COVID-nineteen pandemic. We had a strong start to the year following several financial performance records in 2019. Overall demand levels were healthy through most of the Q1 of 2020. Our strong non GAAP gross profit margin of 31.9% was above our estimated sustainable range of 28% to 30% and produced non GAAP gross profit dollars of $820,500,000 on net sales of $2,570,000,000 and non GAAP pretax income of 200 and $20,600,000 Our non GAAP earnings per diluted share of $2.45 significantly exceeded our Q1 guidance. I will provide additional details on our Q1 performance drivers in a moment.
But first, I would like to address the coronavirus pandemic and how we expect it to impact our business and actions Reliance is taking to address this extraordinary situation. 1st and foremost, our thoughts and prayers go out to everyone around the world fighting this fire, especially those on the front lines helping the people who are directly impacted. Most of our locations continue to operate, albeit at reduced levels as essential businesses under the United States Department of Homeland Security, Cybersecurity and Infrastructure Security Agency, CISA guidance. We continue to work closely with our suppliers and are grateful for their ongoing support and partnership to withstand these challenging circumstances. We are engaged with and listening to our customers and adapting to address and support their needs through this uncertain and difficult time.
We have taken difficult actions, including workforce reduction to right size our operations to sustainable levels that we believe will enable us to emerge from this current crisis intact, prepared and positioned to face new business realities, including the ability to quickly ramp up with our customers and suppliers and to recall laid off employees when the time comes. Importantly, many of our businesses are supporting customers on mission critical projects to aid in the COVID-nineteen response around the country. To name a few, we are pleased to be supplying processed aluminum necessary for ventilator production, metal doors for hospital walls and facilities being converted for patient care and metal for construction of decontamination systems to sanitize N95 masks. We are proud to support these and many other opportunities that improve our service and contribution to the communities in which we live and work. To that end, many of our businesses have been donating personal protective equipment such as masks and safety glasses to support first responders and healthcare providers on the front lines of the fight against COVID-nineteen.
As I have stated time and time again, the health, safety and well-being of our employees is our most important core value at Reliance. As such, we took immediate action to lower the risk to our employees by promoting remote work routines, canceling employee travel and group events and restricting visitors to our facilities. We implemented social distancing and improved sanitation measures in the workforce to comply with heightened safety standards. We provided temporary aid in the form of paid time away from work to support our employees impacted by COVID-nineteen, whether due to exposure to the virus or needed care for their families. We have expanded our employee emergency assistance fund, Reliance Cares, to provide grants to our employees impacted by COVID-nineteen.
I want to take a
minute to thank each and every one of our employees for their unwavering commitment and dedication to health and safety at Reliant and our communities at large. Finally, I would like to reinforce that our operating model is designed to support the company through both good times and bad, as we have demonstrated throughout our 80 year history. Although the current situation unlike anything we have experienced, we believe the resilience of our business model will help us manage through this particularly challenging time just as it has in the past. For instance, during the Great Recession, when our 2,009 shipment fell 32% and our average selling price declined 18.4% from 2,008, we took immediate action, including reducing our workforce by 21% and lowering inventory by over $1,000,000,000 in a 9 month period from September 2008 through June of 2,009. These actions allowed us to remain profitable for the 2,009 year.
While we're doing what we need to do to ensure Reliance stays safe and healthy, we're concurrently focused on maintaining our solid financial position. We have a very strong balance sheet with an investment grade credit rating and $831,500,000 available for borrowing on our $1,500,000,000 revolving credit facility as of March 31. Our business model promotes countercyclical cash flow generation, which we can combine with effective working capital management enhances liquidity. In addition, our highly variable cost structure provides financial flexibility with approximately 65% of our SG and A expense being people related. As I mentioned earlier, we made the difficult decision to reduce our workforce through layoffs and reductions in force.
Since March 4, we have reduced our workforce by approximately 1600 people or 11% of our workforce, including reductions at the 3 energy businesses we have closed permanently. These decisions were made on a location by location basis, which provides us the flexibility to continue to make changes as warranted going forward further, either for with further cuts if business continues to slow by quickly bringing back employees to support stronger demand. Recognizing the unique nature of this downturn, we extended healthcare benefits for a transitionary period to support impacted employees and their families, which is something we have never done in the past. We continue to actively monitor daily and hourly developments of this unprecedented emergency situation, including federal, state and local orders, as well as recommendations of public health authorities. I would like to thank each of my Reliance colleagues for sharing the commitment to promote a healthy and safe workplace by practicing social distancing and heightened sanitation procedures in the workforce and working from home if practical.
Perhaps most importantly, I am grateful to see the consistent application of practical, common sense, good judgment as we all work together to protect each other in these extraordinary and unprecedented times. I'll now shift gears to a more detailed discussion of our Q1 performance drive. Our shipments were generally in line with our expectations supported by a relatively healthy demand environment, while overall metals pricing softened compared to the prior quarter. Despite pricing pressure, our non GAAP FIFO gross profit margin of 31.1% remained at strong levels as a direct result of our management's disciplined approach to pricing and focus on high quality, high margin business. Turning to market conditions in our key end markets.
Demand for non residential construction, the largest end market we serve, remains solid for the majority of the Q1, supported by strength in shipment volumes carbon steel structural and tubing products. While we are beginning to see some second quarter projects being deferred, we are cautiously optimistic that demand trends in the non residential construction market will recover once construction activities picks up after the COVID-nineteen related shelter in place orders are lifted. Demand for the toll processing service we provide to the automotive market started the year off strong, supported by ongoing demand strength for aluminum content in vehicles. However, the sudden closure of many of these automotive OEMs and steel and aluminum mills in mid March due to COVID-nineteen sharply reduced demand, focusing us to drastically cut production at our toll processing operations in both the U. S.
And Mexico. We took decisive immediate action reducing the workforce at our toll processing operations by almost 50% by the end of the first quarter. While the duration of the shutdown remains highly uncertain at this time, we believe we are well positioned to support increased production level as the automotive market recovers due to our proactive investments in facilities and value added processing equipment and the expectations that we will be able to quickly bring back our highly skilled employees. On a more positive note, our toll processing volumes for the canned beverage and appliance end market remained fairly steady throughout the Q1. Aerospace demand was relatively steady during the quarter as we continued to ship against strong backlogs and orders already in progress, with our Q1 of 2020 aerospace tons down only 3.2% compared to the Q1 of 2019 and our average selling price holding relatively flat.
Going forward, we are expecting activity for commercial aerospace to decline beginning in the second quarter as a direct result of COVID-nineteen. We will continue to monitor the evolving situation regarding air traffic and our aerospace businesses supporting these end markets given the uncertain long term impact. Conversely, defense related aerospace demand has remained strong with stable trends continuing into April. Demand in heavy industry for both agriculture and construction equipment was steady throughout January February. However, reductions in spending significantly declined in both of these markets in March April, leaving our outlook highly uncertain at this point in time.
Demand for energy, which is mainly oil and natural gas remains at low levels. Given changes in drilling technology and increased global oil production that led to significantly lower oil prices in the Q1 of 2020, we've made the decision to permanently close 3 of our businesses supporting the energy end market. We also assessed our remaining energy business. Given that our long term outlook for energy market is significantly reduced from prior cycles with an unclear path to recovery, which resulted in impairment charges of those businesses as well as the closed business. As a result, we recognized impairment and restructuring charges of $137,500,000 in the Q1 of 2020, which Carla will elaborate on shortly.
The semiconductor market was a bright spot for the quarter with demand continuing its steady improvement from 2019. While up overall, our semiconductor operations in Asia were negatively impact by COVID-nineteen in the earlier part of the quarter as compared to our North American operation. In the 1st 2.5 weeks of April, our tons sold per day were down 20% compared to the same period in March, excluding our toll processing tons. While our outlook for nearly all of our end markets remains challenging and unclear today, I'd like to highlight that we anticipate that our intentional diversification of end markets, products and geography as well as our decentralized operating model will serve us well through recovery that will follow these difficult and uncertain times. Turning to capital allocation.
Our overall philosophy on this subject has not changed. Even in challenging times like these, we're executing the same strategy through a balanced focus on growth and stockholder returns. Because we sell into cyclical market characterized 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 the countercyclical cash flow generation built into our business model. Even during the Q1, which is typically a period in which our working capital needs are higher.
Further, consistent with our ongoing philosophy, we are continuing to right size our inventory to reflect current demand levels, which helps free up cash during a downturn. Although we remain comfortable with our current liquidity position, we have reduced our 2020 capital expenditure budget from 250,000,000 dollars to $190,000,000 We will deploy cash fund essential needs and certain strategic projects to support our customers through the additional innovative equipment and advanced technology in an effort to further strengthen our value added processing capabilities, we will defer non essential CapEx until we determine that it is prudent to invest in these opportunities. As it relates to M and A, we are not surprised to see a reduction in the number of potential acquisition opportunities in the market given the current environment. Meanwhile, the integration of Fry's Field Company, which we acquired on December 31, remains on track. As you will recall, Fry Steel is a general line, long bar distributor in Santa Fe Springs, California with a strong brand reputation driven by a superior customer service, diverse product offerings and next day delivery commitment.
In regard to stockholder return, we are pleased to continue delivering value to our stockholders through the payment of a regular quarterly dividend as we have done for 61 consecutive years. Since our IPO in 1994, we've increased the dividend 27 times, including our most recent increase of 13.6 percent in the Q1 of 2020. We also repurchased $300,000,000 of our common stock in the Q1. While we expect to remain opportunistic in our approach to repurchases, we must concurrently consider our near term focus on cash preservation as our markets recover from the impact of COVID-nineteen. In summary, market conditions were generally favorable in the Q1 and we delivered solid results despite extraordinarily difficult circumstances resulting from the coronavirus pandemic that directly impacted our business beginning in mid March.
I would like to once again thank each and every employee in the Reliance family of companies for their ongoing hard work and flexibility as well as their unwavering commitment to operating in a safe environment. Their collective efforts empower us to support our customers in essential businesses as we manage through this unprecedented crisis. As a result, we will challenge ourselves to drive continuous improvement in all aspects of our business. However, as we make decisions moving forward, I want to emphasize that the health and safety of our employees, customers, suppliers and communities will always reign supreme. As we look forward, we believe our diversification strategy and our model of focusing on higher margin businesses and value added processing will help support us through the recovery that will follow this crisis.
Our decentralized operating model enables us to evaluate each of our businesses on its own merits and to ramp up individual operations quickly. Our strong balance sheet and cash flow enables us to continue operating our business today, preserve jobs for the majority of our employees, help support future demand from our customers and strategically partner with our key suppliers once the situation stabilizes. We believe that we are well positioned to emerge from this situation as a stronger and more innovative company and we look forward to bringing back those dedicated employees who are currently laid off. Thank you for your time and attention today. I will now turn the call over to Carla to review our Q1 2020 financial results in more detail.
Carla?
Thanks, Jim, and good morning, everyone. Net sales of $2,570,000,000 for the Q1 of 2020 decreased 13% from the Q1 of 2019, mainly due to lower metal prices with our average selling price down 11%. Demand was healthy with only a slight 2.2% reduction in shipment levels. Compared to the Q4 of 2019, net sales increased 5.1 percent driven by a 6.8% increase in tons sold, which was consistent with our guidance of up 6% to 8%. Our average selling price per ton sold declined 1.2% compared to the Q4 of 2019 and was below our guidance of up 1% to 2%, mainly as a result of downward pricing pressure due to the coronavirus pandemic.
Our gross profit margin on a GAAP basis for the Q1 of 2020 was strong at 30.3% and was slightly above our estimated sustainable range of 28% to 30%. Our strong non GAAP gross profit margin of 31.9 percent included $20,000,000 of LIFO income and excluded charges related to the closure of certain of our energy businesses that resulted in a $39,800,000 charge to inventory and cost of sales. On a non GAAP FIFO basis, which is the best measure of our day to day operations, our gross profit margin of 31.1 percent increased 200 basis points from 29.1% in the Q4 of 2019. This is a direct result of the outstanding performance by our managers in the field, who despite the challenging circumstances, continue to maintain pricing discipline by focusing on higher margin orders and increasing the level of value added processing services provided to our customers. We are very proud of and grateful for their efforts.
As I mentioned, we recorded LIFO income of $20,000,000 or $0.23 of earnings per diluted share in the Q1 of 2020 compared to LIFO income of $12,500,000 or $0.14 of earnings per share in the Q1 of 2019 and LIFO income of $81,000,000 or $0.89 of earnings per share in the Q4 of 2019. As a result of downward pressure on metal pricing and significant uncertainty in the current environment, we have updated our estimated annual LIFO adjustment to $80,000,000 of LIFO income from our prior estimate of $20,000,000 annual LIFO expense. Similar to what we experienced in 2019, should metal pricing continue to decline and as we right size our inventory quantities to reflect lower demand levels, we expect to generate LIFO income, which will positively benefit our gross profit margin and earnings. At March 31, our LIFO reserve was $117,600,000 and we believe that the LIFO method helps reduce the volatility of our earnings. Our first quarter same store SG and A expenses decreased $15,300,000 or 2.9% compared to the Q1 of 2019 on a 2.2% reduction in shipments with our average headcount down 3.7% in the 20 21st quarter compared to the 2019 Q1.
Our performance based compensation structure also contributed to lower expenses. I'll discuss our expense drivers in more detail shortly when I discuss the cost reduction actions we are in the process of implementing. As Jim noted, our overall outlook for certain of our energy businesses has deteriorated significantly. Although we have consistently reacted to declines in this market over the years, we made the decision during the Q1 to close 3 of our businesses and to assess future outlook for our remaining businesses servicing the energy market. As a result, we recorded pre tax charges of $137,500,000 or $1.53 of earnings per share, including a $97,700,000 impairment charge and $39,800,000 of inventory write downs included in cost of sales in the Q1 of 2020.
Our non GAAP pre tax income was $220,600,000 with a pre tax margin of 8.6% for the Q1 of 2020, consistent with our pre tax margin in the Q1 of 2019, and we are very proud of these results. Our effective income tax rate for the Q1 was 24.3%, down slightly from 25% in the Q1 of 2019. At this time, we estimate our effective tax rate for the full year of 2020 will be approximately 24.3%. Non GAAP net income attributable to Reliance for the Q1 of 2020 was $164,800,000 resulting in non GAAP earnings per diluted share of $2.45 If you were to back out the change in our LIFO estimate to $20,000,000 of income from $5,000,000 of expense, our Q1 of 2020 non GAAP earnings per share would have been approximately $2.17 which would have exceeded our guidance range of $2 to $2.10 Our earnings per diluted share were $0.92 in the Q1 of 2020, down from $2.80 in the Q1 of 2019, mainly due to both lower metal pricing and the impairment and restructuring charges. Turning to our balance sheet and cash flow, we generated cash flow from operations of $170,800,000 during the Q1 of 2020.
We invested $55,500,000 in capital expenditures, paid dividends of $41,900,000 to our stockholders and repurchased approximately 3,300,000 shares of our common stock at an average cost of $90.09 for a total of $300,000,000 As Jim mentioned, with the significant uncertainty that currently exists, we have adjusted our capital allocation priorities to focus on cash preservation, including rightsizing our inventory and pausing non essential capital expenditures. Nevertheless, we remain committed to concurrently making investments that support the long term growth and sustainability of our company, as well as continuing to provide returns to our stockholders. At March 31, 2020, our total debt outstanding was $1,840,000,000 resulting in a net debt to total capital ratio of 25.4%. Our net debt to EBITDA multiple was 1.4 times. Our leverage ratios support our investment grade credit rating and are well below our financial covenants.
As of
the end of the Q1, we had $831,500,000 available on our $1,500,000,000 revolving credit facility. And 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. Due to the macroeconomic uncertainty stemming from the coronavirus pandemic and overall lack of visibility into future demand trends, metal pricing and market conditions in the end markets in which we operate, we will not provide guidance for the Q2 of 2020 at this time. However, we will provide general guidance as to overall market conditions and the actions we expect to take to help us manage through this downturn. We anticipate that shipment levels in the near term could decline even further than the April levels previously discussed and that metal pricing will remain under pressure and could fall further from current levels.
In this type of environment, we expect competition to increase, which could lead to some erosion of our currently strong gross profit margin. To offset lower shipment levels, we have reduced our workforce by approximately 11%, which is expected to reduce our SG and A expenses beginning in the Q2 of 2020, net of any related severance and extended benefit coverage costs. We expect further workforce reduction if our shipment levels continue to decline. In addition, lower profitability levels will result in reduced performance based compensation expense. We are also focused on rightsizing our inventory to meet current shipment levels.
We have worked with our mill partners to cancel and push out certain orders and expect to reduce our mill purchases in the near term. We will look to leverage Reliance's company wide inventory and purchase from each other in smaller quantities to bring down our overall inventory levels. However, with lower shipment levels, there will be a lag to rightsizing our inventory. While we never take these actions lightly, given the impact to our employees and their families and also to our suppliers, we believe these are the necessary and appropriate steps to maintain our operating efficiencies and to help preserve liquidity and long term profitability. In closing, we produced strong first quarter results despite a softer pricing environment than we had anticipated.
Excellent execution by our managers in the field, along with our strategic focus on high levels of customer service and value added processing resulted in yet another quarter of strong non GAAP earnings. Thank you again to all of our employees in the Reliance family of companies for your ongoing commitment to health, safety and operational excellence. While we face difficult times ahead, as we all work together to slow the spread of COVID-nineteen, I'd like to echo Jim's statement that we believe our proven business model, strategy and the proactive measures we're taking today will help us emerge from this downturn even stronger than before. Our thoughts are with our impacted employees and their families, and we look forward to improved business activity levels so that we can safely bring our employees back to work. We wish good health to all.
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 you. We will now be conducting a question and answer session. Our first question comes from Seth Rosenfeld with Exane BNP. Please go ahead.
Good morning. Thank you very much for taking my questions today. Good morning, sir. I'd just like to get a better thank you. I'd like to get a better sense please of the impact of the sharp decline in the auto market on your toll processing operations.
You commented earlier that I believe headcount has been reduced by roughly 50% in this part of your business. Is that representative of scale of volume decline you witnessed? Or have you seen perhaps a bit sharper decline than that figure? And when we think about the outlook for gross margins going in to Q2, obviously, the Q1 performance is particularly robust. I believe that you commented earlier in the prepared remarks, we should expect to see some compression in margin figure.
How should we think about that in terms of the risk of perhaps fixed cost under absorption, inventory holding losses or just much lower contribution from 12 processing. How should we think about the moving parts and the potential scale of gross margin compression into Q2? Thank you very much.
Okay. Seth, there are a couple of questions in there. Let me talk about a little bit about the automotive first and we have Bill Sales who is not in the room, but I'm going to ask Bill to jump in on the auto part. The 50% reduction, that's kind of reflective of what the business drop we saw. I'll remind you that we've been through this before.
2,009 is a good example of what happens when a certain market goes down. We were having a nice start and fulfilling our obligations to our partners. I'll remind you that our customers are not the automotive companies themselves, but the suppliers of metal. We were going well and they started announcing closures on the aluminum market and in response to the automotive shutdowns. The good part about that is we have a schedule as to when they are coming up.
We'll see. Those are estimates on their part. So, again, we simply react to what our customers are telling us. We don't speculate. But it's a strong market for us.
We've invested a lot of money in it. We continue to see that as a great market going forward. And I'm going to ask Bill, if you don't mind, Bill, giving us some more color to address Seth's question on the automotive?
Yes, Jim. Yes, the 50 percent reduction was really tied to those auto plant closures. And so as Jim said, we've got a schedule. It looks like a majority of those plants are going to be reopening in early May. We've got a structure in place in terms of how we structured the layoff, where those highly skilled employees we can bring back as those plants start to ramp back up.
So I think that was a snapshot in time based on the closures. As things reopen and they start to ramp back up, we'll react to that and be able to meet their requirements.
And Seth, this is Carla. To comment on some of your questions around cost and gross profit outlook, Certainly, with volumes down, we do see a decline there, but we can also with our variable cost structure, the majority, 65% of our SG and A expenses are people related. So, as we unfortunately had to do at Precision Strip, we did take some big workforce reductions very quickly, but we hope to be able when the autos come back up to ramp that up again very quickly. But while we're down, that takes a big chunk of our cost out of the system. There are a lot of other variable costs that go along with that.
So we are scaling. We can't take out necessarily one for 1, but we're certainly bringing our expenses down with the lower volumes that we're experiencing there. And it was most drastic because of the sudden stop in auto, but we've done that across other of our businesses as they're impacted depending on which of their customers can continue to operate as essential businesses. So we've been focused on that. We'll continue to focus on that.
You asked about inventory losses because of prices coming down. That's one of the reasons with our LIFO inventory costing method that it somewhat gives you a buffer, so to speak, from taking those inventory losses because of the LIFO reserve that we have and helps reduce the volatility in our earnings. So, we're not anticipating taking inventory losses. And remember, in auto, which as we said is the hardest hit end market most suddenly hit that we sell into. We don't own the inventory there.
So there aren't any inventory loss of gains, anything related to that part of the business. And I did comment in the prepared remarks that just when things are more competitive, when there's less demand and there's still supply out there and people are holding higher cost inventory, often we can see things happen in the marketplace by competitors and others that can erode margins a bit. We weathered through this before. We still have we had extremely strong gross profit margins in the Q1 and a lot of that's because of the value add processing we're doing, our next day delivery, our small order size. We don't think those get impacted as much as the general market, but we're just being cautious in trying to explain the landscape out there and that there could be some downward pressure.
And Seth, just one more comment, silver lining. The automotive companies do not hold inventory at their plant. So when they do ramp up, they look to us to get right back in as quickly as possible, which we can do very quickly to start supplying parts to that.
Thank you very much. If I can just press with one quick follow-up. The recently revised guidance range of 28% to 30% gross margin, obviously, you're now expecting a greater LIFO tailwind into Q2. But are you still confident that at least the bottom end of that range can be met going into Q2?
I think we're as confident about that as we are about anything right now. I mean, Q2, we're currently anticipating that, that would be the hardest hit time period as we work through this COVID-nineteen crisis. If it extends, we'll see, but could we bump down? I think we kind of tried to say it's sustainable on an annual basis. We certainly we think we should be in there, but as we said, depending on how things unfold because I'm sure you've all seen things change every day.
But currently, I think we should stay within that range on a LIFO basis.
Great. Thank you very much.
Thanks, Jeff.
Our next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, everyone. I hope you're all healthy and well. Thanks for all the Good morning, everyone. So I was just hoping to clarify, I think that the last questions were pretty all encompassing. So I just wanted to drill down a little bit and understand.
I think the key thing we want to understand is how much you can right size operations because you've done a lot. But I just want to ask on the framework for your overhead, if 2 thirds of that is labor and the other 1 third, is it fair to assume that 2 thirds is flexible and then 1 third is less variable? Or can you provide us a little bit more framework on how to think about that?
That's a good way to look at it. You kind of need to factor in how unusual this is. We don't know. I mean, we use the word uncertainty and challenging quite a bit when we're talking about how we're running our facilities. There is a certain level of people you need to make you need to keep to fill orders.
We're filling orders as we are right now. As these businesses ramp up, we'll be able to ramp up quickly, but we that's why we lay people off and remind them that they could be called back fairly quickly also because we are a major part of our customers' business. They continue to ask us to do more and more. We anticipate or I anticipate additional value added when they do come back. So, with the choppy kind of market the way we are right now, we think we have the right level of employment right now as far as the headcount and we have some really good people that we don't want to go elsewhere.
We keep them laid off and try to take care of them best we can. So, we've done this before, Tim, as you well know, and we're good at it. And this is unusual, but we'll continue to make good decisions when it comes to rightsizing our SG and A cost.
Yes. And so and Timna, I can't give you a formula to plug into a model on this one because this is different than downturns that we've been through in the past. As I mentioned earlier, we think it's fairly short lived, so our approach has been a little different because of the nature of this. If we come back in a B or a U differently than we came back from 'nine where it was a very long, slow improvement, We expect to bring a lot of those employees back. So even the way we've approached our workforce reduction has been different during this downturn so far than it did previously in 2,009 2009, over a 9 month period, we took out 23% of our workforce.
We took out over half of our inventory, which is over $1,000,000,000 at the time. But again, that was over a 9 month period. That was more where we were actually letting people go, separating from employment as opposed to putting them on a temporary layoff structure. So we have to see how this evolves. We don't have a model for exactly how far we can go.
A lot of our we do have a lot of variable costs, but a lot of our businesses are structured differently. So it's not cookie cutter to give you a percent fixed versus variable. So as Jim said, I mean, we think we're taking the right actions to reduce, but there's just uncertainty out there.
Of course.
And it helps that our model is so diverse when it comes to product, geography, markets. We have a sound model. And in good times and bad, the model, it remains easier to manage because we can look at it operation by operation depending on what that particular location is what their order count is.
So I guess to summarize, if we look at the Q3 'eight to Q3 or Q2 'nine, you had depressed gross profit margins for 4 quarters in a row, but you're saying this time you're thinking it could be a more contained short lived situation. And that's why you're talking about full year gross margins maybe being within the range or if that's what I understood you saying. So I just want to clarify that. And then just to understand how is it working when you go to the mills and can you delay and extend? I mean how are those negotiations going?
Are they just understanding that you'll recoup those volumes when demand is back? Just wanted a little more color because that's unusual as well.
Yes. Similar to the first part of your question, yes, you're right. Our actions are a little different this time with the way we're reacting because, like we said, we think the nature of this is more short term based on what we know today. So I think that's the positive that we're taking the appropriate actions, but we're taking it in anticipation of coming out of this fairly quickly and being able to be there to support the increased business activity at whatever level that is. And with our model, with our high value add, with our quick deliveries, we anticipate maintaining the value that we provide our customers and being able to get those gross profit margins that we've risen to over the last few years.
Yes. And as far as the mills, obviously, we don't like to do what we're doing. However, we've got long standing relationships with these folks. We've supported them year in, year out for a long period of time. We're a domestic buyer.
I want to remind you that less than 5% of our spend even in normal times has been domestic. I know they appreciate that. They appreciate Reliance and we do everything we can to be a good partner with them and our communication with them is almost on a daily basis and we're here to support them in these situations. They're going to support us and we're both going to need each other in the supply chain when this does ramp up. So, they're going according to plan.
And just to clarify, 95% domestic, 5% imported. That's what
I said, the other way around.
Right. Yes. Good point.
Got it. Alright. Thanks guys.
Thanks, Dennis.
Next question comes from Chris Terry with Deutsche Bank. Please go ahead.
Hi, Jim and Carla. Thanks for taking my questions. I hope you are going okay.
First question
I had is just on working capital expectations and just wanted to get a bit more sense on the ground. Are you getting any issues with cash collection from any of your customers? Are there any things to think about there just in terms of the collecting accounts receivable or generally thinking that you'll be able to get more opportunities in working capital and it will be beneficial throughout the year? Thanks.
Yes. Hi, Chris. So, from a customer payment standpoint, we've been monitoring that just to be on top of it, and we have not seen a fall off yet. So that's very positive that our customers are continuing to pay us in normal patterns. We do think there could be a little slowing in the next quarter, but we haven't seen anything yet.
And we do look at working capital as really being a source of liquidity during this year because as with the expectation that metal pricing could come down and shipment levels coming down, that reduces our accounts receivable more quickly than the inventory. As we talked about, we're looking to bring inventory down, both of those factors, lower metal pricing, matching bringing inventory down to match our lower shipment levels also throws off cash. So, we do anticipate some good contributions to cash flow from working capital reductions this year.
Okay. Thank you. And then you talked a bit about the auto market. I just wondered if I think you if I heard correctly, you said 20% decline in April in shipments. So I just wondered if you could talk about the aerospace market in particular, what you're seeing there and maybe if there's a bit more granularity on that 20% decline and that's excluding tolling I assume.
So just if you could talk about aerospace in the context of the different market splits?
Bill, why don't you take that one?
Okay. Hey, Chris. Much like auto, I mean, the aerospace business obviously has been impacted negatively from this. We've always said, we track build rates, backlogs and mill lead times to give us an indication of the health of that business. Airbus has announced that their build rates are going to be down by about a third.
The picture of Boeing is not quite as clear, but we know build rates are coming down there. Backlogs are shrinking. They're seeing order cancellations. We think the backlog could shrink as much as 50%. But that still brings us to a backlog that is probably in that 3 to 4 year timeframe that if you go back and look over time, historically, that's kind of where the backlog used to be before this super cycle that we've been in.
And what we're doing, much like auto, is we're monitoring the situation on a program by program basis, and we're adjusting inventory and staffing based on what we see there. So that picture is still a little bit cloudy in terms of the commercial aerospace business is driven by passenger miles. And as we come out of this, I think we need to we'll just have to wait and see how quickly people go back to flying again. So we'll keep a close watch on that, but we will adjust accordingly based on what we see happening.
Yes. And Chris, Bill just addressed primarily the commercial market. We've also got some good exposure on the defense side. And as we've talked about the last few quarters, that's been strong. We see that continuing at strong levels.
So far through April, defense has held up. And we actually just extended our Joint Strike Fighter program. We announced that about 4 years ago when we initially got that program. It's a big program for us and we were just awarded a 5 year extension on that, about $660,000,000 over that timeframe. Yes.
That program will take us out through 2026. And then the other thing to remember about our aerospace business is we are less than 50%, probably around 40% commercial aerospace and then the balance of that would be noncommercial aerospace with defense being a big part of that.
Okay. And thank you. Just one more if I may. The energy the 3 businesses you talked about supporting the energy market in your release, Just to put that in context, maybe as a percentage of your total energy exposure, just to see how big those facilities are, can you give any color on that?
Yes, Chris. So, those 3 businesses that we shut down, in total, annual revenue currently, the run rate is about $100,000,000 So, we were it used to be around 10% of our total revenue dollars within energy. Coming out of the last downturn, we were down to about 4% to 5%, but now it's about 3% to 4%. So, not a huge portion. We've still got relatively consistent energy exposure, but I think what remains are the what's been the better parts of our energy exposure.
We're going to continue to service still a good market for us, and we hope to see improvements there in the future. But we felt it was we had a couple of businesses that have been struggling, and we didn't see that really recovering at the levels we needed, so we made the decision to
And in my prepared comments, Chris, I made, those decisions have been under consideration for quite some time. Technology in drilling has just changed. So, if you look at it from a metals consumption in that market, it has shrunk and the pie is smaller. And we have every intention to be a strong player in a smaller piece of the pie of which we are. We still have some very fine energy related companies in the oil patch, and we'll continue to support them and be that leading player in that market.
Okay. Thanks and good luck. Thank you.
Thanks, Graham.
Next question comes from Alex Hacking with Citi. Please go ahead. Alex, your line is live.
I apologize. I was on mute. Good morning, Jim and Carla, and I hope you guys are staying safe. Just to follow-up on the last question, I guess after the closures of those energy facilities, what kind of utilization rate would your residual energy business be operating at? Thanks.
I really can't give you a number. It's too soon to tell, but the customers that we have serviced through those companies that we decided to firmly shut, We're able to absorb in our other energy business. I can't say what percent, but that is the intent. So, I don't know what the utilization will be in the new operations, but suffice it to say, will be better than it was. I just don't know what the percent would be.
And Alex, some of the remaining energy businesses, part of the reason they are remaining is because some of them are not 100% energy. They have other parts of the business too. So giving you a pure utilization rate would be difficult. We've over the last few years, as we've seen declines, all of those different businesses right size as appropriate. So, I think utilization might be a little less company wide average during normal times.
We usually operate about 2 thirds capacity. So, the energy businesses are probably a little below that, but not significantly or we would have looked at it differently. Yes.
And that whole market is pretty much in shock right now with what's going on with the price of oil. So, we'll let you know when the fog clears.
Okay, thanks. And then I guess within the context of your shipments being down around 20% in early April, how does construction fit into that? I would assume that construction is holding it a little better than the average.
Is that fair? It is. That's fair. That's fair. Up until that point, we were like I said call after call, it was kind of a nice slow burn up and that continued for the majority of the Q1.
And then all of a sudden, these jobs that are already in the books, they've been deferred. We don't know how long, they haven't been canceled. You can't cancel an order for a big project midstream. So, we anticipate that business to come back most likely sooner than some of the others and we're a big participant in there. And there's always a hope, I guess, even though we don't think hope is a strategy that there will be an infrastructure spend perhaps on the horizon.
And when that happens, that will be good for that market as well. But we're that's a good business for us and it just kind of hit a slow drag right now based on the end user, the way they see their business and their cash flow. So, we're obviously monitoring that on a daily basis. And I'll remind you that we've spent a lot of money over the years on the value added end of that business and we anticipate that to actually increase when the in the history when you go through these kind of sudden recessions, our customers ask us to do a lot more when they do come back. And we're positioned to do that and we have spent money again this year to put in innovative equipment that allow us to meet and exceed our customers' needs.
Okay, thanks. And then just one more quick one, if I may. I apologize, I should already know this, but I know about 1 third of your shipments are into the transportation sector. Roughly, what's the split there between aerospace, autos and other? Thanks.
Yes. Hi, Alex. So, yes, we think about a third is transportation. What we can identify within that is aerospace, which probably averages around 12%. This is based on total revenue dollars.
Outside of that, there's very little metal sold into auto. We break out the toll processing with where the majority is auto is about 4% of our total revenues. And then you just got truck trailer, barge, shipbuilding, railcar, various other things in that category.
Okay. Thank you very much. Thank
you. Our next question comes from Phil Gibbs with KeyBanc Capital Markets. Please go ahead.
Hey, good morning. Jim, hope and prayer should always be part of the strategy. I just want to tell you that. All right. And BoJo.
BoJo, absolutely. Well, some of that you got to create. Some of the essential growth CapEx that you're keeping for this year, anything that we should be thinking specifically in terms of the projects?
You can just look in general. Again, we've talked about our CapEx. Our CapEx is 300 line items. The ones that we've decided to keep were orders that were projects that were already placed and we need going forward. That's basically equipment, replacement equipment maintenance.
Remember, we have a piece of our CapEx every year that we call maintenance. There's another piece of it that's growth that's new innovative type equipment. We've kept that. It's probably easier to focus on what we've decided to hold up on. And what we've holding up on things like lease buyouts, resurfacing parking lots and redecorating offices and all those types of things that they're just not mandatory.
There are things that we can defer to next year if we need to do that. But we went through with a fine tooth comb and realizing that like I mentioned before that during these recessions when we come out on the other end, our customers ask us to do a lot more. So, we've kept the innovative equipment that
allows us to do
more and the equipment maintenance equipment that allows us to be more efficient. We've kept that going. So, we're going to we're still going to be a participant in the CapEx spend and not to the degree that we had originally thought.
That makes sense. Jim, when we think about the here and now, I know a lot of people are basing their decisions on survival and cash preservation. But as you look out over the next several years, are your customers being more adamant in saying we need to diversify our supply chain away from China, We need you to make these components. We need to start moving more of these specialized value added steps away from them, because clearly what happened in the last 2 or 3 months shouldn't be acceptable to anyone.
I agree. I hope a lot of them are listening. We've seen that. They have a turn forward. Re shoring, my guess is there will be more of that.
Our strategy our model is modeled to do more of that and we anticipate more of that coming back, that certainly would be good for the U. S. And North America and we'll see how that goes. I mean, if I was running one of those companies and not see what's going on in the world, we talk about now not only how do we operate now, but how are we going to operate in the future and we look to see how the business is going to change and we want to be out in front of that and certainly that will be one of our considerations and it should be as far as I'm concerned. As an American, the more domestic manufacturing that does come back will be good for the country and certainly good for Reliance and our domestic suppliers.
And so we can't say that this has been broad based at this point, but certainly with all the trade issues over the past few years, we have seen some of our customers take some actions to do that. And now we've talked about the fact that overall shipment levels are down, but within that, we have picked up some new pieces of business and seen some opportunities where some customers and further downstream are adjusting and have to look for new partners to help them produce their products.
I appreciate that. If I could sneak in one more for Bill and then I'll hop off. But just on the semiconductor market, Bill, what are you seeing there in terms of momentum and what your customers are telling you just in terms of readiness? Thanks.
Yes, sure, Phil. The semiconductor market, as Jim said earlier, has kind of been a bright spot. And we did see a little impact early in the Q1 in Asia, primarily China, from the COVID virus. But that's rebounded and our customers are still optimistic and still talking about good demand through the balance of the year. I will tell you, we're keeping a close watch on that.
As you know, that market can stop on a dime. So we're watching it very closely. But so far, all the indications are it should continue to be very good through the balance of the year.
Thanks.
Next question comes from John Tumazos with Very Independent Research. Please go ahead.
Thank you. Could you elaborate a little more on the outlook for acquisitions? It would seem like there could be some smaller operations here and there with less revenue and less volume could be a lot more willing to sell because they have debt. It may be even chances to buy things below tangible book value since inventory values have fallen so much?
Yes, John, this is Jim. Yes, they are out there. When we look, our M and A strategy hasn't changed. We don't buy fixer uppers. They have to be immediately accretive.
We've bought small companies. We've bought large companies. There's a significant amount of work involved regardless of how large or how small the acquisition is. I can just tell you what we've seen has been on the extremely small side, nothing that meets our requirements for profitability or interest. But we remain open for business.
There was a period of time, well, it's been pretty fast and furious over the last couple of years of companies we look at. And I'm sure you realize we've only pulled the trigger on 1 and that was in December of 2019. And we've got a really nice company there. But so far this year, there's fewer of them and what we see, it doesn't tickle our fancy as they say.
The accounts receivable category used up about $150,000,000 of cash in the March quarter. Is there a seasonal explanation to that Or do you have some customers that are paying you a little bit slower?
Yes. No, that's the typical seasonality, John, along with our sales because of the holidays and customer closures around that during Q4. When our shipment levels are receivables go down and then with the seasonality comes back up in Q1. We monitor day sales outstanding and that stays pretty consistent quarter over quarter, kind of normally around 42 ish days. And so we've seen that so far staying pretty consistent.
Thank you.
Yes. Thank you.
Thank you. There are no further questions. I would like to turn the floor over to Jim for closing comments.
Okay. Thank you very much for taking the time and attention today. And I'd like to reiterate that the health, safety of our employees, their families, our suppliers, our customers and our communities has always been our top priority. And I'd like to sincerely thank the first responders, especially the healthcare workers serving on the front lines to care for those needs. Our thoughts and prayers are with all of you through this difficult time.
Now before I conclude, I'd like to remind everybody that in May, we plan to participate in the B&A Merrill Lynch Global Metals and Mining Steel Conference as well as the KeyBanc Basic Materials Conference, both of which will be held virtually. So I'd like to thank you all for your continued support and commitment to Reliance and I hope you all stay safe and healthy. Thank you very much.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.