Earnings Call Transcript - RS Q1 2026

Operator, Operator

Greetings, and welcome to the Reliance Inc. First Quarter 2026 Earnings Call. The operator provided instructions. Please note, this conference is being recorded. I will now turn the conference over to your host, Kim Orlando with Investor Relations. Please go ahead.

Kimberly Orlando, Head of Investor Relations

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's First Quarter 2026 Financial Results. I am joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.reliance.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance.

Karla Lewis, President and Chief Executive Officer (CEO)

Good morning, everyone, and thank you for joining us to discuss our first quarter 2026 results. Reliance is off to a strong start to 2026, capitalizing on favorable market fundamentals with first quarter volumes, pricing and earnings exceeding our expectations. Strong pricing and demand momentum continued to build throughout the quarter across our diversified product and end market portfolio. Our first quarter tons sold were a record and were up both sequentially and year-over-year. A result that's especially notable given the unusually strong tariff-driven demand pull forward in the prior year period. For the 13th consecutive quarter, we significantly outperformed broader industry shipments. Average selling price per ton sold also rose over the prior quarter, surpassing our expectations. Strong execution converted a 15% increase in sales, driven by higher shipments and prices, into significant operating leverage driving over 30% year-over-year growth in our non-GAAP pretax income and nearly 37% year-over-year growth in non-GAAP earnings per share to $5.16. As previously announced, we also secured two significant government contracts in the first quarter to supply the Department of Homeland Security border wall and Joint Strike Fighter projects through our AMI Metals wholly owned subsidiary. We were excited to win these contracts which collectively represent up to approximately $3 billion in revenue and further reinforce Reliance's role as a trusted partner on critical U.S. infrastructure and defense programs. These wins illustrate our ability to support large and complex projects by leveraging the scale, logistics capabilities, processing expertise, deep supply chain relationships and existing operating infrastructure of the Reliance family of companies. Our diversified platform allows us to concurrently meet the needs of large program partners as well as small-order, quick-turn customers. As a reminder, our first quarter results did not include any contributions from the border wall contract. Our disciplined capital deployment and strong cash profile give us the flexibility to execute on both our growth and stockholder return activities concurrently. In the first quarter, we generated strong operating cash flow even with a typical seasonal build in working capital. Our full year 2026 outlook for capital expenditures is approximately $300 million with a little less than half directed towards strategic growth investments that enhance our processing capabilities, strengthen our ability to serve customers, expand our footprint and grow volumes in attractive markets. In the first quarter, we increased our dividend rate by 4% to an annualized $5 per share and repurchased $234 million of our shares. Our strong balance sheet and liquidity position remain key competitive advantages, affording us the ability to invest in our business, pursue strategic acquisitions and return capital to our stockholders while maintaining our disciplined approach to capital deployment. In summary, we are encouraged by rising customer optimism and activity across our broad end markets with continued momentum in the infrastructure, data center, energy and defense sectors. As we enter the second quarter, extending lead times at our mill suppliers also bode well for a continued strong pricing environment as access to metal becomes a strategic advantage. Reliance's unique scale and capabilities, along with our domestic mill relationships and exceptional teams, position us well to further capitalize on the opportunities ahead in 2026. I'll now turn the call over to our COO, Steve Koch.

Stephen Koch, Executive Vice President and Chief Operating Officer (COO)

Thanks, Karla, and good morning, everyone. Our first quarter performance reflects strong execution across our operations and a continued commitment to safety and customer service. I want to thank our teams for their hard work and discipline, which continue to differentiate Reliance in the marketplace. Turning to our demand and pricing trends. Record tons sold increased 9.4% from the fourth quarter of 2025, exceeding our expectations of up 5% to 7%. Year-over-year, tons sold increased 2.7%, significantly outperforming the service center industry, which reported a decline of 5.1% over the same period. Our nearly 8 percentage point outperformance in the first quarter and sustained outperformance over 13 consecutive quarters reflects the advantages of our operational scale, commercial diversification and unmatched processing capabilities. Carbon volumes remained our primary growth driver with particular strength in nonresidential construction and manufacturing applications. Aluminum and stainless product volumes also contributed to year-over-year volume growth at higher per-ton profitability levels. Our first quarter average selling price increased 5.3% from the fourth quarter of 2025, exceeding our expectation of up 3% to 5%. Carbon steel, aluminum and stainless steel product pricing all trended upward amid tight supply, extending lead times and improving demand conditions. As Arthur will discuss in our outlook, we believe that these market dynamics will continue to support strong pricing in the second quarter of 2026, elevating a strategic advantage we hold in accessing metal from our domestic mill partners. Turning to our end markets. Nonresidential construction represented roughly one-third of our first quarter sales, primarily from carbon steel tubing, plate and structural products. First quarter shipments remained strong supported by data center and related energy infrastructure projects continuing at record levels, along with overall strong demand in heavy civil and public infrastructure work. Our strong position in these markets outweighed lower activity in certain private nonresidential construction markets. Our nonresidential construction market participation is further strengthened by our involvement in the Department of Homeland Security border wall project with activity commencing this month. General manufacturing also represented about one-third of our first quarter sales. Our participation in this market is highly diversified across products, industries and geographies. Shipments grew year-over-year driven by strength in industrial machinery, including data center equipment, shipbuilding programs, military programs, consumer products and construction machinery. We are also capturing rising nuclear-related demand driven by emerging small modular reactor programs and data center energy requirements. Aerospace products accounted for approximately 10% of our first quarter sales. Commercial aerospace demand remains subdued as elevated inventories persisted across the supply chain though we expect conditions to gradually improve in 2026 as OEMs work through record backlogs and increased build rates. Defense and space-related aerospace programs remained robust during the quarter. Automotive, which we primarily serve through our toll processing operations, represented 4% of our first quarter sales. As a reminder, our toll processing volumes are excluded from our tons sold. Underlying demand has remained stable supported by our recent capacity investments and our ability to quickly adapt to the variable demand of the automotive market. Lastly, we are seeing encouraging improvement in demand in the semiconductor market with momentum building in 2026. In summary, Reliance continues to be defined by our people, our strong domestic mill relationships and our focus on delivering unmatched customer service. The strategic investments we've made across our footprint are generating tangible returns and our disciplined commercial and operational approach continue to drive the profitability that differentiates us. I will now turn the call over to our CFO, Arthur, to review our financial results and outlook.

Arthur Ajemyan, Senior Vice President and Chief Financial Officer (CFO)

Thanks, Steve, and thanks, everyone, for joining today's call. We delivered a strong first quarter with sales up 15% year-over-year on stronger-than-anticipated shipments and pricing. Our gross profit of $1.2 billion was up 23% compared to the fourth quarter of 2025 and up 13% compared to the first quarter of 2025. On a FIFO basis, which is how we evaluate our ongoing performance, non-GAAP FIFO gross profit margin expanded to 30.1% compared to 28.5% in the fourth quarter of 2025, and was only slightly below 30.4% in the prior year quarter. Our pricing discipline enabled us to pass through higher mill pricing on most products in the first quarter and expand margins. Higher-than-anticipated material costs resulted in the first quarter LIFO expense of $37.5 million, above our $25 million estimate, prompting us to raise our full year LIFO outlook to $150 million from the prior $100 million annual estimate. Accordingly, we expect LIFO expense of $37.5 million in the second quarter of 2026. I'd like to also briefly address the impact of incremental Section 232 tariffs on our gross profit margins and profitability. The 50% Section 232 tariffs have had the most impact on aluminum gross profit margin as pricing for many common alloy aluminum products increased significantly without a corresponding significant increase in demand. Despite the moderate negative impact on the gross profit margin, our aluminum gross profit dollars are up about 18% compared to the first quarter of 2025. Overall, the current pricing environment is resulting in higher gross profit dollars across our product portfolio and contributing to improved profitability despite variation in margin performance for certain products. Non-GAAP SG&A expense increased 6% compared to the first quarter of 2025, driven by higher incentive compensation from improved profitability, inflationary impacts on compensation and related benefits and higher variable warehousing and delivery costs associated with our increased tons sold. On a per-ton basis, non-GAAP SG&A expense increased 3% due primarily to higher incentive compensation. Our growth in shipments from continued market share gains and improved gross profit dollars drove improved operating leverage and resulted in a 33% year-over-year increase in non-GAAP pretax income to $354 million with an 8.8% pretax income margin, which was up 120 basis points. Our non-GAAP first quarter earnings per diluted share grew nearly 37% year-over-year to $5.16. For reference purposes, LIFO expense per share amounted to $0.54 for the quarter compared to the $0.36 assumption in our guidance and $0.35 in the prior year quarter, stemming from higher-than-anticipated carbon steel and aluminum product cost increases. Moving on to our balance sheet and cash flow. Cash flow from operations in the first quarter was approximately $151 million, reflecting typical seasonal working capital build from increased shipment activity as well as the impact of higher metals pricing. Our inventory turn rate based on tons improved to approximately 5x compared to 4.9x a year ago, while accounts receivable DSO of 42 days was consistent with the prior year. During the quarter, we funded $64 million of capital expenditures, paid $67 million in dividends and repurchased $234 million of our common stock at an average price of $299 per share. We have approximately $529 million remaining available under our current share repurchase program. As of March 31, our total debt was $1.7 billion. Our leverage position remains very strong with a net debt-to-EBITDA ratio of 1, giving us substantial liquidity and flexibility to continue executing on our capital allocation priorities. Looking ahead, we expect both demand and pricing to remain healthy in the second quarter of 2026, generally in line with Q1, subject to ongoing risks from domestic international trade policy and the conflict in the Middle East. We anticipate second quarter 2026 non-GAAP earnings per diluted share in the range of $5.15 to $5.35, up 16% to 21% year-over-year, including an estimated $37.5 million of LIFO expense or about $0.54 per diluted share. Please refer to our first quarter earnings release for further details on our Q2 outlook as well as anticipated contributions from the border wall contract. In closing, we're very pleased with our first quarter performance, our solid volume growth, continued market share gains and disciplined pricing supported improved operating leverage and stronger earnings. This concludes our prepared remarks. Thank you again for your time and participation. We'll now open the call for your questions.

Operator, Operator

The operator provided instructions. And our first question will come from Martin Englert with Seaport Research Partners.

Martin Englert, Analyst

Questions on the guidance here. And just looking at the current quarter FIFO gross profit margins improved to about 30% from the 28.5% last quarter. Even accounting for the new DHS contract in the mix for Q2, given the improving broader price backdrop as well as volumes, do you think you're being conservative with the implicit Q2 FIFO gross margins in guidance? Or are there other factors to be considering here like a lagging catch-up in margins and the inflationary price factors with aluminum here?

Karla Lewis, President and Chief Executive Officer (CEO)

Martin, on the guide for Q2 around gross profit margin, which we don't explicitly provide guidance on: Q1 was a good, strong pricing environment with a lot of products having price increases, which gives us an opportunity to drive our margins up a bit for a temporary period. We expect some continued price improvement in Q2, but not to the level of Q1. We will start to see the higher-cost metal hit inventory and normalize a bit toward the end of the quarter. So probably not stronger; we have less upside than in Q1 from a price increase dynamic. And then on the border wall, the gross profit margins will bring our consolidated number down a bit just based on the product mix of what we're selling and the services we're providing. But as we mentioned, extremely low operating cost on the volume there, which will help us leverage our expense line and give us very strong earnings from the border wall project.

Martin Englert, Analyst

I guess looking another step ahead here and coming back to your comment on maybe by the end of the quarter, so not as much of a price increase or momentum quarter-on-quarter, but maybe things begin to normalize relative to the inventory costs coming through. So looking further ahead, does that offer some opportunity for some partial normalization in FIFO gross margins understanding that you'll have this contract in the mix, and that will be something that's dilutive, but not additive to the bottom line?

Karla Lewis, President and Chief Executive Officer (CEO)

Yes, I think that's right, Martin. That's the way the dynamics typically work: pricing drives a lot of the margin upside and then to the extent it normalizes or comes down, you also need the underlying demand to support that, which we, at this time, feel really good about for 2026 across most of the products and end markets we're selling into. That provides a good backdrop from a pricing standpoint. Q1 had strong price increases. We expect prices to remain at good levels; just maybe not increasing at the same pace.

Martin Englert, Analyst

Okay. So some transitory trends normalizing as the pricing moves through the distribution channel relative to the cost pushing through, not too different than what we saw in recent quarters given the inflationary impact of Section 232 tariffs, yes?

Karla Lewis, President and Chief Executive Officer (CEO)

Correct. Yes.

Martin Englert, Analyst

If I could ask one more: I was curious on your thoughts. It seems like areas of defense are strong and semiconductor is improving, which I think it's been a while since we've seen any positive news on that front. And I think I've also heard in oil and gas. Could you just touch on the margin profile of these product lines that serve these end markets and potential mix implications as we're moving through 2026?

Karla Lewis, President and Chief Executive Officer (CEO)

We don't really talk about how they affect gross profit margin by product, Martin. It does vary, and it depends on how much value-add processing we're doing. Defense continues to remain strong across a lot of the different products we sell. Semiconductor is a small part of the business, but it can be high value. We have some niche semiconductor business with very high-value products that had been down but we're happy to see some improvement beginning. At a consolidated level, there's nothing material to comment on as far as a change in product mix or financial guidance.

Arthur Ajemyan, Senior Vice President and Chief Financial Officer (CFO)

Martin, I would add that from an end market perspective, we saw the ISM manufacturing index stay above 50% for three consecutive months, and we saw that translate into some increased activity in the first quarter. We noted in our release that the manufacturing end market showed increased year-over-year tons. We're looking at that as a good tailwind, and we have a lot of different products with value-added processing that go into that end market, which, as we all know, hasn't been doing well for the past three years. So there's some potential tailwinds there.

Martin Englert, Analyst

Yes. It's nice to see some nascent signs of recovery with activity amongst the end users there. Congratulations on the results and the contract wins.

Operator, Operator

The operator provided instructions. And our next question comes from Bennett Moore with JPMorgan.

Bennett Moore, Analyst

Karla, Steve, Arthur, congrats on the strong quarter. I wanted to get a better idea of how we should think about the cadence of these DHS volumes ramping throughout the year. Is the pricing structured such that if broader market pricing were to fall you could offer downside protection to gross margins in such a scenario?

Karla Lewis, President and Chief Executive Officer (CEO)

Bennett, as far as the cadence on the border wall project: we began shipping in April and are still in a start-up ramp-up phase. We included our current estimate of volume activity in Q2 in our guidance. We do expect that to increase as we move into Q3 and beyond as the program gets up and running. There is not a committed shipment schedule, so it could vary from quarter to quarter, but we do anticipate higher activity in Q3 than we projected for Q2. As far as pricing, we can't get into the specifics, but we do have the contract volume up to certain dollar amounts over the period through 2027.

Bennett Moore, Analyst

Understood. On aluminum, we've seen another spike in pricing. Are you still able to cover your costs at this stage? Is 50 bps still the right way to think about the margin impact? Also, could you share what share of aluminum was in relation to the LIFO expense this past quarter?

Karla Lewis, President and Chief Executive Officer (CEO)

Bennett, the dynamics in aluminum continue where, unlike this time last year, our companies have been able to push through the 50% tariff to our customers, but we're not necessarily getting a full margin on that 50% tariff cost, which puts pressure on the overall gross profit margin percent for our aluminum products compared to periods without that tariff. It also increases LIFO because LIFO was not designed for periods with 50% tariffs, so we have to take a LIFO charge on top of the tariff costs, which is a drag while the tariffs are in place. However, aluminum prices are significantly higher, so even though we're not getting the percentage margin on that, we are getting significantly higher gross profit dollars on our aluminum sales that help cover SG&A and contribute to earnings dollars.

Arthur Ajemyan, Senior Vice President and Chief Financial Officer (CFO)

To add: despite the margin distortion that Karla mentioned, gross profit dollars are up year-over-year by roughly 17% to 18%, showing that profitability has improved significantly on those sales. When you introduce a 50% tariff that creates some noise. The LIFO impact is also substantial: last year, nearly half of our LIFO expense was related to aluminum. This year it's tracking a little less than half, maybe over one-third. If prices level off and remain where they are, you won't have that LIFO headwind on aluminum next year, which will ease the temporary margin compression dynamics. Net-net, these tariffs have contributed to higher profitability across our product portfolio, including aluminum.

Karla Lewis, President and Chief Executive Officer (CEO)

As a reminder, when we book LIFO expense, it increases our LIFO reserve that is then available to come back into income in future periods when prices come down.

Operator, Operator

The operator provided instructions. We'll go next to Samuel McKinney with KeyBanc Capital Markets.

Samuel McKinney, Analyst

We talked about the rapid rise in aluminum pricing being a drag on gross margin given it's been tough to get ahead of that and tariffs are still impacting that market. Am I wrong in thinking that the first quarter sequential gross margin expansion reflects a better job of navigating that market versus the back half of last year?

Karla Lewis, President and Chief Executive Officer (CEO)

Yes. That's fair. To be clear, it's a drag on the gross profit margin percentage but not on gross profit dollars. Incrementally, each quarter coming out of Q2 last year when the tariffs hit, we've made progress. Overall demand has improved a bit for some aluminum products, which helps us pass through cost when demand is stronger. So we agree with your thinking, Sam.

Samuel McKinney, Analyst

On the border wall contract, you're expecting it to be a solid earnings contributor despite the relatively lower selling price versus the rest of your business. When you talk about the operating network, could you discuss the operating levers you can pull as these tons grow over the course of this year and into next?

Karla Lewis, President and Chief Executive Officer (CEO)

Price on those products is lower, but the services we're providing—much of the tonnage involves storage and handling. We are doing some value-added processing, but operating costs are relatively low given the volume. This lowers our SG&A percent relative to the rest of our business. At these volumes and with a low cost structure, it's a good driver to earnings. One reason Reliance was awarded this contract is our ability to operate at scale. Back in 2008, our AMI business secured a smaller border wall contract and performed very well. This is much larger in scale with high tonnage and a short period to provide services. We need multiple locations to store and provide logistics under the contract, and with the Reliance network, our AMI company is working with other Reliance companies and utilizing some of their property, which keeps costs lower. We didn't have to go out and secure new equipment or property to service the project.

Stephen Koch, Executive Vice President and Chief Operating Officer (COO)

A majority of the products being shipped are structural sections, but there's also a lot of sheet that we're processing at one of our plants in Texas. As Karla mentioned, we have planned set-ups along the border, shipping products out of Texas and California. We appreciate the support from our domestic mill suppliers because supply is tight right now. Hot-rolled coil availability is limited, and we're able to get as much as we need to meet our customers' demands.

Operator, Operator

The operator provided instructions. We'll go next to Nick Cash with Goldman Sachs.

Nick Cash, Analyst

Just a quick one on the current inorganic growth pipeline. You have been selective since you did the meaningful acquisitions a while back. How does the pipeline currently look and how are you thinking about capital allocation between organic and inorganic growth going forward?

Karla Lewis, President and Chief Executive Officer (CEO)

From an acquisition pipeline perspective, it remains pretty consistent with what we've talked about in prior quarters. There are opportunities, and we see a steady stream as we have for the last year or so. Many companies we like are privately owned family businesses, so availability depends on whether they're ready to sell and on valuation. Our appetite to acquire quality companies hasn't changed, but it's somewhat dependent on seller timing and valuation. We've been in a strong financial position for the last few years and haven't had to choose between capital allocation priorities. We've been able to execute on acquisitions we like while continuing to grow organically and return capital to shareholders via an increasing dividend and share repurchases. There's no change in that approach.

Nick Cash, Analyst

Appreciate that. One more: within nonresidential tonnage, what percentage is data center-related and how has that mix shifted year-over-year? And within energy infrastructure, how much solar exposure do you have?

Karla Lewis, President and Chief Executive Officer (CEO)

We can't give an exact percentage because we typically sell to fabricators and contractors who work on multiple projects, so we don't always have a clean way to quantify direct project exposure. We have been seeing increasing activity for data centers. Steve, anything to add on solar?

Stephen Koch, Executive Vice President and Chief Operating Officer (COO)

We don't have a lot of direct exposure to the solar market, but our mill suppliers have significant solar-related demand, which consumes tube and hot-rolled coil. That keeps mills busy and supports pricing at good levels for the market.

Operator, Operator

The operator provided instructions. We will take a follow-up question from Bennett Moore with JPMorgan.

Bennett Moore, Analyst

I wanted to come back to the semiconductor markets. What sort of opportunities do you see to gain share from foreign suppliers? And can you remind us what the qualification process looks like and the timing to do so?

Karla Lewis, President and Chief Executive Officer (CEO)

On semiconductor exposure: much of our sales into that ecosystem are to equipment manufacturers and ancillary suppliers. We've seen improving activity in the last quarter or two. Some customers shifted to foreign locations; we have a location in Singapore that supports customers in that region. Another specialty semiconductor company we own sells to chip makers and equipment makers from locations in the U.S., South Korea and China, and also sells into interior construction for chip facilities. That part of the business faced delays in buildouts in the U.S., but it is a good market for us. That company has been working on capabilities to sell more into the data center market, and we expect to see increased activity for that company in the near term.

Stephen Koch, Executive Vice President and Chief Operating Officer (COO)

As far as qualifications go, many customers that had moved to Asia are reshoring due to onshoring trends. We're already certified with many of those customers and are picking up business.

Bennett Moore, Analyst

One more: regarding the defense contract with Lockheed programs and the upsized renewal, can you contextualize what the margin profile looks like for this contract relative to the overall business given that H1 is a little bit below?

Karla Lewis, President and Chief Executive Officer (CEO)

We already have those programs under contract with Lockheed Martin, so there's no significant change in impact from the new contract that begins in 2027. We do expect about 10% higher volumes—it's a larger contract with multiple programs, including the Joint Strike Fighter—so it will add volumes but should not be a noticeable shift in margin profile.

Operator, Operator

The operator provided instructions. We have a follow-up from Martin Englert with Seaport Research Partners.

Martin Englert, Analyst

For the DHS contract, can you share more about the volumes associated with Phase 1 and the incremental volumes and when the rest of the contract completes?

Karla Lewis, President and Chief Executive Officer (CEO)

We have not disclosed tonnage under that contract. We disclosed dollar amounts: Phase 1 and Phase 2 total $2.2 billion, and Phase 1 is $1.4 billion, which runs through...

Arthur Ajemyan, Senior Vice President and Chief Financial Officer (CFO)

Mid-2027.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the floor back over to Karla Lewis for closing comments.

Karla Lewis, President and Chief Executive Officer (CEO)

Thank you, and thanks, everyone, for joining us today and for your continued support of Reliance. In summary, a reminder of Reliance's unique scale, diverse portfolio, financial strength, domestic mill relationships and expanding service capabilities that enable us to support our customers reliably and to capitalize on the significant opportunities ahead in 2026. I'd really like to thank our Reliance family for all that they did for a very strong first quarter; we look forward to them doing so throughout the rest of 2026 and doing it safely. I also want to note that we'll be in Boston next month for KeyBank's Industrials and Basic Materials Conference, and in June we'll be at the Wells Fargo Industrials Conference in Chicago. We look forward to connecting with many of you there. Thanks again, everyone. Goodbye.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.