Reliance, Inc. 2026 Q3 Earnings Call

Kim, please go ahead. Thank you, operator.

Good morning, and thanks to all of you for joining our conference call to discuss Reliance's third 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 in the investors section of our website at investor.reliance.com. Please read the forward-looking statements disclosure included in our earnings release issued yesterday, and note that it applies to all statements made during this teleconference. Reconciliations of the non-GAAP measures are included in the non-GAAP reconciliation section of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance.

Good morning, everyone, and thank you for joining us to discuss our third quarter 2026 results. Reliance delivered an exceptional quarter with record quarterly net sales, our second highest gross profit dollars, and our third highest quarterly earnings per share. Reliance capitalized on a favorable market environment characterized by continued healthy demand and tight supply, leading to increased pricing levels for most carbon steel products. Our long-term strategy of supporting both our valued customers and our key domestic mill partners positioned us particularly well to benefit from these dynamics. Our scale, product diversification, expansive value-added processing capabilities, and ability to source the inventory our customers need, led by the strong execution of our teams in the field, drove our exceptional results. The U.S. Department of Homeland Security border wall contract we were awarded earlier this year continued to ramp and delivered another meaningful contribution to our third quarter earnings.

Our smart, profitable growth strategy once again produced record quarterly tons sold, contributing to non-GAAP diluted earnings per share of $8.02, up 120% year-over-year. Our strong balance sheet and ample liquidity continue to provide us the means and flexibility to concurrently invest in our businesses, pursue strategic growth investments, and return capital to our stockholders. Our full year 2026 capital expenditure outlook remains approximately $300 million, with about half allocated to strategic growth investments that enhance our processing capabilities, strengthen customer service, expand our footprint, and increase volumes in attractive markets. We continue to evaluate acquisition opportunities and stand ready to execute the right opportunities quickly. During the quarter, we funded $79 million of capital expenditures, paid $64 million in dividends, and repurchased $45 million of our common stock at an average price of approximately $395 per share.

On October 20, our board of directors increased our share repurchase authorization to $2.5 billion without a set expiration date, further supporting our disciplined approach to returning capital to our stockholders. Since 2021, we have repurchased $3.4 billion of Reliance common stock at an average price of approximately $236 per share, reducing our outstanding common shares by 23% in that period. Looking ahead, we believe Reliance is very well-positioned as customer optimism remains high and strengthens across infrastructure, semiconductor, general manufacturing, and aerospace. Together, our proven business model, outstanding team, and current market dynamics give us confidence in our ability to gain market share and invest through cycles to continue driving profitable growth and strong stockholder returns through the remainder of the year and into 2027. I'll now turn the call over to our COO, Steve Koch.

Thanks, Karla Lewis, and good morning, everyone. Our outstanding third quarter results reflect Reliance's ability to capitalize on favorable market conditions. This performance would not be possible without the relentless efforts of our teams across the Reliance family of companies. I want to thank each of them for their unwavering commitment to our customers and the safety of our employees. Turning to our demand and pricing trends, the strength of the market was evident in our shipment volumes, which increased sequentially despite normal seasonal patterns and constrained material availability. Record tons sold increased 4.3% from the prior quarter, including a 3.7% contribution from the U.S. Border Wall project. Our third quarter year-over-year growth in tons sold of 15.6% outperformed the industry-wide increase of 10.1% reported by the Metals Service Center Institute. Carbon steel products continued to lead our tons sold growth.

Our third quarter average selling price increased 8.2% from the second quarter of 2026, significantly exceeding our expectation of flat to up 2%. Pricing for all commodities, particularly carbon steel products, increased during the quarter amid constrained supply, extended lead times, and strengthening demand. These dynamics highlight the value of our strong domestic mill relationships and reliable access to metal, which differentiate Reliance in a tight supply environment. Turning to our end markets, non-residential construction represented a little more than one-third of our third-quarter sales, primarily from carbon steel tubing, plate, and structural products. Third-quarter shipments remained strong despite supply constraints, driven by sustained strength in data center and related energy infrastructure projects, alongside solid demand in heavy civil and public infrastructure. Our participation in the U.S. Border Wall project further strengthened our presence in the public infrastructure sector of the non-residential construction market.

General manufacturing represented about one-third of our third-quarter sales. Our participation spans a diverse range of products, industries, and geographies. Shipments showed strong year-over-year growth driven by industrial machinery, including data center equipment, as well as shipbuilding, military, and construction machinery. Aerospace products accounted for approximately 8% of our third-quarter sales. Commercial aerospace demand improved during the quarter with continued progress in OEM build rates and growing backlogs, though elevated inventories persist. Defense and space-related activity remained strong during the quarter. Automotive, which we primarily serve through our toll processing operations, represented about 4% of our third-quarter sales. As a reminder, our toll processing volumes are excluded from our tons sold. Demand improved compared to the prior year as our flexible toll processing operations quickly adapted to the variable demands of the automotive market. Lastly, demand in the semiconductor market strengthened meaningfully.

We are seeing momentum accelerate, supported by increased data center activity. In summary, Reliance continues to distinguish itself through our people, our domestic mill relationships, and our relentless focus on delivering unmatched customer service. Against the backdrop of tight supply and continuing market volatility, our teams remain nimble in adjusting our approach while prioritizing support for our long-standing customers and their metal needs. The strategic investments we have made across our footprint are generating tangible returns, and our dynamic commercial and operational approach continues to drive the market outperformance and profitability that further distinguish 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 a very strong quarter with sales up 43% year-over-year, driven by better-than-anticipated shipments and pricing. As a result, non-GAAP earnings per diluted share of $8.02 significantly exceeded our guidance range of $6.40-$6.60, despite considerably higher-than-anticipated LIFO expense. On a per-share basis, LIFO expense was $2.74 compared to the $1.10 included in our guidance, representing an incremental $1.64 per share headwind. We generated our second-highest quarterly gross profit of $1.5 billion, up 12% compared to the second quarter of 2026 and up 41% compared to the third quarter of 2025. Gross profit margin of 27.9% decreased 20 basis points sequentially due to increased LIFO expense associated with carbon steel costs rising significantly more than anticipated, and the product mix impact of the U.S. Border Wall project. On FIFO basis, non-GAAP gross profit margin expanded to 31.6%, compared to 30.5% in the second quarter of 2026 and 29% in the prior year quarter, despite a roughly 60 basis point year-over-year reduction attributable to the U.S.

Border Wall project. However, due to the project's below company average operating cost per ton profile, it added 40 basis points to pre-tax income margin. Gross profit dollars per ton remained historically strong for aluminum products and continued to increase across carbon and stainless steel products. With respect to LIFO outlook and true-up, we increased our full-year LIFO expense outlook to $450 million from our prior year estimate of $300 million and recorded third-quarter LIFO expense of $187.5 million, well above our estimate of $75 million, reflecting the year-to-date catch-up impact of our higher full-year LIFO estimate.

Based on our updated outlook, we expect to record LIFO expense of $112.5 million in the fourth quarter of 2026. At the end of the third quarter, the LIFO reserve on our balance sheet was nearly $890 million, which remains available to support future operating results by partially mitigating the impact of future metal price declines. Non-GAAP SG&A expense increased 18% compared to the third quarter of 2025, driven by higher incentive compensation from improved profitability, inflationary impacts on compensation and related employee benefits, freight and fuel cost inflation, and higher variable warehousing and delivery costs associated with our increased tons sold. On a per ton basis, non-GAAP SG&A expense increased just 2%, reflecting 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 non-GAAP pre-tax income of $544 million, more than double the prior year amount.

As noted, our non-GAAP earnings per diluted share grew 120% year-over-year to $8.02, with the U.S. border wall project contributing $0.74 per share, exceeding our expectation of approximately $0.60 per share. Moving on to our balance sheet and cash flow. Cash flow from operations in the third quarter improved sequentially to $212 million, despite a significant working capital build attributable to increased shipments and higher metal pricing. Our total debt was $1.6 billion at the end of the quarter. Our balance sheet and leverage profile remained very strong, with a net debt to EBITDA ratio of 0.8 times, providing substantial liquidity and flexibility to continue executing on all of our capital allocation priorities.