Reliance Steel & Aluminum Co.'s David H. Hannah.
Its been a journey, Ill tell you. But its been a lot of fun, says David H. Hannah, serving up the bottom line on a steamroller of a career--one that spans almost three-and-a-half decades and saw the former Ernst & Ernst accountant and a close-knit group of colleagues work M&A and other forms of managerial magic to transform Reliance Steel & Aluminum Co. into a nationwide and international metals processing and distribution powerhouse.
A lot of times we dont realize the size we are, said Hannah, who just turned 63. We kind of have to step back, pinch ourselves, and say wow.
Wow may not be an oft-used word in the lexicon of most one-time accountants everyday language, but it fits Hannah perfectly. It also pretty much sums up the pace-setting performance and track record Reliance has racked up during his tenure at the top, initially as chief financial officer (the companys first) in 1981 and then president starting in 1995, a year after he led a successful drive to take the company public. He was named chief executive officer in 1999 and chairman of the company in 2007, some 68 years after the predecessor company, Reliance Steel Products Co., a distributor of steel rebar products, was founded by Thomas Neilan in 1939.
Hannahs rise at Reliance was not exactly by design--at least, not one crafted personally by the University of Southern California graduate, who majored in accounting and finance. By the time he got his first look at the companys books, Hannah had added the initials C.P.A. to his name, was working full time for Ernst & Ernst and expected to become a partner at the firm in the not-too-distant future.
It was your typical public accounting story, he said. I was assigned to the audit of Reliance Steel & Aluminum Co. And the company was just a wonderful client. And it was growing.
Hannah attributes much of that early appetite for growth to a guy named Bill Gimbel, a nephew of the founder, who along with his sister and other family members and employees at the time was left the company when Neilan passed away in 1957.
Gimbel, who had been with Reliance since the late 1940s, spotted Hannah early on, and when the audit was wrapped up he approached Hannah to ask him if he would like to consider joining the company as its first chief financial officer. I was not looking for a job, Hannah said. And I said, Bill, I really like what Im doing. Ill try to help you find someone, how about that?
It took a while, but Hannah did just that: he joined Reliance in May 1981 and hasnt looked back since. It was an impressive place, he said. Bill Gimbel, as the chief executive officer, ran the company as well or better than any other company I had ever been assigned to in my audit career--public or private.
When Hannah signed on as chief financial officer, Reliance was a private company with annual sales totaling about $180 million. We had 14 divisions, most of which were in California but we had a couple in Arizona and a couple in Texas, he said.
Over the next dozen or so years, Reliance grew at a steady pace. Bill Gimbel was a real aggressive guy by nature, Hannah said, referring to his boss as a mentor, taskmaster and key influence on his career--and the trajectory and humble culture of Reliance--all in one. Bill is the guy who took it from a one-location company in 1957 to multiple locations. And he did it through greenfield expansions and acquisitions.
By his count, Reliance averaged two acquisitions a year during the dozen or so years between 1981, when Hannah joined the company, and 1994, when he spearheaded a push to take the organization public.
The experience of working shoulder-to-shoulder with Gimbel and Joe Crider, the president and number two executive at Reliance at the time, proved invaluable in years to come. The lineage definitely shows. The lessons learned and strategies refined during that pivotal 13-year period provided a template of sorts for sustained growth.
Hannah is quick to point out, however, that the acquisitions made during that pre-IPO (initial public offering) period involved different kinds of companies. They were small. They were typically troubled companies that we thought we could fix one way or the other, either by providing capital or management or perhaps pushing it together with one of our other existing operations.
In 1994, Hannah engaged in what he describes as one of the most important things I was involved in ... even though I wasnt the president or CEO. I was the chief financial officer when we did the IPO, but I was the guy who was kind of pushing that.
Reflecting on that key juncture in his career, Hannah recalls that the times were changing and in more ways than one. Although Gimbel and Crider still occupied the corner offices at Reliance, they were slowing down. So Gregg Mollins and I were the next to kind of guide the company through.
And guide they did, starting with the shared observation that the commercial landscape was changing with respect to expansion possibilities in the service center/metal distribution business. What we saw were larger, more-successful service center companies starting to put themselves up for sale because of estate and family issues, Hannah said. We started to see companies like Siskin Steel & Supply become available.
What Hannah et al also saw was a compelling case to take the company public. We knew we were in a cyclical industry. And we thought the best thing for the company and the best thing for the owners of the company--the Gimbel family and the extended Gimbel family--was not to just lever the company up with debt to continue our expansion, but to get some equity capital. Because if you lever it with too much debt and then theres a cyclical downturn, it could strangle you.
Reliance, a newly minted publicly held company, eventually acquired Siskin in 1996 in a transaction Hannah later described as a big step for us. It was the first of the big acquisitions. It was also the first one we did on the eastern side of the Mississippi River.
Many more were to follow, of course. So many, in fact, that Reliance--which today distributes more than 100,000 metal products to a broad range of industries--lays claim to being the largest metals service center in North America.
Hannah provides some arithmetic. In 1993, the full year ended before the IPO in September 1994, our revenues were $370 million. And we had 18 or 19 locations, he said. Now we have ... call it 300-plus locations. And we are approaching $10 billion in revenue.
Ask the chief executive officer of Reliance Steel & Aluminum Co. if the company he heads is addicted to mergers and acquisitions, and he acknowledges that M&As are kind of habit-forming, but in a good way. I dont know that I would call it a compulsion. But we have a responsibility as a public company to continue to grow. We certainly want to continue to be what people refer to as a successful public company. And in our industry, success is very closely tied to growth, continued growth and profitability.
In the 20 years since Reliance became a public company, it has acquired 56 companies. And every one of them is a better company today than when we acquired it, Hannah said. You hear all these horror stories about failed acquisitions, that less than 50 percent are successful. I truly believe that all the acquisitions weve made since becoming a public company have been successful. And I think it is because we handle all the work ourselves. We do not hire people from outside the industry to go and search these things out and do the due diligence for us. We are all involved. And we are not afraid to turn and walk away from something even if the numbers look good but we dont get a good feeling in our stomachs. And we have done that a lot. We have passed certainly on more deals than we have done.
Reliance didnt walk away from a $1.1-billion acquisition of the outstanding capital stock of PNA Group Holding Corp. in late summer 2008, but in retrospect Hannah views the transaction and events following it as the most painful part of my career.
In exchange for the investment, Reliance added Delta Steel LP, Feralloy Corp., Infra-Metals Co., Metals Supply Co. Ltd., Precision Flamecuting & Steel L.P. and Sugar Steel Corp. to its stable of holdings. The structure was very complicated and it was all carbon steel products, mostly related to non-res(idential) construction, a lot of plate, a lot of beam, a lot of carbon sheet, Hannah said. We closed that transaction on Aug. 1, 2008, and we enjoyed three months of really good business. Then everything stopped.
Looking back, Hannah said Reliance is glad it acquired the six companies and the PNA Group. The only thing is the timing turned out to be not so good. So Im glad we did it. If we could have waited a year or so, it would have been better. But we dont do these things to buy them, hold them and sell them. We do them to buy them, own them, run them and grow them.
Oddly, the PNA acquisition came with what Hannah considers a silver lining, one that provided a real-world show-and-tell that reinforced one of two core principles anchoring Reliances operating philosophy: turn your inventory.
That principle was not shared by some of the companies in the PNA Group, which Hannah said would run offshore and buy large quantities of import material. During our due diligence we saw that they had a lot of material on order. At the time, it was priced below what the current market price was. We did expect pricing to come down, but we didnt expect it to get cut in half at the same time that demand was also cut by about 40 percent.
The silver lining? All of our operators across the country saw what happens if you run offshore and buy huge quantities of material, he said. Basically youre gambling. And we dont support that.
What Reliance does support is rapid inventory turnover. A lot of people liked to have a lot of inventory because it made them feel good. But we have always just banged our people about turn-your-inventory-the-most-you-can, Hannah said.That doesnt mean we expect everybody to turn five or six times. It depends on the products youre in. Some of our places wed be happy if they turned their inventory two-and-a-half or three times. Others, were not happy if they are turning six or seven times.
With some 100,000 items in its product catalogue, finding a metal product Reliance doesnt sell can be a challenge. By Hannahs reckoning, a little over half of the companys revenue dollars derive from carbon steel products: plate, bars, structurals, flat-rolled, pipe, tube and specialty tube. About 15 percent comes from aluminum products (heat-treat alloys, common alloys, plate, bars, tubing, extrusions and sheet), while stainless steel accounts for some 15 percent. More specialty-type alloys represent about 10 percent, Hannah said. Then we sell a little bit of brass and copper, a little titanium, and we do some other stuff as well. So that has been really critical to our success. We have got tremendous product diversity. That doesnt eliminate risk, but it certainly helps and I think it has been a big part of why we have been more consistent than a lot of others. Rarely do we see a market when all our products in all our geographic areas are either up or down at the same time.
The buying patterns of the markets Reliance sells into also have served to mitigate risk. We have very little contract business, Hannah said. Not having a year-long contract to supply a major customer carbon steel sheet or something like that, we werent inclined to buy heavy inventory to protect a gross profit margin because we had a sales price locked into our customer for a year.
Another key distinction is the demographics of the customers Reliance serves. Our market out here is different than the Midwest, Hannah said. We didnt have big industry back when and we dont have it now. It is truly a job shop/fabricator community. Outside of our product and certainly our geographic diversification, something that kind of distinguishes us from others is the type of customer Reliance grew up on.
Last year, the average order size logged by Reliance totaled $1,650. That is a whole bunch of small orders, Hannah said. And just less than half of our orders were customers calling us today wanting their metal tomorrow. Even if we wanted to focus on volume in the old days, you couldnt because there is no volume out here. I think that has helped us. It allowed us to grow up and learn that you cant concentrate on volume. You need to concentrate on just top-notch customer service and quality. Because if a customer calls us this afternoon and they want metal tomorrow, it better be there on time and it better be right. Otherwise, the customer is not going to call you again.
The trick is you cant be bashful about charging for it, Hannah said. I think we do.
The way Hannah tells it, Reliance never did focus on volume. Even when we were much smaller as a private company, we always focused on profitability. If we had to walk away from some business because we realized we were better off without it, to give up some tons or pounds, then that was okay.
Over the years, Reliance has made it a point to pass that tradition on to the companies it has added to the fold. As we have expanded across the country, we have seen a lot of privately owned companies we have acquired have the mindset that in order to be important to our suppliers, we need to buy more metal, Hannah said. And if we buy more metal, we need to sell more metal. So they put themselves in a position of being more volume-oriented. When we come in, we leave the name (of the acquired company) in place--which is different than most others in the industry--and we bring some key ideas with us, one of which is there are probably a bunch of customers or at least some customers out there you shouldnt be doing business with. They are costing you money.
The underlying message? You dont need to chase volume any longer because we are plenty big enough, Hannah said. We can bring you our big company resources. You just continue to exercise that entrepreneurial spirit and drive to grow your business and be successful at your level and well bring you our bigger company resources. I think that has worked pretty well for us.