Reliance, Inc. (RS) Earnings Call Transcript & Summary

Good morning and thank you, everyone, for joining us. My name is Davis Sunderland. I cover sustainable energy and mobility here at Baird with my partner [indiscernible]. We're very happy to have the team from Reliance here, who's going to lead an oral presentation. I'm very happy to welcome Karla Lewis, President and CEO; and Steve Koch, EVP and Chief Operating Officer. I'm going to turn it over to you, Karla, to just give a brief background of yourself, go through a few slides, and then we'll pivot to Q&A. If we have maybe, I don't know, half a time or so. It's a small enough room, don't be shy. Please feel free to raise your hand with questions, or if you would like, you can e-mail them to me at [email protected], and I can pass them along to the speakers. So thank you again for being here. And with that, I will turn it over to you.

All right. Well, thank you, Davis, and thanks, Baird, for having us, and all of you in the audience for showing up this morning. So we'll try to give you a little background on Reliance before we go into questions. So Reliance, we are in the metals space. We're the leading global diversified metal solutions provider, about $15 billion in annual sales, roughly. We've been around for over 85 years. Today, we have over 320 locations and sell 100,000 products to over 125,000 customers. So very diversified portfolio that we have. And at Reliance, since our IPO in 1994, we've completed 76 acquisitions. These are a lot of the brand names of the companies we've acquired. And in our business, we still -- for us, it's still a local business where relationships matter. And when we acquire companies, we look to buy strong, well-run companies, good management teams that have strong brands in the marketplace. So that's one of the reasons why we leave these names in place. We try to buy good companies. We don't want to destroy the value once we've acquired them. And then this -- we talked a little bit about our differentiated approach at Reliance. In the metal service center world, it is a very fragmented industry, a lot of small companies. There are a few large national type service center companies out there. And they generally go after a bit of a different customer base than we do, although we do still service national accounts, we service large OEMs. But again, I talked about being local. So we really focus on a lot of the smaller companies in the local markets. So the diversification, we'll talk about a little more in a minute. The decentralized operating model, we think, is important for us to be close to our customers and put decision-making down there. With that, we also have to have strong pricing discipline. We're a very transactional company. We buy on the spot, sell on the spot. Our salespeople are deciding the price on almost every transaction. And we also do very little contractual sales, probably less than 3% of our revenue, and that's primarily on the aerospace side because we can work with our mill producers to help protect our margin on those longer-term orders with those types of products. And then to come back to the diversification. So this slide shows we've strategically grown in a decentralized way by product, by end market, by geography. We think that's important because in our world, we can't control underlying metal prices coming from the mills. So we pass those through -- we pass the price on with a markup to our customers. So if we're all in aluminum, we're all in carbon flat-rolled, our earnings results, we believe, would be much more volatile. So that's why we try to have this diversification across our products and then also by end markets because, again, we sell into cyclical end markets, so we'd like to have a more balanced approach. And I'm sure in Q&A, we'll talk a little more about some of our major end markets. And you'll see then they don't do the same thing at the same time. Our product mix generally reflective of the overall metal consumption in the U.S., about a little over half of our sales in carbon products [indiscernible] for us is compared to most other metal service center companies, we're a little lighter on flat-rolled products than a lot of the other companies out there. And that's kind of been on purpose. That's generally the most competitive part of the market. We are a large player there, but we try to balance it with other products like plate and specialty long products. And also geographically, we're primarily in the U.S. We do have some operations in Canada and Mexico. And then a couple of smaller -- generally smaller locations outside of the U.S. And that's generally a pretty targeted approach, where we're going after more specialty products and specialty end markets. So outside of North America, we're participating in aerospace, semiconductor and energy because we feel we can get the returns for those types of products in those markets. Some markets are structured differently, and it's hard to hit our profit return metrics there. And then we talk about, again, with the differentiation of Reliance. As I mentioned, we're a very transactional business. As I said, $15 billion in sales, average order size, $3,000 an order. So we're doing a lot of transactions. So 40% of those orders, customer calls us today, we deliver it tomorrow. We are currently processing -- doing some level of value-add processing on 50% of the orders we're shipping, again, including some of those next-day orders. Not every service center company can do that. This kind of goes back to our decentralized structure, having assets and people close to our customers allows us to be able to provide this level of service, and we think it makes sense. It takes a little more assets in the decentralized model, but as long as we get paid for it, as long as our customers see value and us being able to service them like this, so this is where majority of our customer base are small machine shops, fabricators. This afternoon, they'll come in and call and tell us what they need tomorrow, and we'll have it to them in the morning. So they're not as price-sensitive as a big OEM, who's buying thousands of tons of metal on an order. And so that's kind of the -- where we focus. This is showing our gross profit margins. That's really where our people can control their pricing, and how much they can earn on an order. And so this shows how we've stepped up over the years. We used to be about 25% to 27% gross profit margin. Currently, our target range is 29% to 31%. We've been able to grow that primarily by doing more value-added processing for our customers. What we charge there is not subject to fluctuations in metal prices. So it's a little more sustainable. About 10 years ago, we saw improvements in the technology of the processing equipment we use, since started investing more heavily in that. And with that, we used to process about 30% of our orders, as I said, we've grown that to 50% now. And with that, we also had to train our sales people to understand the increased value they provide their customers and to price for that. And then this slide talks about smart profitable growth. And during that time where we were adding all this processing equipment, we were really messaging to our people to focus on the highest priced -- the highest margin orders out there. And we intentionally gave up some volume to do that. But what we found was we maybe gave up a little too much volume in some of our locations. So about 2 to 3 years ago, we started the smart profitable growth strategy, saying don't go after every ton, but we are leaving some volume out there that is profitable. It may not be a 40% gross profit margin, but 27% is putting dollars towards your bottom line. During the wonderful pricing environment we had for a few years, it was okay to give up some tons, but we knew prices would come down. So this year, our team has done a great job winning business through their customer service and their relationships, year to -- through 9/30/2025, our tons sold are up 6%, whereas the industry is down 3%. So we are out there taking share. That's given us extra profit dollars that are helping cover our expenses, and so we're getting some leverage on our OpEx there. And this chart just shows Reliance's performance on gross profit and EBITDA compared to other metals companies and also the industrial distribution companies. So for years, we consistently outperformed the other metal service center companies. And really through some of our long-time investors years ago, they said they looked at us more like an industrial distribution company and felt that we deserved a multiple more -- closer to the industrial distributors, so we've made progress and with the margin profile and have seen a bit of an improvement in our multiple, which we think we deserve. Countercyclical cash flows. So Reliance has again been been profitable. We've grown those profits post COVID. It's a higher pricing environment, so we have higher earnings, higher cash flows. But countercyclical, if we see a dip, we manage our working capital. So our accounts receivable, mainly our inventory. We consistently focus on our inventory turnover rate and try to buy what we're shipping basically. And it's important to manage your inventory in our business. And we continue to invest in the growth of the company as we mentioned earlier, significant investment in -- through capital expenditure and organic growth, primarily in value-added processing equipment, but also adding some locations, expanding locations. And again, the 76 acquisitions since we went public in '94. It's an opportunistic approach. We don't set targets. Our CapEx really comes from our customers asking us to do more. And then the acquisitions we don't set targets because we don't want to do a bad deal. We want to do the right deals. And then also on shareholder returns, we've paid a regular quarterly dividend for 66 years now. We do not have a set policy. We like to be flexible, but we generally try to increase the dividend annually and then also opportunistically enter the market to repurchase our shares. And we're proud of the -- of our stock performance over the last 30 years since we did our IPO. And with that, turn over to Davis.

Great. Thank you, Karla. Maybe you mentioned at the very beginning that we go back to end markets. I think that's probably one of the best places to start. Wondering if we could just dive in and talk a bit about where you're seeing strength, where there may be some weakness relative to the last few years. I mean then we can jump off from there.

Last night, we were downtown with bunch of our local operators, and we said, let's talk about the hot end markets and maybe not so hot end markets, but you can't mention data centers. So we went around the table and everyone mentioned data centers. So I would say that continues to be one of the hotter markets and the trends and weaker markets, ag and HVAC and a couple of other firearms came up. But for the most part was at the end market, we serve almost all of the markets, and they're steady, but there's some that are really high, like infrastructure data warehouse, et cetera.

Step in kind of a tangent to data centers. There's a lot of supporting infrastructure that goes into that as well. Our coverage is sustainable energy mobility. All of our stock charts look about the exact same, and there's been a lot of growth in things like trackers for utility-scale solar and batteries and other types of energy-related infrastructure. And one of the themes that we've seen is that deal sizes are getting larger. Is this something that you guys are seeing? And if you could expand a bit more on what you're seeing from the, I guess, support infrastructure side, that would be helpful.

Yes. I mean I think we -- that's exactly true with the data centers initially when we were hearing from some of our companies about some strength and participation in data centers. It was more kind of our structural steel type companies, people selling metal into the building, right? And now we talk to -- almost all of our companies are touching the actual data center, a lot of interior racking enclosures for servers. We do like perforated metal. There's copper bus bar, there's tubing for the cooling systems, and then there's also the electrification going on to be able to supply the energy, and we've got a couple of small nuclear companies itself. They're not nuclear. They sell into how many different products are feeding into that. And like -- and sometimes we don't even know what people are doing with our metal. But data center certainly has been positive for us and for the industry. I think one of the examples, one of our people gave last night was they're selling like hot rolled steel and for big tanks that are going underground to hold diesel fuel, just because the data centers need backup power sitting there available just in case they had an issue.

The only thing worse than beating a dead horse is being the wrong dead horse. So I don't want to belabor this point, but just on data centers and the growth opportunity. And I guess looking forward for how long this cycle may be if you want to term it that way. I'm wondering if you could just give your thoughts on if we're in the first inning, in the middle of the game or coming to the end as it relates to this type of infrastructure spend around data centers.

Well, it sounds like we're probably early based on all of the announced builds. Probably, it's not going to go on as strong as they say for as long as they say. I mean, that's generally what we see in different cycles. There are a lot of announcements and optimism upfront. But we think -- I mean, we think we're still pretty early, and I'd say, at least a few more years worth of good, solid growth.

Sure. Maybe pivoting a little bit looking at the policy backdrop. And I don't think certainty is a word that anyone would use to describe last year or maybe the next few who knows. But just wondering how you've been impacted by tariffs, how that plays into your pricing and just supply strategy broadly, and then maybe we can go for a few from there.

Yes. So typically, in the metal space, and I kind of mentioned this in my comments, the mills, the producers of the metal, whether it's carbon aluminum, stainless, they set the price, so we buy from them. But where they set the price is dependent on market fundamentals. A lot of times we'll have producers announce a price increase, but the price never changes. They're either trying to set a bottom, or they attempt to price increase. But if demand is not there, if the market doesn't accept it, then it doesn't go through, and then they're still just dealing transactionally with us. But generally, with tariffs and in 2018, Section 232 came into play for metals and that was a really positive pricing environment for us because there was underlying demand that people wanted to buy metal. So we were able to pass through the increased cost of the metal even though the domestic producers price didn't go up, there was less import coming in. But generally, with tariffs, we mark up not just the underlying cost of the metal, but tariffs, nickel surcharges. We look at the total cost of -- our cost of the metal and then we mark that up. So if tariffs -- if it causes the price to go up $100, we're going to try to get $130 for the extra tariffs. So we pass it through plus a markup. So generally, like we said, we're able to expand our gross profit margins when the mills announced price increases because with our customer base, we try to pass through the increase before we get the higher cost metal in our inventory. In 2025, first quarter was really nice. And there was a lot of buying activity. People are trying to get ahead of the tariffs, but also there were a lot of foreign mills shipping metal into the U.S. to also get the metal here before the tariffs took effect. But we had heavy buying. Carbon prices were going up, customers were paying it kind of prices for carbon peaked in April and then they came down pretty quickly because everyone had already bought their metal. And there was a metal sitting at the U.S. mills, a lot of metal with docs that had come in. So mills increased their prices, but there wasn't -- there weren't people there to buy it. So we weren't able to pass through the higher cost in the way we have in previous markets. So our margin got pinched a little bit, still higher dollars. There have been some aluminum increases. They are paying the tariffs there. We've been able to increase our prices on the aluminum and stainless price increases. But instead of being able to capture it all at once, we've had to incrementally step up our prices to catch up with the higher cost, which is a little different than the cycles we've seen previously, but it's really because that underlying demand isn't there. As I mentioned, metal service center industry shipments are down 3%, which shows you demand's okay out there.

Obviously, a global operation, global market. I mean you had a good slide showing just geographic breakdown of end markets. I wonder if there have been any changes policy related to tariff or others that have changed this mix regionally in a material way, or if you anticipate any changes looking forward just as it relates to business planning, and how long these tariffs or other policy changes may linger?

Well, since we're 95 -- at least 95% domestically sourced. At first, we were wondering what all the craziness was about because we had our supply coming in on a regular basis, then with the domestic producers has less import, it's coming and raising their price and we like, okay, there's something directionally changing here, which is a good thing. And then the steel derivatives, which keep adding and adding, adding, we're starting to hear from our customers more and more, where we might have a customer who's globally located. So they're bringing more to North America and more to the United States. So they're asking for more quotes, more shifts. They're running more shifts. So we need to, first of all, decide is this something that's going to be longer term. Like you said, consistencies day-to-day. But we feel like there's going to be a good run. And our customers as they entrench back in the United States, we feel like we're -- because we've invested so much money, we feel like we're ready to take on the demand.

I believe it was shortly before the conference last year or maybe it was 2 years ago that you guys did the rebrand. Is that last year? [p id="9512864" name="Karla Lewis" type="E" /> It was 3 years ago.

Maybe a few years ago, I guess...

2 or 3.

Okay.

2 years ago.

My question stemming from that is just moving into more adjacent metals and other products, how that has been, I guess, looking back and then looking forward, how that mix again may shift?

Yes. So at Reliance, we're -- I think our people are really good at running metal service center companies and doing more value-add servicing their customers. And we think there's still a lot of opportunity for us to grow both organically and through acquisitions in that space. We'll see some acquisition opportunities that are a little adjacent, a little outside of what we do. And they're not that attractive to us. We've always said if something goes wrong, we need to be able to fix it. So we need to understand the businesses that we acquire. But we certainly do look at broadening our products or product mix at our existing locations. We have our locations, working together more now. So they have a broader depth of -- types of metal that they can sell. And I think it's really more on the value-add processing where we see continued opportunity to do more for our customers. And the more than metal is really about the fact that we're not just like a commodity metal provider, that we are trying to provide solutions for our customers through the processing that we do for them through the logistics, the just-in-time supply chain management. There's just more to it than just selling a hunk of metal.

How much of a change in your order book or pipeline, however you want to define it, have you seen from customers taking advantage of funds through things like formerly IRA, now big beautiful bill, CHIPS Act, Infrastructure Act, different funds available through those programs.

Well, they don't ever do it as fast as we would like them to. But I think on the inflation reduction when that was first announced, we saw activity under that build quicker than we typically see. And certainly then under the IRA or in CHIPS Act, there were a lot of announcements, a lot of starts. I think on the alternative energies that started -- that was funded through tax credits. So we saw activity faster, we think, because they didn't have to wait for approval from the government. They were able to spend the money and then get the tax credit on the back end. The Infrastructure Act, we have seen some good bridge work, but I think there's still quite a bit there that we haven't seen yet. The CHIPS Act, it's been -- there certainly is building going on. There's been some stop and start and pushouts of projects. I don't know, Steve if...

Yes. And we've -- in 2025, saw more bridge work, more tunnel, more airport, a lot more activity. So we think it's going to kind of continue into the coming year.

Sure. Maybe a couple -- please.

Do you think the 50% processing [indiscernible] is a good number or [indiscernible].

So we love to increase it and take it higher. We've had record CapEx the last couple of years, and so we still have some of that coming online, but through acquisitions and our organic growth, we're continuing to grow both sides of our business. So the non-value-add processing, the distribution, we're continuing to grow as well as the processing. So -- and with the volumes we have now, it takes a bit to move that number. But -- and the other thing on the value-add processing are 50%, the best way we've -- that's the best way we've seen to track it is a number of orders. But some of the changes we're seeing is now with some of the equipment we have. We might be doing 2 or 3 different processes on that order, but it's only counting as one, or it might be more complex. So hopefully, we can charge a little more for that order even though the 50% may not move.

Maybe a couple on capital allocation and just blending into '26 outlook. I guess, first, just started M&A, which obviously has been a very important part of the story. Could you talk to the integration of any big larger acquisitions that have been more recent. And then maybe looking forward, your appetite for more, what type of businesses you would look for in that type of outlook, I suppose.

Yes. I mean so far in 2025, we have not completed any acquisitions. We have completed 4 acquisitions in early 2024. I think they're all moving along well. I don't know, Steve, if you want to comment on any of those.

Yes, we -- in 2024, we were pretty active. In 2025, we've not seen many good opportunities. But I'd say that in 2024, we bought an energy company in Texas specialty plate house, which we've -- that integrations gone really well. We bought a flat-rolled company outside of Cleveland, which that acquisition is. There's going to be some more mill capacity coming on board in that vicinity, will probably really ramp up in the next couple of years. Then in the Southeast and South Central, where there's a lot of growth, we bought a company with 3 locations, that integration's been adding to some of our existing customer base.

Sure. And then maybe just the second part about appetite for more, it sounds like maybe there aren't as many near-term opportunities, but your willingness to approach more M&A?

We're always willing. We just have to see the right opportunities out there. So we're continuously looking at the teasers that come in, we maintain relationships throughout the industry. And it's really when is that seller going to be ready. I mean, there are some companies that's been over 30 years, we've been talking to them. And they're not there yet, right? Playing golf with them next week, right, trying to -- still trying to get there. But we're seeing a decent level of activity. But again, we have to make sure it's the right company that fits Reliance, that fits our profile. There are companies maybe 15 years ago, we would have absolutely gone after this company, but now Reliance has a bigger footprint. A lot of our companies have elevated their game. And so maybe that company isn't as attractive to us anymore as they would have been 15 years ago. We will grow organically, but we still want to buy good companies. Now we've got the balance sheet to do it. And well -- whenever we find -- and we'd like to find bigger ones, but it's just it's -- our universe is made up of a lot of small- and medium-sized companies, especially the ones that fit Reliance.

Sure. I think maybe a minute left.

Process for M&A, any thoughts on two of your public [indiscernible]

I knew somebody was going to ask that question, we're on webcast, right? I mean I think for each of those companies, it probably makes sense for them to put together. And we certainly do compete against each of them in certain pockets of our business. But generally, they're targeting large volume, national contract-type accounts, they have gotten more into fabrication. But they're going to do what they're going to do, and we're going to keep doing our thing, and it might create some opportunities for us if there's disruption while they're combining.

I think we'll leave it there in the interest of time. Thank you very much, guys.

All right. Thank you.