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RS Reliance Steel & Aluminum

Participants
Kimberly Orlando ADDO, Investor Relations
Jim Hoffman Chief Executive Officer
Karla Lewis President
Arthur Ajemyan Chief Financial Officer and Vice President
Bill Sales Executive Vice President of Operations
Sathish Kasinathan Deutsche Bank
Emily Chieng Goldman Sachs
Phil Gibbs KeyBanc Capital Markets
John Tumazos Very Independent Research
Call transcript
Operator

Greetings. Welcome to the Reliance Steel & Aluminum Company Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Kim Orlando of ADDO Investor Relations.

You may begin.

Kimberly Orlando

Thank you, Operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's second quarter 2021 financial results. I am joined by Jim Hoffman, CEO; Karla Lewis, President; and Arthur Ajemyan, Vice President and CFO. Bill Sales, Special Advisor and former Executive Vice President, Operations, will also be available during the question-and-answer portion of this call. A recording of this call will be posted on the Investors section of our website at investor.rsac.com. The press release and the information on this call may contain certain forward-looking statements which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors, including the impacts of the COVID-19 pandemic and related economic conditions on our future operations, which may not be under the company's control and may cause the actual results, performance or achievement of the company to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include but are not limited to those factors disclosed in the company's annual report on Form 10-K for the year ended December 31, 2020, under the caption Risk Factors, disclosure in our press release this morning and other documents Reliance files or furnishes with the Securities and Exchange Commission. The press release and the information on this call speak only as of today's date, and the company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Jim Hoffman, CEO of Reliance.

Jim Hoffman

Thank you, Kim. Good morning, everyone. And thank you all for joining us today to discuss our second quarter 2021 financial results. I will begin with a high level overview of our second quarter performance and capital allocation priorities. Karla will then speak to our operating results and demand trends by end market. And Arthur will conclude with a review of our second quarter 2021 financials.

Our resilient business model, coupled with favorable market conditions drove a second consecutive quarter of record financial performance. I am inspired by the ongoing operational excellence and performance demonstrated by all of my colleagues within the Reliance family of companies. Despite lingering disruptions associated with the global pandemic, including limited metal availability, and various other supply chain constraints, our managers in the field exhibited tremendous execution and most importantly, maintain the relentless focus on safety.

During the second quarter, we continued to experience considerable strength in metals pricing, led by multiple mill price increases for carbon and stainless steel products in particular. The favorable pricing environment along with continued strong underlying demand in the majority of the end markets we serve drove record quarterly net sales of $3.42 billion.

Our business model, which is strategically highly diversified in terms of our products, end markets and geographies, and focused on small order sizes with quick turnaround, is particularly effective during periods of tight supply and volatile pricing.

In addition, despite metal supply constraints, our strong, long-standing relationships with the domestic mills and our unique ability to cross-sell inventory among our Family of Companies allowed us to source the metal we needed to satisfy our valued customers. Through continued pricing discipline by our managers in the field, we generated a strong gross profit margin of 31.7% which, when combined with our record sales, resulted in record quarterly gross profit of $1.08 billion in the second quarter of 2021. Both our record quarterly gross profit and our continued focus on expense control contributed to our second consecutive quarter of record quarterly pretax income of $444.1 million.

Our quarterly earnings per diluted share of $5.08 were both another record and substantially in excess of our guidance as well as up 23.3% from our prior quarter.

Our resilient and continuously improving business model has enabled us to maintain industry leading gross profit margins throughout various metals pricing and demand cycles. We most recently increased our long-term sustainable gross profit margin range to 28% to 30% during the first quarter of 2020, and we have remained above this range throughout the uncertain COVID-19 pandemic environment. We believe our sustainable outperformance resulted from our managers disciplined approach to pricing and increased value added processing that led to a greater focus on high quality high margin business. Today, we are very pleased to announce that we are once again increasing our estimated sustainable gross profit margin range to 29% to 31%.

We are confident in our ability to maintain this higher range on an annual basis as a result of our sustainable impacts the investments we have made in our business are having on our gross profit margins.

Let me touch on this a little bit more in detail.

Over the past five years, we have invested nearly a $1 billion into our company through capital expenditures, approximately half of which was directly - that was directed towards state of the art value added processing equipment across the family of companies. These investments not only introduced new processing capabilities, and help us increase the percentage of orders with processing from our historic levels of about 40% to our current level of about 50%, but also enhanced and upgraded our existing value added processing equipment to improve the quality of our service offerings to our customers.

Our investments within our family of companies enables our managers in the fields to provide additional value to our customers and an appropriate price, which further supports our increased sustainable gross profit margin rage.

Looking ahead, we will continue to prioritize investing in our company's growth as a key element of our capital allocation strategy. We maintain a flexible capital allocation strategy that is focused on both reinvesting in our company's growth and stockholder returns.

Beyond the significant investments, we are continuing to make in value added processing equipment, our 2021 capital expenditures will also be focused on both new facilities and projects to expand, upgrade and maintain many of our existing operations.

As such, we are increasing our 2021 capital expenditure budget from $245 million to a new record of $310 million due to various key projects, including a significant expansion of our operation in South Korea, that services the semiconductor and biochem and pharma markets, new expansion - new expanded total processing capacity and increased investments in renewable energy at many of our existing facilities.

During the second quarter of 2021, we invested $80.1 million in capital expenditures.

Turning to our other avenue of growth acquisitions, we have a healthy pipeline of prospective opportunities, including both traditional metal service center businesses and adjacent businesses.

As always, we would adhere to our strict transaction criteria when evaluating prospective targets to ensure a strong fit within our family of companies. In regard to stockholder returns, we returned $67.8 million to our stockholders during the second quarter of 2021 through the payment of $43.8 million in dividends, and the repurchase of $24 million of Reliance, common stock.

As announced earlier today in our earnings release, our Board of Directors approved an amendment of our share repurchase plan that was set to expire at the end of this year, increasing our repurchase authorization to $1 billion. Since 2018, we have repurchased approximately $900 million of our common stock at a weighted average cost of $85.52 per share.

We expect to remain a prudent allocator of capital by maintaining our flexible approach focused on both growths, which remains a top priority as well as stockholder return activities.

Finally, I would like to briefly comment on our recently announced executive officer succession matters. Effective January 2020, Bill Sales will retire from Reliance following 24 years of service with our company, as of July 1st, Bill transition from his role as Executive Vice President of Operations to Special Advisor, where he will provide support on special projects to facilitate the transition of those responsibilities. Bill's deep industry experience and relationships have contributed significantly to Reliance and our success over the years. I'd like to sincerely thank you, Bill, for all your hard work and dedication to the company. And on behalf of all of us at Reliance, wish you the very best in your retirement. Relatedly as a part of our deliberate succession planning process I'd also like to congratulate both Sean Mollins who has been promoted to Senior Vice President, Operations, and Brian Yamaguchi, who has been promoted to Vice President, Supplier Development. Both Sean and Brian have a long standing history with Reliance, as well as a significant industry experience and a passion for our business. I applaud both of you for your well-deserved new roles. In summary, I am beyond inspired by the outstanding operational execution demonstrated by the entire Reliance team, and their unwavering focus on the core elements of our resilient business model, which drove our second consecutive quarter of record financial performance in an environment characterized by extremely high metals pricing, strong demand from our customers and limited metal availability. We believe Reliance remains well positioned to continue supporting the growth and needs of our customers and our suppliers while generating strong earnings and returning value to our stockholders. We remain confident that America is going to need Reliance to rebuild, and we will continue to support our colleagues, customers, suppliers and community in collective efforts to do so. Thank you very much for your time and attention today. I will now turn the call over to Karla to review our operating results and demand trends. Karla?

Karla Lewis

Thanks Jim. And good morning, everyone. I would like to begin by thanking all of my colleagues within the Reliance family of companies for their record setting performance during the second quarter. I would also like to recognize and thank Bill for his many contributions to Reliance during his successful career. I was fortunate to work with Bill for all of the 24 years he spent at Reliance and wish him all the best in his upcoming retirement.

Additionally, I'd like to extend my appreciation to our customers for their ongoing trust in Reliance and our mill partners for their continued support.

Turning now to our second quarter operational performance, continued strong underlying demand in the majority of our end markets resulted in our tons sold increasing 1% compared to the first quarter, which was within our guidance range of flat to up 2%.

We continue to believe, however, that underlying demand is stronger than our second quarter 2021 shipment levels reflect due to factors hindering economic activity, such as metal supply constraints, labor shortages, and other supply chain disruptions we are experiencing in our business, as well as impact on our customers and suppliers. And we look forward to fulfilling this pent-up demand in future periods. Disruptive supply chain factors, however, do support increased metal pricing, resulting in ongoing metal price escalation for many of the products we sell during the second quarter, most notably for carbon and stainless steel products.

Our average selling price in the second quarter reached a new all-time high and increased 19.7% compared to the first quarter of 2021 and exceeded our guidance up 5% to 7% by a significant amount.

As Jim noted, the robust demand and favorable pricing conditions contributed to record quarterly gross profit dollars of $1.08 billion in the second quarter of 2021. And a strong gross profit margin of 31.7%. On a FIFO basis, which we believe better reflects our current operating performance. We achieved a record gross profit margin of 37.5%, our second consecutive record FIFO gross profit margin quarter. To our managers in the field, we greatly appreciate your superb performance and continued focus on high quality, high margin business.

We also applaud the level of cooperation you have exhibited across our family of companies to provide creative solutions to our customers. In the current environment, we are experiencing even more business opportunities from new and existing customers.

Our size and scale, combined with strong collaboration among our family of companies, and support from our key mill partners have collectively helped to ensure that we are able to meet valued customer's needs. I'll now turn to a high level overview of our key end market trends on a sequential quarter basis. Demand for nonresidential construction, which includes infrastructure and is the largest end market we serve continued to gain strength.

Our second quarter ton sold surpassed first quarter shipments and reached pre pandemic levels.

We continue to experience solid quoting activity for projects in the areas of distribution and fulfillment centers, data processing and manufacturing facilities, big box retail and the like. Due to supply constraints, and increase pricing, we're also experiencing an uptick in smaller projects that can be completed quickly.

Given our healthy backlogs, solid quoting activity, positive customer sentiment and favorable key industry indicators, we are optimistic demand will continue to strengthen through the remainder of 2021. Demand for the toll processing services Reliance provides to the automotive market softened slightly from first quarter levels. Nevertheless, we believe underlying demand is stronger than our second quarter trends reflect due to the impact of global microchip shortages on production levels in certain automotive markets.

We are continuing to provide solutions to support our automotive customers increase transportation and storage challenges through recent investments, which include purchasing a new facility in Michigan and opening a new tolling facility in Indiana. This increased capacity will allow us to serve as many new opportunities for our tolling business.

Looking ahead, we are cautiously optimistic that our tolling volumes to the auto market will strengthen in the back half of the year as we ramp up our expanded capacity and if auto production increases.

Importantly, we remain confident about the long-term strength of our toll processing business, as evidenced by our ongoing investments in growth and innovation in this area.

As a reminder, our Greenfield Kentucky tolling operation commenced production in November 2020 and has been steadily ramping ever since. Construction also continues on our Greenfield tolling facility in Texas, which we expect will commence operations in the fourth quarter of 2021 and ramp throughout 2022. We're very excited about these opportunities to expand our tolling presence. Demand in heavy industry for both agricultural and construction equipment improves significantly during the second quarter, with our shipments exceeding pre pandemic levels. Demand for machinery used in manufacturing processes was also very strong in the second quarter of 2021. And we expect demand in the heavy equipment and manufacturing industries to continue at solid levels through the rest of the year. Semiconductor demand during the second quarter continue to improve from solid first quarter levels. The semiconductor space remains one of our strongest end markets. And we expect this trend to continue well into 2022. With regard to aerospace, demand and commercial aerospace, which is roughly half of our aerospace exposure softened in the second quarter compared to our first quarter shipment levels due to increased COVID-19 related shutdowns in Europe. We believe we are slowly exiting the trough of the demand cycle and expect limited gradual improvement throughout the remainder of 2021. Demand in the military, defense and space portions of our aerospace business were also down from the first quarter due to COVID-19 related shutdowns in Europe remain solid with strong backlogs and exceeded our pre pandemic shipment levels. We anticipate strong demand in the noncommercial aerospace market will continue for the balance of the year.

Finally, demand in the energy sector, which we define as mainly oil and natural gas improved slightly in the second quarter as a result of increasing oil prices and rig counts along with customer inventory replenishment.

We expect demand in the energy sector to continue to improve at modest levels in the second half of the year. In summary, the first half of 2021 was distinguished by back to back quarters of record financial performance. Today, early in the third quarter of 2021 positive momentum in both demand and pricing continue, which, when combined with our proven and resilient business model positions us to optimize our performance and deliver strong results once again. We thank our Reliance colleagues for their dedication to health, safety, and operational excellence. And we also sincerely thank our customers and suppliers for their ongoing support as we all manage through these extraordinary times. I will now turn the call over to Arthur, who will review our financial results. Thank you.

Arthur Ajemyan

Thanks Karla, and good morning, everyone. I'll start with a recap of our quarterly results. Once again, record pricing levels, healthy demand, and strong gross profit margins contributed to record gross profit dollars, which in turn, drove record pretax income and record earnings per share. The significant increase in metal pricing and ongoing strengthened demand resulted in record quarterly sales of $3.42 billion, up 20.4% from the first quarter of 2021, and up 69.3% from the second quarter of 2020. Strong pricing momentum for most carbon and stainless steel products contributed to the 19.7% increase in our average selling price per ton over the first quarter of 2021.

As Jim and Karla mentioned, the continued pricing discipline we focus on higher margin orders by our managers in the field, along with our ongoing investments in value added processing capabilities collectively resulted in record quarterly gross profit of $1.08 billion and a strong gross profit margin of 31.7% in the second quarter of 2021.

Our non-GAAP FIFO gross profit margin of 37.5% in the second quarter of 2021 was a record and exceeded the prior quarter by 40 basis points and the prior period by 730 basis points. Please refer to our earnings release where we provide a reconciliation of LIFO to non-GAAP FIFO gross profit margin for each reported period. We incurred LIFO expensive OF $200 million or $2.31 per share in the second quarter of 2021 compared to LIFO expense of $100 million, or $1.16 per share in the first quarter of 2021.

As a result of higher than anticipated costs for certain carbon and stainless steel products, we revised our annual LIFO expense estimate to $600 million from $400 million for 2021. Consistent with our accounting policy, we allocate our annual estimate on a pro rata basis in each quarter and had to true up to our new annual estimate in the second quarter of 2021 by incurring $200 million of LIFO expense, bringing our six month 2021 LIFO expense to $300 million.

Our current projected LIFO expense for the third quarter of 2021 is $150 million based on this revised annual LIO expense estimate.

As in prior years, we will update our expectations each quarter based upon our inventory costs and metal pricing trends. At the end of the second quarter of 2021, Our LIFO reserve on our balance sheet was $415.6 million and is projected to be $715.6 million at December 31, 2021 based on our current $600 million annual LIFO expense estimate. This reserve can benefit earnings in future periods that include declining metal prices.

Now turning to our expenses; our second quarter SG&A expense increased $44.8 million or 8.6% compared to the first quarter of 2021. The bulk of the quarter-over-quarter increase was a result of higher incentive based compensation, given our record gross profit and pretax income levels.

Additionally, inflation contributed to increase variable expenses, most notably for fuel and freight as well as packaging costs. In comparison to the prior period SG&A expense was up $124.8 million or 28.5%, primarily as a result of higher incentive based compensation to variable plan and delivery expenses associated with 70.5% increase in shipments and to a lesser extent, inflationary increase. Overall, our headcount was relatively flat, compared to both the first quarter of 2021 and the second quarter of 2020.

Our non-GAAP pretax income of $442.8 million in the second quarter of 2021 was the highest in our company's history.

Our non-GAAP pretax income margin of 13% was also a record.

Our effective income tax rate for the second quarter of 2021 was 25.6%, up from 20.9% in the second quarter of 2020, mainly due to higher profitability. We currently anticipate a full year 2021 effective income tax rate of 25.5%. We generated record quarterly earnings per share of $5.08 in the second quarter of 2021, compared to $4.12 in the first quarter of 2021, and $1.24 in the second quarter of 2020.

Now turning to our balance sheet and cash flow; our operations continue to generate cash, despite significantly higher working capital needs attributable to rising metal costs. In the second quarter, we again generated strong cash flow from operations of $101.6 million despite over $300 million in additional working capital requirements.

In addition, our second quarter of 2021 cash flow from operations was impacted by approximately $174 million of income tax payments, compared to $7 million in the first quarter of 2021.

As of June 30, 2021, our total debt outstanding was $1.66 billion, resulting in a net debt to EBITDA multiple of 0.7x. We had no borrowings outstanding on our $1.5 billion revolving credit facility, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy, while maintaining our investment grade credit ratings. I'll now turn to our outlook. We remain optimistic about business conditions in the current environment, with strong underlying demand in the majority of the end markets we serve.

However, we expect factors impacting shipment levels in the second quarter of 2021, such as metal supply constraints, labor shortages, and other supply chain disruptions will continue to persist in the third quarter of 2021.

As such, we estimate tons sold be down 1% to up 1% in the third quarter of 2021 compared to the second quarter of 2021.

We expect metal pricing trends to remain strong in the third quarter as metal prices at the beginning of the third quarter of 2021 are higher than the average for the second quarter of 2021. We estimate our average selling price per ton sold for the third quarter of 2021 will be up 7% to 9%. Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $5.55 to $5.75 for the third quarter of 2021. In closing, we're thrilled with our operational and financial performance in the second quarter, supported by strong pricing and demand trends, as well as outstanding execution by all of our colleagues in the field, who continue supporting our customers' needs. These factors, coupled with our resilient business model resulted in yet another quarter of record financial performance and solid cash flow, enabling us to continue executing on our capital allocation priorities of investing in the growth of our business and returning value to our stockholders. That concludes our prepared remarks. Thank you for your attention. And at this time, we'd like to open the call up to questions. Operator?

Operator

[Operator Instructions] And our first question is from Sathish Kasinathan with Deutsche Bank.

SathishKasinathan

Yes. Hi, thank you. Good morning, Jim, Karla and Arthur. Thanks for taking my questions.

You mentioned that shipments to non risk construction market are back to pre pandemic levels and that shipments to heavy industry are above pre pandemic levels. Can you also provide similar comparison on what the current shipment levels are for other end markets? Mainly automotive, tolling, commercial aerospace and energy. And when do you expect the volumes to recover to previous levels?

KarlaLewis

Hi, Satish. How are you today? I'll hit that.

So we did point out a couple of end markets where we did see and when weren't comparing to pre pandemic in our comments here, we compare to the second quarter of 2021 to the second quarter of 2019.

And so there were obviously different levels of strength in some of those end markets in the second quarter of 2019. But we called out those areas where our Q2, '21 shipment levels were higher, to the best that we can tell us, I think you're familiar, we don't have perfect end market visibility, but based on our best estimates, and the products that we sell into those end markets, non res construction and heavy equipment, along with our defense, military and space markets, we did call out we're above pre pandemic levels. That means that the other end markets we sell into are not yet above pre pandemic levels. And as you know, you're aware and we call it out commercial aerospace certainly was hit the hardest of our end markets by the pandemic, still recovering, although we are seeing some improvement there. Same with the energy market. And we expect to see some continued improvement in both of those markets. I will say generally, all of our other end markets we feel are at good healthy levels, strong in some cases, we expect that that underlying demand to continue to be strong and to get back to pre pandemic levels in a lot of those other markets. Commercial aerospace lagging the others, but good, really good demands seen by our customers, especially with the way we service these markets, the customers that we sell to are seeing really strong demand.

SathishKasinathan

Okay, thank you. That's helpful color. My next question is a clarification on CapEx.

I think Arthur mentioned that the previous CapEx of $245 million, there was also some carryover cash from that needs to be paid, which would imply that the overall cash on CapEx was about $300 million. How does it compare to the new guidance of $310 million?

KarlaLewis

Yes, so Satish with those numbers that you refer to that was what we approved for spending, beginning in 2021.

So earlier this year, we announced our 2021 CapEx budget of $245 million. We did just announce that that $245 million is now $310 million.

So that's what we have approved as new projects to begin in 2021, we will not spend all of that money because of long lead times on equipment building, et cetera that has been approved, some of that cash will be spent in 2022. And at the same time, what Arthur mentioned is that those same long lead times we have some carryover from our CapEx projects that were approved in 2020, where we're expanding cash in 2021. And Arthur, did you give an estimate on?

ArthurAjemyan

Yes, Satish, it's a good point. And we said we're estimating cash spend for the year to be perhaps $300 million, but as the year progresses, we continue to run into lead times, and it's just difficult to spend the money.

So but we'll keep kind of revising that estimate at the moment.

I think the $300 million cash spend is probably as good an estimate as it was last quarter. And we will update you next quarter.

KarlaLewis

Yes, but the full year 2020 CapEx budget and the $310 million in '21 includes a lot of growth projects, we see a lot of opportunity, and we will spend those funds, it just may lag into a future year.

Operator

And our next question is from Emily Chieng with Goldman Sachs.

EmilyChieng

Good morning, Jim, Karla, Arthur. And thanks for the update today. My first question is just around what you're seeing in terms of demand, clearly, demand is very strong there. But when you speak to your customers, are there any signs of double booking or push back against current price levels? And are there any end markets where you could see some early signs of demand instructional or project deferrals? One that comes to mind would be sort of renewable energies, we're seeing some headlines there, but curious as to what you're seeing from your customer base.

JimHoffman

Sure, hi, Emily. This is Jim. No, it's - feels good. Most of the markets we are selling into are doing quite well.

As far as double booking, I'm not sure if we would ever know that. I don't think we have that. I mean, metal so hard to get right now, my guess is that our customers are busy, and they're glad to get it. And they're glad to pay us for it. And they're really happy to ask us to do more and more value added.

So I'm not - this - I don't think that's one of the - this is one of those markets where people are just double booking, thinking that the price is going to continue to go higher and higher and higher, I think people have come to the realization that this is what we need to deal with right now. And they're busy.

So they're relying on Reliance to do more. Karla, you may have some additional insight to what you're seeing out there.

KarlaLewis

Yes, hi, Emily. I would say that our customers, as I just mentioned are very busy. But people out there are looking for metal, there is limited supply. And we are hearing from some customers that maybe don't normally buy from us who are looking for the metal. But we, with our strong domestic supplier relationships, we've been able to meet the needs of our key customers that we've worked with for a long time and get them in the metal that they need.

We have seen, I would say a nonresidential construction, I mentioned that the types of business, the customers we work with there continue to be extremely busy.

We have heard of some potential project delays for larger projects. But with the, a lot of the fabricators we work with they're servicing some of the smaller projects, which is normal for us. And that because they're - it's a shorter time period for them to complete the project, they have more certainty on pricing. But in general our customers are busy, they're looking for metal, and we're able to get it for them.

JimHoffman

Yes, you might ask that question to the producing metals, they could probably give you an idea double booking, but my guess would be that they're not seeing it. They're running their mills in the 90% capacity range right now.

So they're making what they can make and taking care of us and taking care of the supply chain, the best I can. But that might be a good question to ask them.

EmilyChieng

Great, that's really helpful and an exciting place to be in. Maybe one follow up is just around the various capital allocation buckets that you've got out there.

You've clearly outlined some growth spend today, you recently upped the buyback authorization program. And I think you still think about M&A as one of the problems there. Are you keeping some balance sheet capacity for acquisitive growth? Or how should we think about Reliance repurchasing shares in the case transactions are not executed? Is there some kind of cadence we should expect through the course of the year or is it perhaps more opportunistic in nature?

JimHoffman

We said as we have a really good problem.

We have a lot of cash; we generate a lot of cash so we can pretty much do anything we want in any one of those buckets.

So it's just a matter of remaining flexible and making the right decision at the right time. Arthur?

ArthurAjemyan

Yes, sure. A good question, Emily. And I think consistent with our practice we don't necessarily comment about the timing or the amount of share buybacks that we anticipate. But as you may have noticed, we disclose it since 2018, we've purchased over $900 million of our stock back.

So it's something we'll continue to monitor and be flexible with our capital allocation. And with our balance sheet today, we have the ability to execute on all prongs of our capital allocation strategy. And we could do the M&A, we can do the record CapEx levels, and along with that provide healthy levels of stockholder returns so.

ArthurAjemyan

And saying all that we think the buying Reliance stocks, really good investment, seems to be a good stock, right.

Operator

Our next question is from Phil Gibbs with KeyBanc Capital Markets.

PhilGibbs

Good morning. What's the outlook for net working capital for the rest of the year?

ArthurAjemyan

Yes, so this is Arthur.

I think I would say majority of it is behind us.

With the - I mean, if we said that in Q2, and then prices increased, much higher than we had anticipated. But I think at this point, Q2 probably was the highest quarter in terms of working capital build. Q3 should be below those levels. And it depends on what happens with pricing, but we had some tax payments that we caught up with, for the six month period, so we shouldn't have that impacting Q3, we had about $174 million of estimated tax payments, and Q3 should have about half of that. And price based on our guidance, with prices going up, 7% to 9%. The working capital build should be less than what we had in Q2, hope that answers your question.

KarlaLewis

Yes. Phil, I'd add, also adds on to that, and I should have commented on this earlier in some of the demand questions. Also in our guidance, as you know, typically at Reliance, we're building working capital in the first two quarters of the year, the first half of the year, and then we release some working capital in the back half, mainly because of demand trends and number of shipping days, because of the normal seasonal decline. And in our demand, our tons sold guidance for Q3 down 1% to up 1%. We just wanted to call out that we think that is a very positive guidance signal, because typically, the seasonal trend is for Q3 to be down.

I think industry wide, it's usually down about 5% to 7%, Q3 versus Q2, for us with our product mix, it's usually a little less than that, in a quote, normal demand environment, we would have probably guided down anywhere from 3% to 5%.

And so we just wanted to highlight that. We hope you guys recognize that the positive thing pretty much flat. Q3 with Q2, we think is very positive indicator for demand strength.

PhilGibbs

Thank you.

And so the net working capital builds for the third quarter.

So you're still anticipating a build, but just less so than Q2. Is that right, Arthur?

ArthurAjemyan

That's correct, Phil.

PhilGibbs

Okay. And then you gave some color on your gross margin range in terms of what you all think is sustainable 29% to 31%. And I know that sometimes we can get mixed up with LIFO and FIFO. Is that a number for reported gross margins that you're citing there? Meaning FIFO.

ArthurAjemyan

That would be on LIFO basis. And that's an annual range.

PhilGibbs

Okay. And tax rate over the balance of the year. Did you say about 25%?

ArthurAjemyan

25.5%.

PhilGibbs

Okay. Is Bill on the call?

BillSales

I am here.

JimHoffman

Make it more Bill.

PhilGibbs

Congrats, Bill on all of your achievements with the company and just wanted to thank you for all your wisdom over the years and wish you all the best. Thanks.

BillSales

Thanks a lot, Phil. Appreciate that greatly.

Operator

And our next question is from John Tumazos with Very Independent Research.

JohnTumazos

Congratulations on all the great results. I see that 8% midpoint of the price per ton guidance for the third quarter, which is swelling a little bit from the 19% gain sequentially in June. The publish quotations look like sheets and plates should be good that should we infer from the 8% guidance to tubes and long products and stainless and aluminum are going to be pretty flat, or any products gone down?

KarlaLewis

Hey, John, it's Karla, I'll give initial response. And then any of my colleagues here can join in if they'd like. But our guidance and what we tried to point towards is that during the second quarter, obviously, with a 20% increase, prices were increasing consistently for many of the products throughout the second quarter.

So we ended Q3 with a higher rate than our Q2 average.

So our guide of 7% to 9% is really getting us up to the pricing levels where we ended the quarter basically, the current pricing levels, including a couple of announcements we've seen recently on certain products.

So we, it's an overall pricing guidance, we do see strength continuing in stainless, common alloy, pretty much most of the products that we sell, we're not saying that the same rate that we saw, price increases on some of those products earlier in 2021, but we see prices holding, not any individual items that we're thinking we're going to see certainly any material decline in prices.

JimHoffman

John, you know the drill, I mean, if you think flat rolls and plates going to go up, and tubes going to follow that. And then when you see the mills running at 90% capacity, you can pretty much anticipate some kind of maintenance shutdown. And if we get the chip situation squared away, you're going to see automotive guys crank back up.

So all those things in my mind, I don't see a price decrease. And anything I just mentioned there. Will there be additional price increases? Probably.

JohnTumazos

If I can ask one more, thank you. Thinking about how tough it is to get steel. Do you think that you could see Reliance being a little more outside the box and maybe buying a slab from a mill that has a little extra mill and taking it to another mill to get to a [Indiscernible] that might have a little extra rolling and trying to squeeze a little bit more supply out of the system when everything is stretched out like this?

JimHoffman

I hear you. I don't think we would do that.

Now, I might not be in one day.

And somebody might think that's a good idea. But the way it looks, I mean, the way we've done this, John, as you well know for decades, we have this model, that we're very proud of the fact that we've been a domestic supporter for so many years, and the relationships that we have, they pay off all the time. And certainly in times like this, they pay off.

So we don't, I can't tell you, we're getting everything we want. We're getting what we need. And there's really no reason for us to muscle up and try to force people to do things that might not be good for their business because we care. We care about the domestic producers. We want them to do well. We want them to reinvest in their companies, which they are doing. And I don't, I just don't see a need for us to go out and do anything out of the box like that with the -

JohnTumazos

I wasn't thinking of an imported slab. I was thinking that there might be domestic slab availability out there. Familiar, maybe don't have a good rolling - as big a rolling mill as they wished.

JimHoffman

Yes, you know what; those guys are really good at that kind of stuff. We're not. We're going to stick to what we're good at and let them do that kind of stuff. But I see where you're going. And I would say that at Reliance won't be doing things like that.

Operator

And we have reached the end of our question-and-answer session. At this point, I will return it, hand it over to Jim Hoffman, President and CEO for closing remarks.

Jim Hoffman

Okay, thank you all for taking the time and give us your attention today.

Our record financial results would not have been possible without the strong operational execution demonstrated by the entire Reliance team including the hard work and resilient commitment to health, safety and wellbeing of our colleagues in the fields. We thank you and we are inspired by your performance every day.

Lastly, we will participate virtually at the Raymond James Diversified Industrial Conference on August the 25th. We hope to see a lot of you there. Bill, we're going to miss you, buddy.

Bill Sales

I am going to miss you too.

Jim Hoffman

Thank you very much.

Operator

This concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.