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

All right. Good morning, everybody. Welcome to the Jefferies Industrial Conference. My name is Albert Realini. I work on the metals and mining research team here, and I'm joined today by Reliance's CEO, Karla Lewis; and COO, Stephen Koch. And yes, this is going to be a fireside chat. If anybody has any questions, just feel free to raise your hand, and we'll come over and give you over a mic.

But maybe, Karla, I'll start pretty high level, just maybe the state of demand you guys are seeing for your products. During two quarter earnings, more so on the mill side of things, I think they painted a pretty positive outlook, seeing some green shoots, more so in construction-related end markets, new age kind of construction, data centers, things of that nature. So maybe what you're seeing more on the downstream side of things, service center side of things. Yes, if you could just maybe walk through some of your demand end markets, what has been strong as of late?

Great. Yes. Well, we'll dive into that. And first off, thank you all for being here this morning. I'm guessing that none of you were at the tennis match last night because you made it into the meeting today, and thanks to Jefferies and Albert for asking Reliance to be here. So as Albert mentioned, we are a metals service center company. So for those of you not familiar, we buy from the major producers, primarily here in the U.S. We're the most diversified from a product mix and end market exposure standpoint and the largest service center in North America, so we cover a lot of different products and end markets. Overall, we would agree with the mills. The mills are very bullish. We typically follow what they're seeing in demand. And we also typically -- we service a lot of smaller orders at Reliance are with $15 billion of sales. Our average order size is about $3,000 in order, so we're doing several transactions. 40% of our orders, customer calls us today, we deliver tomorrow. We also do sell into some larger projects and larger OEMs, and then at a high level, and then I'll let Steve talk a little more specifically on the markets. At a high level, as I said, overall, pretty bullish carbon steel products, 1/3 of our business, nonresidential construction and infrastructure, which has been healthy for us for the last couple of years, and getting stronger, about 1/3 general manufacturing, where we started to finally see a pickup after a couple of years of operating at fairly low levels in all of the U.S. And then the other 1/3 kind of transportation with aerospace, shipbuilding, et cetera, we strategically don't sell metal directly into the automotive end market, but we process and ship a significant number of tons to the auto OEMs on what we call a toll processing basis where it's customer-owned material. So we don't take possession of the metal, so we don't have metal price risk. And we don't get squeezed on profits, on margins by the OEMs. And we're able to participate meaningfully in that market with the mills as the producers, as our customers, and we charge a fee to process the metal to handle the metal, to store the metal, to deliver the metal, et cetera. And that's been a very profitable way for us to participate in the automotive market. But Steve, if you could maybe talk about some of the end markets.

Yes. Thank you, Karla. So basically, when people ask us about what end markets are strong, which are weak, there's a lot more strong -- many more strong markets than weak markets. We used to point back ag and semiconductor and some other markets that are lagging, but it just seems like everything seems to be really coming to the forefront. There's a lot of products that are in short supply at our mill suppliers level, which might make some of our customers who are on the sidelines come out and try to make sure that they secure those products. Copper products for electrification and data centers, copper bus bar, aluminum plate is in short supply and many carbon products, whether it's structural tube, sheet, wide-flange beams which is the highest price they've ever traded at. And supply is -- basically on allocation into 2027. And there's carbon plate that has recently become more scarce. So we feel like our customer base, we serve all markets, we have 220 locations, mostly in the United States, but Canada and Mexico and Asia and Europe also. But everybody is trying to get their supply. And fortunately, our model is 95% domestic suppliers, and we have some early good relationships with them and they've done a really good job making sure that our customers have what they need, no matter what the end market is.

Yes. And I think just in that little specifically data center electrification around it continue to be strong. On the non-res side, we've seen a lot of schools, hospitals, public infrastructure, airport type of business over the last couple of years, and we continue to see the activity there on the non-res side. Automotive continues at healthy levels for us. We haven't really seen a dip. We continue to have opportunity for more demand there. As I mentioned, general manufacturing fairly broad-based, as Steve said, ag probably the one lagging but we're starting to see a little activity there, but consumer products, industrial machinery, most of that, the heavy equipment, construction equipment, we've seen those pick up. Aerospace has been picking up. There's been some excess supply -- inventory in the supply chain that's being worked through. There is still some there, but for a lot of the products we sell, that has been worked through. So with the higher build rates now and the multiyear backlog, we're very positive on aerospace going forward as well as semiconductor, we were lagging a bit, but we're starting to see that pick up as well.

Okay. And then maybe getting more into the weeds on steel versus aluminum, but I think that kind of goes into my next kind of question, which was on the tariff front. And obviously, we've had a little bit of a ping pong related headlines lately with the potential reduction of -- on tariffs in Canada of 25%, I think there's also maybe some more optimism out of Mexico that they maybe can get something similar done. I mean, again, and I think we've seen with the current administration, the reality might be very different than what the headline ultimately reports. And that initial headline said could be based on different products. But just, I guess, how would a reduction to 25% in Canada, kind of affect your business? And especially, I guess, on the aluminum side of things, just given we import so much primary aluminum from Canada in recent years.

Yes. And this is kind of unchartered waters, so we don't know exactly what the impact would be or how that would happen or play out. But in general, we think a trade deal in North America with Canada and the U.S. would be positive for trade flow and for activity levels on the steel side. And also, I think a lot of that is dependent upon what each of those countries how they handle their overall trade policies, including countries outside of North America, and if they limit some of the metal they import that was coming in to each Canada, Mexico and then making its way to the U.S. So we're hopeful that they have protections in place there to prevent some of that from happening, which I think is probably part of a trade deal. But as Albert mentioned, particularly on the aluminum side of things, last year, when the tariffs were announced, the U.S. brings -- the U.S. aluminum producers who we buy from, they bring in about 2/3 of the primary alumina from Canada, so that was immediately hit with the 50% tariffs. And that created some disruption in the U.S. market. Prices went up very high immediately because the tariffs were real, there was not strong underlying demand at that time to support customers paying higher prices. There was a lot of kind of pre-tariff aluminum in the system, and it was pretty readily available, so there was a bit of a hit to margins. Customers were not buying and not buying at the full tariff costed prices a little over a year ago. Since then, demand has improved for a lot of those products. And so we are seeing now the customers are -- they're paying our markup on the base aluminum price. They're paying the tariff, but they're not paying our markup on that. And the other behavior it caused at our customer base last year was both our customers and other service centers really skinny down on their inventory because everyone was concerned there was going to be a trade deal with Canada any day and their inventory would be immediately devalued, and they didn't want to get stuck holding that. Also, a lot of our smaller customers and competitors have to worry about credit lines and with prices as high as they are, they're very hesitant to hold any extra aluminum inventory. And there's still the concern that if the tariffs do get reduced that there will be a devaluation. We saw a little bit with the rumors or the talks, the other week where there was a little bit of a pullback on aluminum pricing, but there's more to go if there would be a trade deal. I think at Reliance, we're better positioned than most other companies because of our size that if inventory, if aluminum prices go down, we can stop buying from the mills and basically supply each other and get rid of that high-cost aluminum faster than most other of our competitors to protect our margin hopefully, a little better than others in a declining price environment. I don't know, Steve, if you have anything...

Yes, I would just add a few weeks ago, and there was talk of reducing tariffs from 50%, 25%. You saw the stock prices drop a little bit Canada is -- has been a supplier to the United States for the last 30, 40 years, as long as I've been in the business. And to buy material from Canada, you can get it within days or weeks as opposed to if you're buying from Europe or Asia, where there's a longer time to get the material. So if they are going to hit our market again like they have in the past years, it will help with some supply for some of our customers. But we've found that Canada, staying where they are and being a little more restrained, it's been good for our industry, good for our mill suppliers, so we have invested billions and billions of dollars. So if the tariffs are reduced, I think that some sort of quota system would maybe keep things normalized for. So our domestic mill suppliers can continue to invest in our industry.

Maybe just digging deeper there on that quota system. So I think if you look at like market expectations for steel prices next year, right, there -- I think there's some type of trade deal within North America kind of embedded there. And I think that's been kind of the base case expectation just given how intertwined those industries have become after Trump gave them the original exemption, I believe, in 2020. So we've argued that the rail risk is like this is maybe a first sign of a crack in the administration and if it's a sign of things to come. So just based on maybe what you're hearing high level, do you think there's risk that maybe Europe or Southeast Asia or other kind of nations could see some type of reduction to 25% or even some type of quota system like you just mentioned, Stephen?

Yes. I mean it's hard to speculate what the current administration might do. But generally, this administration and even the Biden administration have been favorable from a trade perspective to the metals industry. So we don't see -- and I know Albert, you didn't suggest this. We don't see Section 232 going away. But certainly, there could be some modifications to the current tariff levels. And generally, as long as -- if we still have Section 232, I think it's favorable for the metals industry and provides a lot of the protection we need. But generally, prices probably would come down, that's what we've seen in the past, but they would still be at healthy levels. I mean we're at elevated levels on a lot of products now. and we can still be very profitable. We like the higher prices, we make more money when prices are higher, but we can still be very profitable even if there is some modest reduction in overall metal prices, and we could see some more activity if prices come down a bit.

Yes. I would say that one recurring theme with our mill suppliers is they're aware that they don't want to give the administration an excuse to start trying to promote more material coming in from offshore. So prices are high, lead times are extended, but they're trying to balance that to make sure that they're able to fill material requirements for vital jobs and add more capacity. So the customers and users aren't going to the administration, asking for relief. So it's a balance, and I think they've done a really good job of keeping all parties in business. .

Okay. And then maybe just the last one I had on the tariff side of things. We've seen kind of imports tick up from the low in March, I think flat rolled imports are near double where they were in March currently. And just given some of the, I guess, elevated freight and insurance costs as a result of maybe the war, excluding that, we've calculated that kind of that import arbitrage spread is near the highest level it's been outside of like post-COVID in 10-plus years, but you really haven't seen much move in the price. So I think maybe that's maybe a sign of demand is indeed improving at the margin. But anything to call out in terms of maybe you guys are seeing customers willing to pay the higher domestic price for a security of supply or a maybe cleaner steel, right, maybe some carbon concerns with imported steel?

Sure. Our customers who are building equipment or making data centers, they just want to make sure that they have their material as long as they know they have a secure supply. They're not as price-sensitive as they have been in past years. Yes, like I said, it's -- they've asked for maybe to go offshore, but it's a conversation we have between our mill supplier, the customer and us to make sure that we're able to solve their problems without making drastic purchases. I don't think a lot of our competitors, they don't have the 95%, 5% the best that we have, it's more 50-50. And I think that, that hasn't served them well. I think they're trying to do more domestic. And I think that is the trend I don't think that it's a smart play to go take a bigger position overseas.

And then if any -- if there are any questions in the room, just raise your hand. But I guess, yes, moving on more maybe to specifically the service center and Reliance specifically. I guess this is kind of a combined question in one. But one, just maybe you want to talk about what you're seeing with your market share gains since initiating that kind of growth spending cycle. I think that began in 2021 that was really spearheaded by M&A. And then maybe some of the other consolidation we've seen in the service center industry over the past 12 months and how that's affected your business? And I guess, maybe the opportunity you see going forward for further consolidation in the market.

Okay. Yes. And a lot in there, so Reliance has grown significantly over the years quite a bit through acquisitions. Since our IPO in 1994, we've completed 76 acquisitions, we typically look for good, profitable, well-run opportunities, companies out there, bring them into Reliance and strategically growing our product portfolio, value-add processing. And so a lot of Reliance's growth came through those acquisitions really in around 2015 or so, we started to see the processing equipment that we use really advance and have better capabilities so that we -- if we invested in that equipment, we could provide more value to our customers. And at the same time, a lot of our customers we're wanting to reduce the amount of in-house processing. But we do like first and second stage processing change the size and the shape of the metal. And so they were asking us to do more for them. They wanted to do more design and assembly. And so it played well that we were investing significantly in the equipment. And we were picking up picking up more activity, especially on the processing side. But we, at that time, Reliance, we wanted to focus on quality of earnings. And so we actually reduced our volumes, we were making more money at the time by going after only the highest margin business. But then a few years ago, Steve and I said, we started talking about what we call smart profitable growth, keep all of that high-margin business. We really like that. But there's a lot of other good business out there that's profitable. And especially if prices decline, we need more of that volume with inflation to cover our expenses. So we've been growing quite a bit organically taking market share over the last 3 years, we've been outpacing industry shipments by a couple of percentage points every quarter for the last 2 years, I think, with that focus on picking up good volume business, we're getting better leverage on the operating expense line. So we're continuing, in 2025, we did not complete any acquisitions but we grew our tons shipped by over 400,000 tons on us shipping about 6 million to 6.5 million tons a year. So it was pretty significant organic volume growth last year. And just because we did not complete any acquisitions last year does not mean that we were not actively looking and in processes, but again, we try to buy good profitable companies, but at prices that make sense to us. And there have been, in our opinion, some inflated views by sellers and maybe their bankers on what the value should be. So sticking to our kind of disciplined approach. We did not complete any even though, as Albert mentioned, there were some have been some -- has been activity, continued consolidation activity. We think the consolidation will continue. Steve's talked about our mill suppliers, they're growing. They're looking for people to partner with them customers are consolidating and growing. They're looking for those secure supply change the sustainability of their suppliers. So we think consolidation will continue as far as there have been two larger public service center company transactions in the last 12 months. And to the extent that brings more pricing discipline to those companies because they've each taken out a competitor, that would be positive for all of us. We'd love to see them be more disciplined in the market. Also, there's always disruption around mergers and consolidations, and so we've benefited from picking up some customers, picking up some of their employees as they work through the consolidation.