All right. Good morning, everybody. Welcome to the Jefferies Global Industrials Conference. My name is Albert Realini. I work on the Metals & Mining Research team here, and I'm joined today by Reliance's CEO, Karla Lewis, and COO, Stephen Koch. If anybody has any questions, just feel free to raise your hand and we'll come over and give you over a mic. 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. If you could just maybe walk through some of your demand end markets, what has been strong as of late?
Great. We'll dive into that. First off, thank you all for being here this morning. I'm guessing none of you were at the tennis match last night because you made it into the meeting today. Thanks to Jefferies and Albert for asking Reliance to be here. As Albert mentioned, we are a metal service center company. 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 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 service a lot of smaller orders.
At Reliance, with $15 billion of sales, our average order size is about $3,000 an 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. 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, a third of our business, non-residential 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. the other third's 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. 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. We are 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. That has been a very profitable way for us to participate in the automotive market. Steve, if you could maybe talk about some of the end markets.
Yeah. Thank you, Karla. Basically, when people ask us about which end markets are strong, which are weak, there are many more strong markets than weak markets. We used to point back to ag and semiconductor and some other markets that were lagging, but it just seems like everything seems to be really coming to the forefront. There is 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 busbar, aluminum plate is in short supply. Many carbon products, whether it is structural tube, sheet, wide flange beams, which are at the highest price they have ever traded at. Supply is basically on allocation into 2027.
There is carbon plate that has recently become more scarce. We feel like our customer base, we serve all markets. We have 320 locations, mostly in the United States, but we are in Canada, Mexico, and Asia, and Europe also. Everybody is trying to get their supply, and fortunately, our model is 95% domestic suppliers, and we have some really good relationships with them. They are doing a really good job making sure that our customers have what they need, no matter what the end market is.
Yeah, I think just in that, a little specifically, data center electrification around it continued to be strong. On the non-res side, we have 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 are starting to see a little activity there. Consumer products, industrial machinery, most of the heavy equipment, construction equipment, we have seen those pick up. Aerospace has been picking up. There has been some excess supply inventory in the supply chain that is being worked through.
There is still some there, but for a lot of the products we sell, that has been worked through. With the higher build rates now and the multi-year backlog, we are very positive on aerospace going forward, as well as semiconductor. We were lagging a bit, but we are starting to see that pick up as well.
Okay, then maybe getting more into the weeds on steel versus aluminum, but I think that goes into my next question, which was on the tariff front. Obviously, we have had a little bit of ping pong-related headlines lately with the potential reduction on tariffs in Canada to 25%. I think there is also maybe some more optimism out of Mexico that they maybe can get something similar done. Again, I think we have seen with the current administration, the reality might be very different than what the headline ultimately reports. That initial headline said it could be based on different products. Just, I guess, how would a reduction to 25% in Canada affect your business, especially, I guess, on the aluminum side of things, just given we import so much primary aluminum from Canada in recent years?
Yeah. This is kind of unchartered waters, so we do not 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, 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. If they limit some of the metal, the import that was coming in to each Canada, Mexico, and then making its way to the U.S. so we are 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. 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 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 we are seeing now the customers are paying our markup on the base aluminum price. They are paying the tariff, but they are not paying our markup on that. 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 did not 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 are very hesitant to hold any extra aluminum inventory. There is still the concern that if the tariffs do get reduced, 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. There is more to go if there would be a trade deal. I think at Reliance, we are better positioned than most other companies because of our size. 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 do not know, Steve, if you have anything.
Yeah. I would just add a few weeks ago when there was talk of reducing the tariffs from 50% to 25%, you saw the stock prices drop a little bit.
Canada has been a supplier to the United States for the last 30, 40 years, as long as I have been in the business.
To buy material from Canada, you can get it within days or weeks, as opposed to if you are buying from Europe or Asia, where there is 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 have found that Canada staying where they are and being a little more restrained has been good for our industry, good for our mill suppliers who have invested billions and millions of dollars. If the tariffs are reduced, I think that some sort of quota system would maybe keep things normalized for our domestic mill suppliers can continue to invest in our industry.
Maybe just digging deeper there on that quota system. I think if you look at market expectations for steel prices next year, 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. We've argued that the real 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. 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?
Yeah. 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. 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. 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.
Yeah. 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, the end 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.
And then maybe just the last one I had on the tariff side of things. We have seen imports tick up from the low in March. I think flat rolled imports are near double where they were in March currently. Just given some of the, I guess, elevated freight and insurance costs as a result of maybe the war, excluding that, we have calculated that import arbitrage spread is near the highest level it has been outside of post-COVID in 10 + years. But you really have not seen much move in the price, so I think maybe that is 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 materials. So as long as they know they have a secure supply, they are not as price-sensitive as they have been in past years. Yeah, like I said, they have asked for maybe to go offshore, but it is a conversation we have between our mill supplier, the customer, and us to make sure that we are able to solve their problems without making drastic purchases.
I do not think a lot of our competitors, they do not have the 95/5 percent balance that we have. It is more 50/50. I think that has not served them well. I think they are trying to do more domestic, and I think that is the trend. I do not think that it is a smart play to go take a bigger position overseas.
And then if there is any questions in the room, just raise your hand. But I guess, yeah, 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 them to talk about what you are 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. Then maybe some of the other consolidation we have seen in the service centers industry over the past 12 months and how that has affected your business and I guess maybe the opportunity you see going forward for further consolidation in the market.
Okay. Yeah, and a lot in there.
Reliance has grown significantly over the years, quite a bit through acquisitions. Since our IPO in 1994, we have 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. 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 if we invested in that equipment, we could provide more value to our customers. At the same time, a lot of our customers were wanting to reduce the amount of in-house processing. We do first and second stage processing, change the size and the shape of the metal. They were asking us to do more for them. They wanted to do more design and assembly.
It played well that we were investing significantly in the equipment and we were picking up more activity, especially on the processing side. We, at that time, Reliance, we wanted to focus on quality of earnings. We actually reduced our volumes. We were making more money at the time by going after only the highest margin business. 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. We've been growing quite a bit organically, taking market share.
Over the last three years, we've been outpacing industry shipments by a couple percentage points every quarter for the last two years, I think. With that focus on picking up good volume business, we're getting better leverage on the operating expense line. 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 tons- 6.5 million tons a year. It was pretty significant organic volume growth last year. Just because we did not complete any acquisitions last year does not mean that we were not actively looking and in processes. Again, we try to buy good profitable companies, but at prices that make sense to us. There have been, in our opinion, some inflated views by sellers and maybe their bankers on what the value should be.
Sticking to our kind of disciplined approach, we did not complete any, even though, as Albert mentioned, there 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 chains, the sustainability of their suppliers. We think consolidation will continue. As far as there have been two larger public service center company transactions in the last 12 months, to the extent that 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, so we've benefited from picking up some customers, picking up some of their employees as they work through the consolidation.
Yeah, you did a good job covering that. Karla mentioned the mill suppliers. As Nucor opens up a mill in West Virginia, Steel Dynamics continues with their aluminum mill in Mississippi, and you have a lot of foreign entities adding new capacity. It'd be silly for us with our footprint not to grow alongside our suppliers as our customers continue to ask for more products and services. Our 16,600 employees are happy to work overtime and be part of a growing business. I think that we made, like Karla said, 76 acquisitions. It takes time to put all of those together and strategize what you're going to do with them. But I think that we have great team, great culture, great chemistry out there, and we're growing and we're going to continue to grow alongside our mill suppliers and customers.
That was a good point, Karla, on the consolidation giving more pricing power, because I think that's exactly what we've seen on the mill side of things, right? Maybe post Cleveland-Cliffs becoming an integrated producer with Cleveland-Cliffs and U.S. Steel having that integrated pricing power for maybe some of the higher grade auto blends and then CMC and Nucor on the rebar side of things. So I definitely agree there. Correct me if I'm wrong, but the service center industry is still pretty fragmented, right? I think from your last deck, was it 18% market share you guys have? So there's plenty of room for further consolidation, yeah.
Yeah. Okay. Question in the room?
[audio distortion] . You guys didn't buy back any shares last quarter. You guys did like $200 million quarters before that, more end of year. What should we read into that? I hope you heard me.
I did. I heard you, yeah. The question was about the fact that in the second quarter of 2026, we did not repurchase any shares. That should not indicate anything. We have not changed our approach on capital allocation or repurchasing shares. We take an opportunistic view and each quarter we enter the market at the levels we think are appropriate. In the second quarter, there was a big run up in our stock price from where it was when we entered the quarter. So we were not in the market during that quarter, but again, our approach stays consistent. We expect to be in the market opportunistically going forward. There was speculation that because our working capital increased, that that kept us from repurchasing. That's not the case.
We have plenty of liquidity to be able to be executing on all of our capital allocation priorities, whether that be organic growth, M&A growth. We continue to pay, and consistently increase our dividend rate, and then also our repurchase shares. So it just so happened that we were not in the market in Q2, but no change in strategy.
I guess, yeah. I actually was going to segue into capital allocation, just given the free cash flow profile or maybe the coming free cash flow profile, if we have a multi-year period of the elevated tariff regime. But I guess, just what you mentioned there on buybacks. Of course, you want to be strategic and opportunistic with that, but I guess any concern that maybe if you guys aren't in the market buying shares, is that maybe a read-through to investors like that, hey, if the own company maybe isn't buying their own shares at the current level, why should we?
Yeah. That should not be the read-in, of course. As I said, we monitor where the stock is trading when we enter the quarter and set some targets at that time. We also don't know that our shareholders want us buying at peak levels. What is peak? It's hard to tell these days because of all the volatility that's out there in the stock price. But yeah, we understand that could be potentially implied. As I said, the whole market kind of bounced back pretty quickly in the second quarter of this year from an equity price standpoint, and we just did not anticipate it happening that quickly in the second quarter.
Makes sense. I guess just maybe one more on capital allocation, just I guess high level, the capital, there's no policy, right, in terms of a split between dividend and buybacks. Just maybe, I guess, I think you already alluded to it, but how you think about that. Then just on the growth side of things, just, I think you guys have a multiple where you would consider for M&A and just maybe how you gauge that versus organic growth.
Yeah. From a capital allocation standpoint, we do believe that investing in the right long-term growth of our business is the best use of our capital. So whether that's organically or through acquisition. On the acquisition side, as I mentioned earlier, we do look for good companies that are immediately accretive to earnings and cash flow. There continue to be a lot of companies out there, a lot in the fragmented industry. Again, a lot of small and medium-sized companies, but many of those are growing. So we look at those opportunities, and see as companies become available, we look to see how they fit within Reliance. Are they going to provide the right returns to us?
We typically, the way our kind of discipline valuation, we look at the companies and come up with what we think a normalized, long-term go forward EBITDA level is for them, and typically value it then at 5x-7x . In the market the last few years, it has been closer to the 7 x. There have not been many deals getting done at 5 x. We try to stay pretty disciplined from that standpoint. On the organic growth, we also, for the larger CapEx items, we do look at payback periods, and that can vary depending upon the type of investment we are making, whether it is in a greenfield building or whether it is in equipment. Those opportunities come up from customer needs.
They come through our operating entities, and then Steve works with our different companies to evaluate the opportunities and look at the ones that we think provide the right return levels. On our dividend, we do not have a formal policy, but we have been paying dividends for, I think, 66 years now, a quarterly dividend. We have never not paid it, and we have never reduced it. So we like to consistently increase the dividend. Typically, it has been on an annual basis, to a level that is sustainable, so we can continue to always be able to pay that. As we talked earlier, the repurchase activity is on a more opportunistic basis.
Great. Thank you. Just a few more minutes here. If there is any questions in the audience, please just raise your hand. I guess moving into, I know working capital is a very large part of your business, and on the mill side of things, in the first half, we saw a lot of builds, partly due to the run-up in pricing, also due to some of the companies and some of their organic growth, like some ramp-up costs with Steel Dynamics and aluminum and things of that nature. Just maybe, high level, just a reminder how working capital really impacts your business, and then maybe what you are seeing in the second half, just given pricing has continued to run higher. Do you expect working capital to be a source of funds? Yeah.
Yeah. Generally with seasonality, we typically build working capital in the first and second quarters of the year, and then we see it start to decline in the third and fourth quarters, basically just because of number of shipping days. Our shipment levels generally decline a bit in the third quarter and the fourth quarter. That is absent increasing price levels. We did see some inventory build. We carry about $2.5 billion worth of inventory. The way we monitor and manage our inventory is we have inventory turnover targets. So our overall consolidated turn target is about 4.7 x. Second quarter, we were a little above five turns, so turning a little more quickly. What we tell our companies to do is buy to what your shipment levels are. Each of our companies, depending on their product mix, has their individual inventory turn target.
We've been very happy with the way our companies have been turning their inventory. Our AR has popped up quite a bit too, because of the higher pricing levels. We manage that on a days sales outstanding basis. That's remained consistent at around 41, 42 days. We're very happy with the way our teams are executing from a working capital management standpoint and where those levels are. If metal prices are going up, that's good for us. We generally, as I mentioned, get a gross profit margin of around 30%. If we get 30% gross profit on $1,100 a ton as opposed to 30% on $600 a ton, we're very happy. We have no problem, and we have no liquidity issues of our working capital continuing to increase, as long as we're comfortable that we're managing it well.
Second half of this year, typically, we would see some working capital release, but if prices hold and continue to increase, if activity levels are stronger than normal seasonality, we could see it build, but we're fine if that's the case. I don't know, Steve, if you have any comments on suppliers and performance or anything with working capital.
Yeah. Just in general, looking at the tons we have on hand compared to year-over-year, they're almost identical. Maybe they're up 10,000 tons or 20,000 tons, but the cost is much higher. Based on customer demand and what we're hearing from our 2,000 salespeople, the reports that they're giving us, we're going to continue to buy inventory into the third and fourth quarter. We don't feel like our customers are scaling back. Lead times are still extended. I think that we're going to continue going down the path we're on right now.
All right. Thank you. I want to be conscious of your time. I know you have a meeting right after this, but maybe just lastly, a high-level quick one. I think on the mill side of things, we're seeing a lot of those companies take a different path to growth this time around, maybe recognizing that the current tariff regime might not be around in its full existence, maybe during a new administration. They're all kind of pivoting into their own kind of growth, Nucor more downstream, CMC as well. Just anything you see there maybe impacting your industry as maybe some of the mill players start to look more downstream?
Yeah. Certainly, we think that service centers have a valuable role in the supply chain, and obviously, so do the producers, and we need each other. We would like us all to respect that and recognize that. I think, for the most part, it has worked okay. A lot of the downstream value add that some of the mills have entered into and are talking about is a little different than the type of value add that we are doing. So it is working, I think, well so far. As I mentioned earlier, Reliance bread and butter, $3,000 an order. We put 15 different orders on a truck and go out and deliver it to our customers. That is not mill business. None of them are set up and equipped, and I do not think they are going after that.
Some of the larger projects, there can be some conflict sometimes, but we try to work that out. We try to be a good customer to our suppliers and have strong relationships with them and look for opportunities to grow together.
Great. Well, thank you, Karla and Stephen.
Thank you.