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

Good morning, everyone. This morning, we're starting with Reliance. And with us today is CEO, Karla Lewis. Karla, over to you.

Good morning, everyone. Thanks for joining us today, and thank you to BMO and Katja for inviting Reliance to the conference. We're just going to kick it off with a really quick overview of who Reliance is. We're a metal service center and processor. Most diversified and largest company. We've been in business since 1939. We've grown through acquisitions, 76 acquisitions completed since our IPO in '94. We think we have a bit of a differentiated approach with a really local focus where we are generally delivering to customers within a 200-mile radius. Decentralized operating model, putting decision-making close to the customer. We really focus on managing our inventory, strong pricing discipline and have limited contractual sales. This shows our product diversification. Again, we believe, the most diversified in the industry. And that's on purpose, because not all metal prices go up and down at the same time and we sell into cyclical end markets, so we think the diversification is important. Last year, $14.3 billion in sales, with an average order size of about $3,000. 40% of our orders: customer calls today, we deliver tomorrow. And that's really kind of our sweet spot that we think helps us drive up our gross profit margins, which you see here our trajectory over time, rising our gross profit margin. The sustainable part of that is really through doing increased levels of value-added processing. Recently, we've, in the last few years, been focused on growth. And our people have really been out there taking market share, and we've been growing our tons shipped significantly more than the industry average. Countercyclical cash flows, so we seem to perform well with our model through different cycles. As I mentioned, we continue to invest through both organic growth with capital expenditures and also through acquisitions, and also focus on returning value to our shareholders through both our dividend, which we just increased again for the 33rd time since our IPO, and also through share repurchases. And just a visual of our stock price compounding above the S&P 500 over the years. And that's the intro.

Perfect. And if anyone has any questions, please send them in through the app. But maybe starting off with the current market conditions. Can you talk a bit about your major markets, what you're seeing, what your customers are saying?

Yes. As mentioned, we try to be diversified and sell into many different end markets. Many times, we don't know exactly where our product is going because we sell to a lot of subcontractors of the OEMs. We do some sales direct into OEMs, but a lot through small job shops and tiers 2 and 3. Our largest end-market exposure is in nonresidential construction, which we would also throw infrastructure in there. For Reliance, similar to many other companies, data centers has been a big driver of demand for all of us. And at Reliance, we have the part of the data center that would fit into the nonresidential construction part with the building, but we're also selling products that would go into the interiors of the building, also into the energy grid. We're selling tubing, we're selling to go into the racking on the interior. We're perforating metal for the enclosures around the servers. We have tubing for some of the cooling systems and some of our high-end liquid tubing that the water travels through for the coolants. We're selling copper into it. So we're touching data centers in many, many different ways with our diversified product mix. But data centers in the nonres side. Infrastructure has been strong. We also have continued to see a lot of public infrastructure works with hospitals, airports, schools; that has stayed strong for us. Reliance and service centers, typically, we're selling into like 5-story and below buildings. We're not doing the big high-rises. There's been a lot of bridge work. General manufacturing. There's a lot going on in the defense world. The government has been pretty active, and then a lot of related companies around that. We've seen consumer products come back a bit, industrial machinery, some of the heavy construction equipment. Ag continues to be weak, and we see that continuing to lag. We also touch automotive through our toll processing companies. Toll processing means that we don't own the metal, so we don't take on any price risk. But we inspect and process and deliver a lot of metal into the automotive companies with the steel and aluminum producers as our customers. And we've seen auto holding up, at least for the part of the business that we have. Aerospace, we sell a lot into aerospace. There has been a bit of an overhang in the supply chain for the last 1.5 years to 2 years. We are seeing that being worked out. And with build rates improving in 2026, we look for continued improvement in that end market as we continue through 2026. And then also semiconductor, we touch. That had been a really hot market. It's, for us, it's been a little slower the last couple of years because again they also bought heavy coming out of COVID and so are still working through some of the metal that they have in their supply chains. But overall going into 2026, our customers are optimistic. We're seeing a lot of activity, a lot of inquiries, a lot of big projects out there. Again, a lot of government and defense projects that are in the works. So we're excited about 2026.

And we do have a follow-up question from the audience on the semiconductor business. The question is, how big is your semiconductor business? And what kind of growth do you see this year and next year?

Yes. So for us, with semiconductor, we generally sell into kind of 2 different channels in semiconductor. One is really to the equipment makers. And that part of the business, we have seen a little bit of improved activity for certain types of metal. And what we're selling in there is a lot of like thick general engineering aluminum plate, is the main product we're selling. There has been a shift of some of that business going overseas the last couple of years. And with the tariffs, maybe with the tariffs, I don't know these days, but some of that metal has not been coming back to the U.S. the way it had been. So that's keeping that, we think, from coming back more significantly than it might. But we do think that we'll continue to see modest improvement in 2026, but that's probably more towards the end of 2026, going into 2027. And I think semiconductor in total is a little less than 5% of our total revenue dollars. And then we have a company that what they do for semiconductor is more in the project phase, when the semiconductor fab plants are being built, and then for repair and maintenance afterwards. And they're actually manufacturing the ultra-high purity gas systems that are kind of the plumbing within the fab plants that take the clean gases and filter those throughout the plant. And that, more specifically for us with the customers, with our largest customers in that space, they've had a lot of starts and stops and slowed a lot of their projects of building. So we're not certain when that comes back; it's somewhat customer-dependent.

And maybe shifting a little bit on the pricing side. The underlying commodity prices have mostly been moving higher. But there were some, I guess, challenges with pushing prices higher on the aluminum side. Is that behind you now? Are you able to fully push all the prices to your customers?

Yes. I mean 2025 was a unique environment, and we're really proud of what our people out in the field were able to do in that type of an environment. And on the carbon steel side, in early 2025, when the tariffs came in, our people executed really well and expanded gross profit margins, which is our typical model, because we have limited contractual sales, because it's kind of that next-day delivery. Typically, we buy in the spot, we sell in the spot. So when the customer calls us with an order, we're pricing that order. And if there's an announced mill price increase, we pass that price increase -- we try to pass that price increase on right away. And so there's a lag before we get the higher-cost metal in. So typically, we can expand our gross profit margin when mill price hikes are announced. And so we were able to do that primarily on the carbon steel side first half of 2025. But then the aluminum tariffs came in, and those -- the U.S. aluminum producers actually had to pay the tariffs. So their costs went up, our costs went up significantly. Customers were very aware. So on the aluminum side, we had more pushback because demand wasn't there. And that's what's important on the carbon side. We were able to get the higher margins because there was good underlying demand to help support that. On the aluminum side, demand was weaker. So it's much more difficult to pass through a price increase when people aren't buying. And so we were not able to do our normal where we would push through the full price increase day 1 or even before we had the material. So we did see -- we didn't see the expansion in our aluminum margins and stainless steel also in the back half of 2025 the way we typically do. By the end of the year, we had -- we're covering the higher cost, but prices keep going up too. The Midwest premiums at record levels, which is good for us. We're still making more gross profit dollars per pound on the aluminum we're selling, which is good for us. It's just when you do the math on the percent, it compressed a little bit. And so coming into 2026, aluminum prices are still elevated, which is good for us. And we'll continue to push this through. We may not get the margin on top of the cost, but we'll get the -- we'll fully cover our costs. So we expect, and especially if demand improves, as we talked about aerospace and some of the other markets, we should see our margins come back to more normal levels.

And to your point on the margin side, right, currently staying towards closer the lower end of your sustainable range. When you look maybe even longer term -- in the past, we talked about adding more value-added processing that could support higher margin. Is that still a possibility over time that you could drive the sustainable gross profit margins higher?

Yes. So we did -- we do talk about, and we had a slide on the intro, that as we've done more value-add processing, we've been able to drive our gross profit margin higher. And the sustainable part of that we did talk about being driven a lot by the increased levels of processing that we're doing, because the processing is not dependent on the metal price, the underlying cost of our metal. But when prices are higher and demand is strong, that also adds into our overall gross profit margin. But it's hard to quantify how much of that lift comes from the pricing environment. But we do believe a 29% to 31% sustainable gross profit margin is our target on an annual basis. We did dip a little below that in 2025. No reason for a downgrade, of course, because we think that that's transitory. And we think some of the pressure on some of the higher-value products we have, particularly in aerospace and semiconductor that we talked about, were a little bit of a headwind on that margin. But long term, we still expect to be in that range. And we are continuing to invest in value-added processing equipment and expanding facilities. In 2025, we increased our tons sold by over 300,000 tons. That's pretty significant in our space. And again -- and we were able to keep our gross profit margin up. Most of that growth was in carbon steel products where we did increase our gross profit margin. So we hear some questions, "Is Reliance going more after volume than after margin?" We're going after both. And we think, given the market in 2025, our people did a great job of balancing, maintaining the margin along with the growth.

We do have a question from the audience on the strategy to grow volumes. And it's how do you balance volume growth while also ensuring you're getting the full margin for the services you provide? And is there a willingness to trade margin for volume?

Yes. So again, as I just mentioned, our people in the field ask us, "Well, what do you want? Do you want volume or do you want margin?" And we want both, right? We think bottom line is growing our earnings dollars. So there's some business that's good business, it might not be 32% gross profit margin, but it might be 27%. And it might be good, we're making profit dollars on that, so we should go after that business. Because we also have inflation impacting us, and so our costs are going higher. We need earnings dollars to be able to cover that. So it's that balance of still going after good business, but there's good business out there at 27% margin, but you have to still be able to get 35% margins on some of your other products. And it will vary for us by company depending upon what their product mix is. Because not all markets, not our margin profiles are the same for the different products and end markets we sell into. So there's a lot to balance there. But we think bottom line for our shareholders, the more earnings dollars we can generate for you, the better. But it is still a strategy to focus on both volume and margin.

And then typically with -- on the -- when we see focus on growth on the upstream steel or aluminum side, it comes with a lot of CapEx spending. Will you have to spend more on CapEx in order to grow?

Well, I think we've done a really good job growing over the last couple of years. We had that one chart showing our tons shipped growth. We had record tons shipped in 2025. We have had kind of a higher-than-normal capital expenditure budget in 2023 and '24. It came down a little bit in '25. And our budget for 2026 is a little lower than it has been, but it still has a lot of growth opportunity, again, mainly through value-added processing equipment. We do have some greenfields and some expansions. But we really have a focus this year on really making sure we're utilizing the spend of the last couple of years. And so that's really a focus for us. And we can do more with the equipment, with the spend that we've already incurred, and that's what we're really pushing our people to do. But we will continue to grow, and our CapEx budget for 2026 is at $275 million. But as I mentioned earlier, there is a lot of customer optimism, a lot of jobs being quoted out there, that we're fully capable and willing to increase that budget if we see good opportunities brought to us by our customers. And that's really how our CapEx budget is built. It's from opportunities with customers, and we want to be there to support them in their growth.

And I think you mentioned the CapEx spending for this year. If I'm not mistaken, half of that is directed to growth, right? Can you maybe talk a bit about what type of projects, if there are larger projects that you're investing in?

Yes. So for Reliance, which is different than a lot of other companies here you'll talk to, a big CapEx spend for us is maybe $40 million. And that's buying property, building a new service center facility and putting equipment in it. I think our largest-ever CapEx spend was like $70 million. If you're a producer or a miner, you're spending hundreds of millions to billions of dollars on a single item. We're buying saws for $600,000 or $100,000 each. We're buying a lot -- there's been a big advancement in both flat and tube laser processing equipment. Those pieces of equipment might be $1 million to $2 million. If we put in like a full slitting line for flat-rolled products, that might get up to $5 million to $6 million, maybe $10 million on the high side. So it's a lot of individual pieces of equipment that add up to that total.

And Karla, you spoke earlier about your diversified product mix. Are there any products that you would still like to grow more than others?

Well, we'd like to grow all of our products more as long as it's profitable business. And so with our service centers, it's not like a Walmart where everybody carries the same thing. Most of our service centers, we have 310-plus service center locations, predominantly in the U.S., North America range, but a few overseas. And a lot of them specialize. Some sell primarily into the aerospace industry, and they have to have certifications for that. Some have auto certifications. We've got general line companies that sell into multiple different industries. Some focus more on nonresidential construction. So there's typically -- even though we might have 3 to 10 locations in an urban area, there's still room for us to grow in certain products there. So we're very opportunistic and look to our people running our businesses to tell us what the customer need is in that area. And then we can grow organically, or we look at the acquisition opportunities that come before us and evaluate. But there's room to grow quite a bit more in most markets.

Maybe staying on the acquisition side, we've seen 2 larger deals announced or mergers announced. How do you think that impacts the industry? Is that a positive from your perspective? Or how are you looking at it?

Yes. So it should be a positive for the industry. Because what we look for -- we think we're pretty good at pricing discipline. Our gross profit margins are among the highest in the industry. But we do have competitors. And so typically, the fewer competitors, the more pricing discipline you see. So if those mergers result in better pricing discipline because of fewer players in the market, that would be something that we and everyone would benefit from. Also when there are mergers like that, there is disruption. And so for Reliance, we also look at it as opportunity in a couple of other ways. One, that we might pick up some customers. We might pick up some good salespeople or employees with the disruption going on. And also with the 2 mergers that Katja is speaking about, that creates bigger, more diversified companies that might be more attractive acquisition targets for Reliance at some point in the future.

And then from your perspective, as you mentioned earlier, you -- historically, you've been very acquisitive. Can you talk about right now what you're seeing in the marketplace? Are there any good opportunities for you to grow through M&A?

Yes. So we did not complete any acquisitions in 2025. We completed 4 in 2024. But we were busy looking in 2025. So just because we don't complete any doesn't mean that we're not looking. Our appetite is still there. But as Reliance gets bigger and we continue to grow, and we have really solid management teams, we might be a little more selective sometimes. But we really weigh the opportunities. And as I mentioned earlier, we grew our tons sold by over 300,000 tons last year. That's equivalent to doing an acquisition of a company of like $650 million plus. And we paid a lower price, so to speak, to grow those tons than if we would have paid a premium to acquire a company. But that doesn't mean -- I mean, we still want to buy good companies that fit. But we are -- just because we didn't do any acquisitions last year doesn't mean we're not growing the company.

Maybe lastly, quickly on shareholder returns. How are you thinking about it this year and longer term?

Yes. So we do think about shareholder returns over the long term. And as I mentioned in the intro, we think we've been pretty active and pretty balanced. We've, as I mentioned, we've paid a quarterly dividend for, I think, 66 years now. We've increased it 33 times. We want -- we've never not paid our dividend and we've never decreased our dividend. So we want to consistently grow the dividend at a sustainable level. And then we're opportunistic on our share repurchases. So we look at the market. And the one thing I think that's important at Reliance is we've been able to be very balanced with our financial strength. We don't have to pull back in shareholder returns to be able to do an acquisition. We're able to execute on all the good opportunities we see in front of us.

Perfect. Thank you so much, Karla.

All right. Thank you, everyone. Thank you, Katja.