Prepared remarks
Greetings, and welcome to the Reliance, Inc. Second Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press zero. It is now my pleasure to turn the call over to Kimberly Orlando, Investor Relations. Kimberly, please go ahead.
Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's Second Quarter 26 Financial Results. I am joined by Karla R. Lewis, President and Chief Executive Officer; Stephen 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 R. Lewis, President and CEO of Reliance.
Good morning, everyone, and thank you for joining us to discuss our second quarter 26 results. Reliance delivered another excellent quarter building on the positive momentum of the first quarter and the continued strong execution by our teams. Market conditions remained favorable, supported by improving customer activity, extended mill lead times, and strong pricing across our broad product portfolio. We achieved our second highest quarterly revenue as well as record quarterly tons sold and continue to outperform broader industry shipment trends. These results and our sustained industry outperformance reflect our scale, diversification across end markets, products, and value-add service offerings and our position as a partner of choice with domestic mills. Nonresidential construction end-market sales remained strong and we began to see meaningful improvements in our sales to the general manufacturing, aerospace and semiconductor end markets throughout the second quarter. We also benefited from initial contributions from the U.S. Department of Homeland Security border wall contract that we were awarded earlier this year, generating activity in excess of our guidance and contributing meaningfully to our second quarter earnings. Steve and Arthur will speak about its financial impact later in the call. Elevated pricing levels along with strong execution by our teams drove significant growth in our profitability, including a 40% year-over-year increase in non-GAAP pretax income and non-GAAP earnings per share of $6.27, our highest EPS result since the second quarter of 2023. Trade policy continues to limit imports and support strong domestic pricing, which is further strengthened by extended lead times. Our longstanding domestic mill partnerships help ensure reliable material availability allowing us to better serve our customers and capture new opportunities. Our balance sheet and liquidity remain key competitive advantages supporting strategic growth investments and ongoing returns to stockholders, as well as disciplined capital deployment. For the full year 2026, our capital expenditure outlook remains approximately $300 million with about half allocated to strategic growth investments to enhance processing capabilities, strengthen customer service, expand our footprint, and grow volumes in attractive markets. As customer optimism builds, and activity continues to strengthen across infrastructure, including the border wall project, semiconductor, general manufacturing, and aerospace, Reliance remains exceptionally well positioned to capitalize on the many meaningful opportunities that we expect to continue to materialize throughout the second half of 2026 and into next year. I will now turn the call over to our COO, Steve Koch.
Thanks, Karla, and good morning, everyone. Our second quarter performance reflects continued strong execution across our operations, and our dedication to safety and exceptional customer service. We will recognize our teams across the Reliance family of companies whose relentless focus and hard work fuel our industry leading results and reinforce the many competitive advantages that set Reliance apart. Turning to our demand and pricing trends. Record tons sold increased 7% from the prior quarter, and were up 10.8% compared to the second quarter of 2025, significantly exceeding our expectations of up 1% to 3% sequentially, and up 4.5% to 6.5% year over year. The sequential increase in our second quarter tons sold included a 5.1 percentage point contribution from the U.S. border wall contract. Carbon steel products continue to lead our tons sold growth. Aluminum and stainless steel products also contributed at higher per ton profitability levels. Our second quarter average selling price increased 7.8% from the first quarter of 2026, exceeding our expectation of up 1.5% to 3.5%. This includes a 1.6 percentage point offset from the U.S. border wall project as a result of higher shipment volumes of lower priced products. Pricing for carbon steel and aluminum products continued upward amid constrained supply, extended lead times and strengthening demand. These market dynamics magnify the strategic benefit of our reliable access to metal from our domestic mill partners. Turning to our end markets. Nonresidential construction represented roughly one-third of our second quarter sales, primarily from carbon steel tubing, plate and structural products. Second quarter shipments remained strong despite supply constraints, driven by sustained strong activity in data center and related energy infrastructure projects, alongside solid demand in heavy civil and public infrastructure work. Our participation in the U.S. border wall project further strengthened our presence in the nonresidential construction market. General manufacturing also represented about one-third of our second quarter sales. Our participation in this market is highly diversified across products, industries, and geographies. Shipments showed strong year-over-year growth driven by industrial machinery, including data center equipment, as well as shipbuilding, military, consumer products, and construction machinery. Aerospace products accounted for approximately 9% of second quarter sales. We saw early signs of improvement in commercial aerospace supported by improving backlogs as OEM build rates increased, though elevated inventories persist. Defense and space-related aerospace activity remained strong during the quarter. Automotive, which we primarily serve through our toll processing operations, represented about 4% of second quarter sales. As a reminder, our toll processing volumes are excluded from our tons sold. Demand improved in the second quarter as our flexible toll-processing operations quickly adapted to the variable demands of the automotive market. Lastly, demand in the semiconductor market is showing clear improvement. We are seeing momentum accelerate, supported by increasing data center activities. In summary, Reliance continues to be distinguished by our people, our strong domestic relationships and our focus on delivering unmatched customer service. In addition, strategic investments we have made across our footprint are generating tangible returns and our disciplined commercial and operational approach continues to drive the market outperformance and profitability that further differentiate us. I will now turn the call over to our CFO, Arthur Ajemyan, to review our financial results and outlook.
Thanks, Steve, and thanks, everyone, for joining today's call. We delivered another strong quarter with sales increasing 27% year over year on stronger than anticipated shipment and pricing. Our second quarter gross profit of $1.3 billion was up 11% compared to the first quarter of 2026, and up 20% compared to the second quarter of 2025. On a FIFO basis, which is how we evaluate our ongoing performance, non-GAAP gross profit margin expanded to 30.5% compared to 30.1% in the first quarter of 2026, down modestly from 30.6% in the prior year quarter. This includes a roughly 40 basis point margin headwind from the U.S. border wall project. However, as we are leveraging existing infrastructure, the project below-company-average operating cost per ton more than offset its impact on gross profit margin, adding approximately 30 basis points to pretax income margin. Higher than anticipated carbon and aluminum product costs caused us to increase our full year LIFO expense outlook to $300 million from our prior estimate of $150 million. As a result, we recorded second quarter LIFO expense of $112.5 million, significantly above our estimate of $37.5 million. Accordingly, we also expect to record LIFO expense of $75 million in the third quarter of 26. At the end of the second quarter, the LIFO reserve on our balance sheet was approximately $700 million which remains available to support future operating results and help mitigate the impact of future metal price declines. Aluminum was a notable driver of the LIFO expense increase, disproportionately affecting our LIFO gross profit margin relative to historical levels. Higher aluminum pricing resulting from Section 32 tariffs, without a corresponding increase in demand, also continued to constrain FIFO gross profit margins. However, we are realizing higher gross profit per ton on aluminum sales and across our entire product portfolio as a result of the current pricing environment. Non-GAAP SG&A expense increased 11% compared to the second quarter of 25 driven by higher incentive compensation from improved profitability, inflationary impact on compensation and related benefits, freight and fuel cost inflation resulting from the U.S.-Iran conflict, and higher variable warehousing and delivery costs associated with our increased tons sold. On a per ton basis, non-GAAP SG&A expense was flat due to favorable operating leverage from higher shipment volumes including contributions from the U.S. border wall project. Continued market share gains, higher shipment volumes, and increased gross profit dollars drove meaningful operating leverage, resulting in a 40% year-over-year increase in non-GAAP pretax income to $429 million. Our non-GAAP second quarter earnings per diluted share grew 42% year-over-year to $6.27, with the U.S. border wall project contributing $0.41 per share. LIFO expense of $1.64 per share for the second quarter exceeded the $0.54 estimate included in our guidance and $0.35 in the prior year quarter. Moving on to our balance sheet and cash flow. Cash flow from operations in the second quarter improved sequentially to approximately $162 million despite a significant working capital build from increased shipments and higher metal pricing. Our inventory-turn rate based on tons improved to approximately 5.2 times compared to 4.8 times in 2025. Accounts receivable DSO of approximately 42 days remained healthy and consistent with the prior year. During the quarter, we funded $93 million of capital expenditures and paid $64 million in dividends. We did not repurchase any shares of our issued or outstanding common stock during the quarter and have approximately $529 million remaining available under our current share repurchase program. We remain opportunistic in our approach. Our total debt was $1.7 billion at the end of the second quarter. Our leverage position remains very strong, with a net debt to EBITDA ratio of 0.9, providing substantial liquidity and flexibility to execute on all of our capital allocation priorities. Looking ahead to the third quarter, we expect demand and pricing to remain at healthy levels with continued improvement across several of the key products and end markets we serve, subject to ongoing risks from domestic and international trade and the U.S.-Iran conflict as well as normal seasonality. We anticipate third quarter 26 non-GAAP earnings per diluted share in the range of $6.40 to $6.60, up 76% to 81% year over year, including an estimated $75 million of LIFO expense or about $1.10 per diluted share. Please refer to our second quarter earnings release for further details on our Q3 outlook as well as anticipated contributions from the U.S. border wall project. This concludes our prepared remarks. Thank you again for your time and participation. We will now open the call for your questions.
Questions and answers
Thank you. We will now be conducting a question-and-answer session. You may press 2 if you would like to remove your question from the queue. Our first question today is coming from Lawson Winder from Bank of America. Your line is now live.
Hi. Good morning. This is Satish on for Lawson Winder. My first question is on the border wall contract. The shipments accounted for about 5.1% of Q2 volumes, and then you expect an additional 2% improvement in Q3. Is there potential for further upside to these volumes, or should we assume volumes to be fairly consistent through the remainder of phase 1, that is through mid-2027?
Yes, Satish. The volumes we mentioned were stronger than we had anticipated. We just started shipping under the contract in April, and we did see the volumes ramp. Per the guidance we are giving, yes, we expect higher shipments in Q3. We believe that is close to a full shipment run rate and should be close to that going through the middle of next year. Of course, it is dependent on metal supply to us and how quickly our customer pulls the inventory from us. But you could assume for now that the Q3 guide is to be sustained through the following quarters.
Okay. Thank you. In your opening remarks, you talked about the ability to capitalize on many meaningful opportunities that will continue to emerge in the second half and into 2027. Can you provide a bit more color on what these opportunities are? Is there potential to add similar large government or infrastructure contracts in the near term?
The border wall contract is a very significant contract, so I do not know that there will be more of that size. However, we want to highlight that we have the capability to do those types of large contracts or large orders. With the momentum we see from our customers, whether it is on the data center, the infrastructure side, the power side, or military spending, there is a lot of customer optimism. Reliance is doing a better job of having our companies cooperate with each other to provide a broader package to customers and make it easier for them to come to us as a solution for their multiple product needs. We anticipate being able to support our customers when they desire it. With reshoring, there is just a lot of positive momentum right now.
Thanks for taking my questions, and congrats on a great quarter.
Our next question is coming from Samuel McKinney from KeyBanc Capital Markets. Your line is now live.
Hi, good morning. Thank you.
Good morning.
Your quarter-end inventory increased less than $100 million despite the $600 million increase in revenue. Could you talk about the inventory positioning moving forward given that many of your orders are just-in-time?
Yes, Samuel. Our inventory-turn rate was a little above 5x for the quarter, which is a little faster than typical. Our company-wide goal is 4.7 turns, and we are comfortable with where our inventory position is. There are some limited supply constraints at some of the mills, but with our strong relationships, we are very happy with how our mill partners are treating us and we are able to get the inventory we need for our customers. Inventory levels are probably a little lower across the industry right now.
I would add that our strategy of buying domestically, although lead times are extended, still results in much shorter lead times than imports. Based on our robust inventories and our access, we feel like we are in a very good position to capitalize on the growing demand in the marketplace.
Appreciate that. SG&A as a percent of sales this quarter was lower than it has been in a couple of years. With all the storage and handling you are doing for the border wall contract, it would be helpful if you could further discuss the cost to service that contract versus the rest of your business. The storage and handling are obviously much cheaper.
The SG&A cost as a percent of sales is driven lower by the significantly higher average selling price. We are still facing inflationary factors on different elements of our SG&A expense, resulting in higher dollars, but the elevated selling prices helped to cover that. On the border wall contract, we are doing some value-add processing, but at a lower rate based on total tonnage than the rest of the company. That keeps the SG&A cost lower per ton for the volume going into the border wall.
Yes, Samuel. Since we are leveraging our existing infrastructure, that is what allows us to lower the variable cost on this project. For anyone else to take this on, they would have to make significant investments in infrastructure, facilities, equipment, etc. The variable cost per ton is significantly lower than the company average, and hence the pretax margin accretion impact that we mentioned.
Great. Thank you.
Thank you.
Our next question today is coming from Timna Tanners from Wells Fargo. Your line is now live.
Good morning. I would like to ask a little bit about the components of the product mix. Plate and beams seem particularly tight and prices have inched up further. Aluminum, at least LME, has retreated. How does that play out for your products and pricing into the second half? Then I have a follow-up on flat roll.
Hi, Timna. Beam and plate prices have seen strong increases. It is a tight market and there is significant customer demand pulling that. We are participating in those markets at higher pricing levels and seeing a stronger pull on those products. There was an aluminum price pullback, but from very high levels; even though price pulled back a bit, it remains elevated. We are making very high levels of gross profit dollar margin on the aluminum products we are selling as well as beam and plate.
Timna, based on our market position in beams and plate and some of our service centers that have been in this business for a long time, when demand tightens, we get preferential treatment from suppliers. When supply is tight, we receive the allocations we have historically received and sometimes get favors when needed. Our long track record helps in a market like this.
On the flat-rolled side, lead times seemed to come down and then back up depending on who you look at. Are you seeing evidence that the mills are starting to catch up with their lead times? What do you see on the flat-rolled side? It seems like even if you are not importing, there is quite a bit on the water. A little more color there would be great.
We are not importing flat rolled. Our average flat rolled order is about two weeks late, but with some mills they are four to eight weeks late. We have not seen significant signs of suppliers catching up, although they are trying to deal with the increased demand and some production challenges.
And on stainless and alloy, what are you seeing trend-wise in terms of pricing and activity?
For stainless, prices have stayed pretty steady. Some specialty stainless where there was an inventory glut seems to be working itself off, and we think the second half should show some price increase.
Thank you.
Thank you.
Our next question today is coming from Nicklaus Cash from Goldman Sachs. Your line is now live.
Hi. Thank you and good morning. I want to go back to the border wall. You shipped about 85 thousand tons in 2Q and that is ramping up to maybe 120 thousand tons in 3Q. In 2Q, it added about 30 basis points of pretax margin. Do you expect that the operating-expense-light structure to hold as you scale up shipments? Or could there be any change there?
Hi, Nicklaus. We expect it to hold at those levels. The higher volumes make us probably a little more efficient with the tons going through, so those are good assumptions for the border wall contract.
Thank you. One more on carbon tubing that jumped from 9% to 12% quarter over quarter. Are you seeing the wall crowding out any potential commercial availability for tubing? Or how are you counteracting that?
The increase in our product mix for tubing is directly attributable to the tons we are shipping under the border wall contract. From a market standpoint, it is consuming a good amount of product, but that helps support overall carbon pricing, especially for the tubing products.
Thanks.
Thank you.
Next question today is coming from Martin Englert from Seaport Research Partners. Your line is now live.
Hello. Good day, everyone. I wanted to come back to a question in the release. You noted potential supply availability as a headwind in nonresidential construction. Could you provide more color and what you are hearing from customers and the construction industry regarding potential project delays or cancellations due to supply and/or higher metals prices?
Hi, Martin. As we mentioned, our volumes shipped have been strong. There is some allocation, so to speak, on some of those products.
Because demand has been so strong, that helps elevate prices. We have not seen any significant project delays as far as I know. When demand is strong, our customers want us to grow alongside them, and we try to give them everything they need. We just do not have an unlimited amount, but we are keeping up with customer demand.
Okay. A broader question about the industry: there has been some consolidation. Do you anticipate increased competition from this, or could it result in a more disciplined distribution and processing industry in the United States when it comes to price and margin?
We are hoping it will create a more disciplined environment with fewer competitors. We hope it removes at least one competitive bidder and leads to more pricing discipline.
I appreciate the color. Congratulations on the results and the outlook.
Thank you.
Thanks, Martin.
Next question today is coming from Bennett Moore from JPMorgan. Your line is now live.
Good morning, Karla, Steve, Arthur. Thanks for taking my questions and congrats on the strong quarter.
Thanks.
Excluding the DHS contract contribution, shipments were guided down 2% to 4% quarter over quarter, which I believe is typical seasonality for Q3. With market commentary being incrementally positive and you continuing to gain share, what level of conservatism may be baked into that guide?
Bennett, you are correct; that is kind of the typical seasonality. Limited supply availability is also a factor in that. So that is our best estimate at this time.
On LIFO expense, you indicated aluminum was proportionately a bigger driver. When you were pushing through price hikes last quarter on the steel side, it seemed supportive of margin expansion. What was the breakout on the LIFO aluminum versus carbon this past quarter? And are you seeing any steel buyers less willing to accept price hikes at these levels given expectations pricing may be peaking soon?
LIFO's aluminum disproportionate impact is notable. Aluminum is roughly 17% of our sales and is contributing to about a third of our annual LIFO estimate. Out of the $300 million annual estimate, roughly $100 million is currently aluminum-related. Aluminum pricing nearly doubled compared to pre-tariff levels, and the increases are more significant than in carbon. You do not have the same supply-demand dynamics as carbon. That said, our gross profit per unit and overall gross profit dollars are up significantly from a year or two ago. At the percentage level, aluminum has introduced margin compression noise — roughly a 50 basis point compression relative to two years ago from FIFO dynamics and another roughly 50 basis points from LIFO impact, so aluminum alone is introducing roughly 100 basis points of margin compression noise. On the flip side, gross profit dollars per ton are higher.
Any evidence of pushback from buyers at these price levels on carbon?
As long as our customers can buy the product from us and put their fair markup on it and sell it to their end markets, they are okay right now. Many competitors face higher interest rates and higher costs of carrying inventory, so there are holes in inventories. Our inventory levels are robust, so there is opportunity for us to capture more market share and help customers who are having trouble getting steel in the marketplace.
Thank you.
Thank you.
Next question is coming from Katja Jancic from BMO Capital Markets. Your line is now live.
Hi, thank you. Maybe going back to the border wall: I think last quarter you mentioned that phase 1 of the project is expected to add about $1.4 billion in sales through mid-2027. At one point, the discussion mentioned the total value of the contract could be over $2 billion. Does that mean the contract could extend beyond mid-2027, or how should we think about it?
That is correct, Katja. There is phase 1 with $1.4 billion through the middle of 2027, and then there is another roughly $800 million to $900 million that is up to our customer to opt into. It is not guaranteed. We believe they will probably execute that extension for phase 2, which would extend it beyond the middle of 2027. They also could accelerate some shipments during the project phase. We are there to satisfy our customer's needs.
Are there any products within your portfolio that are currently harder to source than others or that you are having issues procuring?
Overall, because of our relationships with our domestic suppliers, I would not say we are having issues getting metal. Some markets are tighter than others, such as beams, carbon plate, heat-treated aluminum plate, with aerospace and semiconductor rebounding.
Thanks, Katja.
Thank you, Katja.
We reached the end of our question-and-answer session. I would like to turn the floor back over to Karla for any further or closing comments.
Thanks again to everyone for joining us today and your continued support of Reliance. A special thanks to all of our employees throughout the Reliance family for staying safe and helping us generate such strong results. Before we conclude, I also want to mention that we will be in New York in early September presenting at the Jefferies Industrials Conference and we look forward to connecting with many of you at the event. Thanks, everyone, and goodbye.
Thank you. That does conclude today's webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.