Reliance Steel & Aluminum Co. (RS) Earnings

Management highlights

- Overall Financial & Operational Performance - Reliance delivered its second highest quarterly revenue and record quarterly tons sold, continuing to outperform broader industry shipment trends, with favorable market conditions supported by improving customer activity, extended mill lead times, and strong pricing across the product portfolio. - Non-GAAP pre-tax income grew 40% YoY, with non-GAAP EPS of $6.27, the highest result since Q2 2023. - The U.S. DHS border wall contract, awarded earlier in 2026, generated higher activity than guided and contributed meaningfully to Q2 2026 earnings, adding 30 basis points to pre-tax income margin despite a 40 basis point gross margin headwind from lower priced product. - Demand & Pricing Trends - Record tons sold significantly outperformed management expectations of 1-3% sequential growth and 4.5-6.5% YoY growth. The border wall contract contributed 5.1 percentage points to sequential tons growth. - Q2 average selling price increased 7.8% sequentially, exceeding expectations of 1.5-3.5% growth, with a 1.6 percentage point offset from higher volumes of lower-priced border wall product. Pricing for carbon steel and aluminum continued an upward trend amid constrained supply and strengthening demand. - The semiconductor market is showing clear improvement with accelerating momentum supported by growing data center activity. - Strategic Advantages & Capital Allocation - Longstanding domestic mill partnerships provide reliable material availability, enabling the firm to better serve customers and capture new market opportunities, while trade policy limits imports and supports strong domestic pricing. - A strong balance sheet and liquidity remain key competitive advantages, supporting strategic growth investments, shareholder returns, and disciplined capital deployment. Full year 2026 capital expenditure guidance remains ~$300 million, with half allocated to strategic growth investments to enhance processing capabilities, strengthen customer service, expand the firm's footprint, and grow volumes in attractive markets. - Inventory turns by tons improved to 5.2x from 4.8x in 2025, accounts receivable days remained healthy at 42 days, and net debt to EBITDA was 0.9x, indicating a strong leverage position. - End Market Dynamics - Non-residential construction demand remains strong, with the border wall contract expanding the firm's presence in the market. - General manufacturing demand is diversified across products, industries, and geographies, with solid shipment growth. - Commercial aerospace is showing early signs of recovery, while defense aerospace activity remains strong. - Automotive demand improved in Q2, with the firm's flexible toll processing adapting quickly to variable market demand.

Guidance

- Full year 2026 capital expenditure guidance is maintained at approximately $300 million. - Full year 2026 LIFO expense guidance was upwardly revised to $300 million from the prior estimate of $150 million, driven by higher than expected carbon and aluminum product costs, with aluminum as the primary driver of the increase. Q2 2026 LIFO expense was $112.5 million, above the original estimate of $37.5 million, and third quarter 2026 LIFO expense is expected to be $75 million (or ~$1.10 per diluted share). - For the third quarter of 2026, management expects non-GAAP diluted EPS in the range of $6.40 to $6.60, representing 76% to 81% YoY growth. Border wall shipment volumes are expected to increase to a sustained full run rate in Q3, which management expects to hold through mid-2027. - Excluding the border wall contract, Q3 2026 shipments are expected to decline 2% to 4% quarter-over-quarter, in line with normal seasonality and current limited supply availability. - Phase 1 of the border wall contract is expected to generate $1.4 billion in total sales through mid-2027, with an additional $800 million to $900 million in optional Phase 2 work that may extend the contract beyond mid-2027 if the customer opts in.

Segment performance

By end market, which represents revenue contribution: 1) Non-residential construction: ~33% of Q2 2026 sales, with strong sustained activity from data center, energy infrastructure, heavy civil and public infrastructure projects. The U.S. DHS border wall contract contributed to this segment and added 5.1 percentage points to Q2 tons sold growth. 2) General manufacturing: ~33% of Q2 2026 sales, with strong year-over-year shipment growth driven by industrial machinery (including data center equipment), shipbuilding, military, consumer products, and construction machinery. 3) Aerospace: ~9% of Q2 2026 sales, with early improvement in commercial aerospace as OEM build rates increased, and ongoing strong defense and space-related activity. 4) Automotive: ~4% of Q2 2026 sales, served primarily via toll processing (toll volumes excluded from tons sold), with improving demand in Q2. By product category: Carbon steel led tons sold growth; Aluminum and stainless steel contributed to growth with higher per-ton profitability. Overall, the firm achieved record quarterly tons sold, up 10.8% YoY and 7% sequentially, with total sales up 27% YoY. Q2 2026 gross profit was $1.3 billion, up 11% sequentially and 20% YoY. Non-GAAP pre-tax income was $429 million, up 40% YoY; non-GAAP diluted EPS was $6.27, up 42% YoY, with the border wall contract contributing $0.41 per share.

Risks & headwinds

- Ongoing risks related to domestic and international trade policy, as well as the U.S.-Iran conflict, could impact future performance. - Persistent supply constraints and product allocation for certain products (including beams, carbon plate, and heat-treated aluminum plate) could limit volume growth despite strong customer demand. - Elevated aluminum pricing from Section 232 tariffs, without a corresponding demand increase, has constrained LIFO gross profit margins and disproportionately increased LIFO expense, creating margin compression distortion. - The sustained full run rate of border wall shipments through mid-2027 remains dependent on consistent metal supply and customer inventory pull, with Phase 2 expansion not guaranteed.

Analyst Q&A

• Q: The border wall contract contributed 5.1% to Q2 2026 volumes, with an expected 2% volume increase in Q3. Can volumes rise further, or will they stabilize at the Q3 run rate through mid-2027 phase one? /

  A: Q3 volumes are expected to reach the full run rate for the contract, which management expects to hold steady through mid-2027. Volumes are ultimately dependent on incoming metal supply and customer inventory pulls, but the Q3 run rate is a reasonable baseline for coming quarters.

• Q: Inventory increased less than $100 million in Q2 despite a $600 million revenue increase. What is the firm's inventory positioning moving forward, given most orders are just-in-time? /

  A: The firm achieved an inventory turn rate above 5x this quarter, above its 4.7x company target, and management is comfortable with current inventory levels. While industry-wide inventory is lower than typical amid mill supply constraints, strong long-term domestic mill relationships ensure the firm can access the inventory it needs to serve customer demand. Shorter lead times for domestic metal compared to imports further support the firm's ability to meet demand.

• Q: How have recent price movements for beams, plate and aluminum impacted the firm's pricing and profitability in the second half of 2026? /

  A: Beams and plate have seen strong price increases amid tight supply and high customer demand, and the firm is capturing these higher prices. Longstanding mill relationships mean the firm gets preferential access to supply when markets are tight. While aluminum prices have pulled back recently, they remain at elevated levels, and the firm is still generating strong gross profit per ton on aluminum sales. Stainless steel prices are steady, with glut-related inventory drawdowns expected to support price increases in the second half.

• Q: LIFO expense came in well above guidance this quarter, with aluminum as a disproportionate driver. What is the breakdown of LIFO expense between aluminum and carbon, and are carbon buyers pushing back on recent price hikes? /

  A: Aluminum makes up ~17% of total sales but is expected to contribute roughly one-third of the full year $300 million LIFO expense, with aluminum pricing nearly doubling pre-tariff levels driving the outsized impact. While this creates ~100 basis points of margin compression noise, gross profit per ton and total gross profit dollars for aluminum are significantly higher than they were two years ago. For carbon, customers are still accepting current price levels, as they can mark up product and sell through to end markets. Many competitors hold leaner inventories due to high carrying costs, creating opportunity for Reliance to gain market share by meeting unmet customer demand.