Fitch Assigns 'BBB' First-Time Ratings to Reliance Steel & Aluminum
The Rating Outlook is Stable.
The ratings reflect the company's flexible, scalable operating model, its stable and leading operating margins, strong working capital management and cost control, and leading scale and diversification. The ratings also reflect Fitch's expectations that free cash flow generation will be used to repay debt while earnings are below trend.
KEY RATING DRIVERS
RS primarily buys and sells on a spot basis with relatively short delivery times. As such there is minimal backlog. The company does, however, maintain a strong regional salesforce and close customer relationships allowing it to respond quickly to changes in demand.
RELATIVELY STABLE MARGINS
Despite exposure to construction and manufacturing end-markets, RS' gross margins have been relatively stable since 2009 ranging between 25% and 27%. EBITDA margins have ranged between about 7% to about 9.5% over the same period.
LOW CAPITAL REQUIREMENTS
The company's existing operations are scalable and capital expenditures have averaged around $180 million per year over the period from 2010 through 2014 and maintenance capital is estimated at $80 million.
GROWTH THROUGH ACQUISITIONS
RS has acquired 59 businesses since its IPO in 1994 providing scale, diversification, purchasing synergies and logistical efficiency. The 2013 acquisition of Metals USA for $1.2 billion in cash and assumed debt was the largest acquisition adding 48 service centers. Fitch expects acquisition activity to continue but for transactions to average $500 million or less, be of a more specialized nature with higher margins, and be cash flow accretive.
SHAREHOLDER FRIENDLY ACTIVITY
RS initiated a share repurchase plan in 1994. The company did no share repurchases from 2009 through 2013 but bought $50 million in shares in 2014 and $314 million in the first 9 months of 2015 bringing the total to $683.6 million. On Oct. 20, 2015, the Board of Directors amended the plan increasing the authorized number of shares available to be repurchased by 7.5 million to 8.4 million and extending the program through Dec. 31, 2018.
Absolute dividends increased from $29.4 million in 2009 to $108.7 million in 2014 and represents 21% of FFO for the LTM Sept. 30, 2015.
Fitch's key assumptions within its rating case for the issuer include:
--Volumes down 2.25% in 2015 and flat in 2016 before recovering to 3% annual growth thereafter;
--Weak average selling prices to persist in 2016 before very gradual improvement;
--Gross profit margins for 2015 at 26.5% dropping to 26% in 2016 and thereafter;
--High single digit dividend growth but no future share repurchases;
--Capital expenditures consistent with historic levels;
--Debt repaid with excess cash flow.
Positive: Future developments that may, individually or collectively, lead to positive rating action:
--Not anticipated over the next 18 months given the company's capital deployment priorities but would include total debt to operating EBITDA sustained below 2x.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--RS sustains total debt to operating EBITDA near 3x; or
--Gross margin sustained below 25%, driven by a loss of competitiveness or inadequate restructuring in the face of structurally lower demand.
Fitch expects the company to generate free cash flow on average given the company's flexible operating model. At Sept. 30, 2015 there was $952 million available under a $1.5 billion revolver due in 2018. The facility has a debt/capital maximum of 0.6x and an interest coverage minimum of 3x. Fitch expects the company to be in compliance. Trapped cash is not an issue.
FLEXIBLE CAPITAL STRUCTURE
Fitch expects RS to repay revolver borrowings with free cash flow but refinance the $350 million of 6.2% notes due 2016. Estimated maturities of debt over the next five years are $61.7 million in the remainder of 2015, $440.9 million in 2016, $50.5 million in 2017, $788.3 million in 2018, and $0.6 million in 2019.
Fitch expects RS to remain a consolidator in the industry but for acquisitions to generate free cash flow and for total debt to EBITDA to remain under 3x and generally range between 2.0x and 2.5x.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
Reliance Steel & Aluminum Co.
--$1.5 billion senior unsecured revolving credit facility due April 4, 2018 'BBB';
--$500 million senior unsecured term loan due April 4, 2018 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.