Q4 2021 Reliance Steel & Aluminum Co Earnings Call
Greetings and welcome to the reliance steel and aluminum company fourth quarter and full year 2021 earnings 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. During the conference. Please press star zero on your trial.
Phone keypad as a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Kim Orlando with Auto Investor Relations. Thank you you may begin.
Thank you operator, and thanks to all of you for joining our conference call to discuss reliance's fourth quarter and full year two.
2021 financial results.
I am joined by Jim Hoffman, He yeah, Karla Lewis President and Arthur Jimmy in Senior Vice President and CFO .
A recording of this call will be posted on the investors section of our website at Investor Day, Our S E T Dot 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 related economic conditions on our future operations.
It may not be under the company's control and may cause the actual results performance or Chi.
<unk> 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 31st 2020 under the caption risk factors.
Disclosure in our press release this morning.
And other documents the lifestyles or furnished 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 here and I will now turn the call over to Jim Hoffman CEO of reliance.
Thanks, Kevin.
Good morning, everyone and thank you for joining us today to discuss our fourth quarter and full year 2021 financial results.
Again, with an overview of our 2021 performance and capital allocation activities.
<unk> will then speak to our operating results and demand trends by end market and Arthur will conclude with a review of her fan at financial results.
Reliance to finish the year strong with record financial performance across nearly every metric driven by the resilience of our business model and exceptional execution by all of my colleagues throughout the reliance family of companies.
I continue to be inspired by their passion and dedication to operational excellence and their steadfast commitment to safety.
Our value of our company.
The durability and effectiveness of our model is apparent in our results despite macroeconomic challenges, including the continuing pandemic supply chain disruptions and a tightening labor market.
Strong demand and favorable metal pricing trends throughout 2021, combined with our highly diverse mix of products and end markets and strong relationships with our domestic mill partners helped us generate record annual sales of $14.09 billion and record.
Earnings per share of $21 97 shops.
Our gross profit margin remains bolstered by our managers in the field, who continue to appropriately price the value of the products and services, we provide our customers.
Much of that value stream from the significant investments, we have made to enhance and expand our value added processing capabilities to support the increasing needs of our customers.
In 2021.
Performed value added processing services, and just over 50% of our orders.
From 49% in 2020.
Our value added processing capabilities, not only support our strong gross profit margin levels, but also help stabilize our margin in times of declining prices and or demand.
We invested 230 $616 million into our business through capital expenditures in 2021.
More than half of which was for growth opportunities. Today, we were pleased to announce our 2022 capital expenditure budget of $350 million that includes projects to expand upgrade and maintain many of our operating facilities.
Our 2022 budget includes the purchase and installation of over 200, new pieces of metal processing equipment, as well as energy efficient lighting and solar panels in certain of our locations.
Turning to M&A, we completed four acquisitions in the fourth quarter of 2021 with aggregate purchase consideration of approximately $439 million.
As discussed on our last call. We completed the acquisition of Mirth This United a leading master distributor of tubular building products in the U S. On October the first.
We also completed three additional acquisitions in December .
First new tech precision metals.
Headquartered in Ottawa, Ontario.
Enhances our product offering and specialty metals, and the neutral or aerospace and defense markets along with others.
Second we acquired <unk>.
Well, Matt also distributor servicing the northeastern United States Admiral metals expands our product offering into especially nonferrous products and fits well within our business model given its end market diversification high level of customer service and next day delivery standards.
Third we acquired road tax a single location metal service Center in Brooklyn, New York that specializes in copper.
Arms and bras.
Each of these acquisitions aligns with both our business model as well as our strategy of investing it immediately accretive high quality businesses that expand our product end market and geographic diversity.
For additions to our family of companies increase the total number of acquisitions, we have completed since our 1994 IPO to 71.
Current with our combined $676 million of growth related investments through capital expenditures and acquisitions. In 2021, we also returned over $500 million to shareholders through dividends and repurchases of reliance common stock.
On that note we were pleased to announce today that we increased our dividend by 27% for the first quarter of 2022.
Arthur will elaborate more on this capital allocation shortly.
Before I conclude I'd like to recognize both our Arthur Jam in and Susie Bonner further well deserved promotions Arthur has been promoted from Vice President to a senior Vice President Chief Financial Officer. Following its 2021.
Promotion to CFO Susie.
As soon as he has also been promoted from Vice President Senior Vice President and Chief Information Officer, We look forward to continuing to benefit from their wealth of knowledge and expertise.
In closing I want to recognize the outstanding performance of my colleagues throughout 2021 their execution over a highly resilient business model, which was strategically designed to perform throughout industry cycles generated record setting financial results and 2021.
In addition, our highly diversified product mix strong value added processing capabilities and decentralized operational structure, coupled with our focus on small order sizes and quick turnaround times were particularly effective in delivering value to our customers and promoting a strong and stable margin profile.
<unk>.
Our model generates strong cash flow to fund continued execution of our capital allocation priorities of growth and stockholder returns.
Looking ahead, we will continue to execute our proven business small despite macroeconomic challenges.
And maintain our focus on continuous improvement to support our customers suppliers and.
In communities, we were confident that American needs reliance to rebuild.
Thank you for your time and attention to that I will now I'll turn the call over to Carlos who will review, our operating results and demand trends.
Thanks, Jim and good morning, everyone.
I'd like to start off by thanking all of my colleagues for their outstanding record setting performance in 2021 and for their continued focus on health and safety our folks in the field have done an exceptional job managing through the pandemic and we are very pleased to continue supporting our colleagues.
With extended health benefits during these extraordinary times.
I'd like to also extend my thanks to our customers for their continued loyalty and partnership as well as our suppliers for their support of reliance.
I'll now turn to our fourth quarter operational performance.
Our tons sold decreased five 7% from the third quarter, which was within our guidance range of down 5% to 8%.
Our same store tons sold were down 8.2%, primarily due to the typical seasonal factors, including customer holiday related shut downs and fewer shipping days in the fourth quarter.
However, many of our customers shut down or reduce shifts further than we anticipated in response to increased labor shortages that we believe are attributed all attributable to the AMA crime surge in mid December that continued into January and although to a lesser extent.
February .
Nevertheless, we continue to believe that underlying demand is fundamentally stronger than our fourth quarter shipment levels indicate and that we remain well positioned to satisfy pent up demand in future periods, when labor and supply chain disruptions subside.
Our average selling price per ton sold increased from the previous quarter across all of our major commodity metrics, including carbon stainless aluminum and alloy. Despite the hot rolled coil price pressure.
The diversity of our product mix was important factor, that's hot rolled sheet and coil products represent only 10% of our total sales.
While our average selling prices for carbon flat rolled and tubing products in the fourth quarter remained higher than the third quarter prices for these products started to decline in November . Conversely, however prices for carbon structural bar and plate products continue to rise throughout the.
Fourth quarter and prices for the vast majority of stainless aluminum and alloy products remained at elevated levels compared to the third quarter.
As a result of our diversified product mix. It features a limited exposure to commoditize hot rolled sheet and coil products, our average selling price per ton set another quarterly record record at $3139, an increase of nine 7% from the third.
Third quarter of 2021.
Which exceeded our guidance of up 5% to 7%.
And approximately 2% of the increase in our average selling price was mix related due to our four acquisitions, bringing a high value product mix, including copper bronze aluminum and PVC pipe.
Looking ahead market conditions for the majority of the products, we sell remains supportive of elevated pricing continuing into the first quarter of 2022.
As Jim highlighted the unique characteristics of the reliance business model combined with strong operational execution helped us maintain our gross profit margin within our robust sustainable range, while our fourth quarter non-GAAP gross profit margin of 31, 5%.
Maine's strong we began to experience some margin compression on a FIFO basis relative to the prior quarter as inventory costs began to catch up with our average selling price.
On a FIFO basis, which we believe better reflects our current operating performance. We achieved a non-GAAP gross profit margin of 35, 1% down 320 basis points from the third quarter of 2021.
Despite the sequential decline our non-GAAP FIFO gross profit margin remained near record record levels surpassed only by our non-GAAP FIFO gross profit margin in each of the first three quarters 2021.
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 it's the largest end market. We serve was lower than the third quarter and relatively consistent with seasonal trends, we typically experienced in the fourth quarter.
Demand for the toll processing services reliance provides to the automotive market remained steady during the fourth quarter. Despite despite supply chain challenges, including the continuing impact of the global microchip shortage on production levels.
Demand in heavy industry for both agricultural and construction equipment also remained relatively steady with the prior quarter, despite the seasonal slowdown and ongoing supply chain issues.
Semiconductor demand remained strong during the fourth quarter.
And continues to be one of our strongest end markets.
Aerospace demand improve during the fourth quarter as a reminder, roughly half of our exposure to aerospace as commercial which saw a resurgence of activity, but fourth quarter tons sold exceeding that of the prior quarter.
And demand in the military defense and space portions of our aerospace business remains solid.
Finally demand in the energy sector sector, which we define as mainly oil and natural gas improved with fourth quarter tons, surpassing the third quarter of 2021.
We remain cautiously optimistic underlying demand trends in 2022 will continue to improve and most of the end markets we serve.
In addition, we expect metals pricing will remain elevated in the near term notwithstanding the impact of declines in carbon flat rolled pricing.
We believe execution of our proven business model combined with our diversity scale value added processing capabilities and strong long term relationships with our suppliers and customers will enable us to continue to achieve industry leading results.
I'll now turn the call over to Arthur to review our financial results.
Thanks, Karla good morning, everyone and thank you for joining US My remarks. This morning will mainly focus on the factors that drove our record fourth quarter performance.
Strong pricing coupled with solid demand for most of our product contributed to record quarterly non-GAAP earnings per share of $6.83.
Exceeding our guidance of $5 five to $5.15 per share.
I had headwinds from declining carbon flat rolled product pricing and continued labor disruptions related to the pandemic.
Ported the best quarter in Reliance's history.
Which is exceptional given our fourth quarter financial results are typically the lowest within our fiscal year due to seasonal impact.
This outstanding performance was fueled by a rich diversity of product end markets and geographies along with leveraging our significant investments in value added processing that collectively supported elevated selling prices in the fourth quarter.
Higher selling prices offset the impact of lower seasonal shipment contributing to a record of about $4 billion in sales for the quarter.
Our fourth quarter 2021 acquisitions contributed approximately $171 million to our fourth quarter sales and approximately 34 cents to work there.
Diluted earnings per share.
Our non-GAAP gross profit margin of 31, and a half for the fourth quarter was consistent with the third quarter. Despite a significant LIFO expense of $142 $3 million or a dollar in 68 cents per share.
Recognized LIFO expense of $704.8 million or $8 21 per share for 2021.
You may recall that our guidance for Q4 assumed LIFO expense of 887, and a half million dollars based on our 750 million dollar annual estimate.
We recorded our original lifestyle annual estimate of $750 million for the year, our fourth quarter 2021 earnings per diluted share would have been 50 cents lower also our income tax rate came in lower than expected, which provided a 23 cent incremental benefit to our fourth quarter diluted.
Earnings per share.
Even after adjusting for lower than anticipated LIFO and income tax expense listen we still would have beaten our fourth quarter EPS guidance by a significant margin.
As of December 31, 2021, the LIFO reserve on our balance sheet was $824 million, which will be available to benefit future period operating results and mitigate the impact of declining metal prices on our gross profit and pre tax income.
Based on current market conditions, we expect to benefit from annual LIFO income of $100 million.
In 2022, consistent with our accounting policy, we allocate our annual estimate on a pro rata basis and each quarter as such our current projected Q1 2022, LIFO income is $25 million.
Our fourth quarter SG&A expenses increased slightly by $11 1 million or one 8% compared to the third quarter of 2021, mainly due to the impact of our fourth quarter acquisitions same store SG&A expenses were down $6 8 million or one 1% from the prior quarter.
Additionally, the majority of the increase in SG&A expense compared to the fourth quarter of 2020 is attributable to higher incentive based compensation, resulting from our record gross profit and pre tax income levels in the fourth quarter of 2021.
Turning to our balance sheet and cash flow.
We generated.
Strong cash flow from operations of $393 $8 million during the fourth quarter of 2021 supported by record earnings levels.
Capital investments for the quarter were relatively modest at about $85 million.
For the year, we generated $799 $4 million in cash flow from operations.
Right over $950 million in additional working capital requirements.
We made significant investments of nearly $676 million to grow our business through $236 $6 million of capital expenditures and $439 $3 million for acquisitions.
We also returned over $500 million to our stockholders through $177 million in dividends and 323 and a half million dollars in share repurchases at an average cost of $153 50 755 per share.
We had $712 $6 million of remaining share repurchase authorization.
Our 1 billion share repurchase program approved by our board during this third quarter of 2021.
Over the past five years, our stockholder returns have totaled nearly $2 billion and is comprised of a little over 50% of our net income.
We have paid regular quarterly dividends for 62 consecutive years.
In addition, we've increased our dividend 29 times in 2000, 1994, IPO, including the most recent increase of 27, 3%, but the first quarter of 2022, we have ample liquidity to continue executing on all areas of our balanced capital allocation strategy.
I'll now turn to our outlook.
We remain optimistic about business conditions in the current environment with solid underlying demand across most key end markets.
We estimate our tons sold will be up 5% to 7% in the first quarter of 2022 compared to the fourth quarter of 2021.
At a normal seasonal increase in shipping volumes.
However, I pencil testing it is lower than our typical first quarter expectations. As a result of softer demand in January and early February due to continued supply chain and labor disruptions at reliance our customers and our suppliers, resulting from the Omnipod Serge.
Further despite the significant declines in pricing for carbon hot rolled coil and sheet product, we estimate our average selling price per ton sold for the first quarter of 2022 will be down only 2% to 4% compared to the fourth quarter of 2021.
Fueled by our diverse product mix and continued strength in pricing, but the majority of our product and the end market into which we sell.
Just on these expectations. We currently anticipate non-GAAP earnings per diluted share in the range of $7 five to $7.15, but the first quarter of 2022.
In closing I'd like to again, thank all of my reliance colleagues for their contributions to these exceptional results.
For your attention at this time, we'd like to open the call up to questions operator.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the camp for participants using speaker equipment. It may be necessary to pick up your handset before pressing starkey.
Our first question comes from the line of cities.
<unk> with Deutsche Bank. Please proceed with your question.
Yeah, Hi, good morning, Thanks for taking my questions. My first question is on the shipment guide for first quarter is.
Is there any way you could quantify how much of the 5% to 7% increase in volumes is attributable to the Florida equations I'm just trying to gauge the impact of our supply chain and labor disruptions from an organic or same store perspective.
Yeah, Hi, Satish Carla So our Q1 guide as we indicated from a ton standpoint is a little muted compared to what we would typically see the bounce back be from normal seasonality in the first quarter, we did see and in our operations.
And also even more so at our customers in terms of suppliers. The last couple of weeks of December and then the first couple of weeks of January .
A pretty hard hit from the omicron, a surge that that we all experienced that so our shipments have been improving each week as we've moved through the first quarter. So far so we tried to give a conservative estimate as far as the exact tonnage within that coming from the acquisitions.
We don't have that.
Quantified, but you know it would be a small part of that yeah. Sure. This is Arthur and just a reminder.
Murphy was our biggest acquisition and they were in our numbers for all of Q4 and the others in the acquisitions came in towards the end of it so there's little bit of an impact there, but not much.
Okay. Thanks for the color and my second question is on your LIFO guidance for the full year can you provide some color on the underlying assumptions for the 100 million LIFO income guidance is based mainly on the current spot pricing or does it. They can book on be forward, though and should we expect the LIFO income to increase.
Export pricing continues to click through to the year.
Yeah. Good question to teach so as you've heard us say today.
Has significant amount of products that are still experiencing price increases. So it is that net number you know theres going to be some products that are going up some products that are going down.
And yeah, we take we look at the same information you know you look at the forward curve et cetera that are at the end of the day, one thing that certain about our LIFO estimate that at the end of the year, it's gonna be a number other than 100 million right. So it's not bad.
<unk>, given what we know and give them what we see in the kind of market place based on the product and pricing trends that we talked about.
And we as we always have you know each quarter each month as we get a little more visibility into the ear you know, we'll adjust it as appropriate each quarter.
Understood. Thank you and congrats on a great quarter.
Okay. Thanks.
Thank you. Our next question comes from the line of Emily Chang with Goldman Sachs. Please proceed with your question.
Good morning, Jim coloring out here and thanks for the update this morning. My first question is just around your acquisition strategy. So if we take a look at the full of recent acquisitions.
It seems like there has been a little bit of a tilt towards nonferrous more so than what we've seen in the past could you perhaps discuss your strategy around this mix shift and what you're seeing in those end markets that you do like and you know it is not far as the segment that we should continue to expect you guys to expand subtle.
Uh huh.
Good question no.
We don't really sit around and say hey, we knew the bar more aerospace companies are more.
Non res companies, if we just look for good governance and Theres a lot of them out there.
And we spend.
We spend a lot of time looking some foreign companies.
Those are three that you're that you are.
Three that you're talking about they just happen to be outstanding companies with really strong managers with great track records and they they've shipped so we are we've got with them and it worked out knowing Murphy issues are you all we call adjacent bar outstanding company that goes into some new products.
And in some new markets kind of gets in a residential play a little group. So yeah. There are.
When you're thinking about reliance phenomena or were just looked really good companies and they don't.
That just happens to be with those companies fell into that who knows next next one or five we bar might be in a completely different a little market, but we'll keep looking for either good ones and do the right thing for our shareholders.
Got it that's really helpful. And then my follow up is just around your ability to secure metal supply I believe last quarter. There was some some constraints that and thought that was more broad based across a number of different products, but anything that you're seeing currently around any sort of challenges and inquiring.
[noise] acquiring products in a timely manner all has the upstream supply chain challenges that have they been lost largely resolved at this point.
Yeah, you know.
It's still part I mean, I know people are too smart to talk about hot rolled coil and plot role in general and that's okay, but as you know that's the only 10% of our business. So that's loosened up quite a bit which is okay. Fine where we are you know our model is designed to bar from domestic suppliers and we've done.
At three years, we continue to do that and we thank them every day for broad success, because you know during the real tight times, they're there for us as we have been there for them for a long period of time, so even though it's a it's still tight right now and we're still getting what we need.
We could probably we could probably get more if we wanted to we're a world where we really care about are Josh and we spend it wisely.
But to answer your question other than flat rolled everything else is pretty still still.
If you if you wanted to get the quality of the domestic stuff.
And that still works is it still a little tight so you know as far as we're concerned other than the flower road, it's gonna businesses spend two hours.
Well I'd say the last six months anyway. So we're good with where it is and in our domestics.
Turning to our <unk>.
Support reliance and we continue to support our grocers and I would just add Emily that you know with some of the improved demand we've seen in aerospace and energy markets. You know if if that continues we might see some you know more tightness in certain of the products, especially some of the specialty products.
That are sold into those markets.
One of the great differentiator, whether it seems tight or or what or what have you from from the outside looking in them from inside looking out we are one of our great Differentiators weaken bar within the family of companies and that helps us helps us in good times.
And then a little slower times, we can move it around.
Thunder was our our cash wisely.
Great. That's very helpful. Thank you.
You're more than welcome.
Thank you. Our next question comes from the line of Seth Rosenfeld with BNP Paribas. Please proceed.
Hi, good afternoon, thanks for taking our questions today, congrats on a very good quarter.
If I can kick off with a question on Capex, obviously your guidance for 'twenty two points to a significant increase year over year on the highest in recent record how should we think about the allocation of that Capex is different parts of the growth profile you pick up cloud it should be aware of the time horizon for those ramp ups and he is looking forward longer term suite.
Think about this new guidance as being a more sustainable number we should consider long term, whereas 22, perhaps a uniquely elevated levels it will be something of a one off.
Yeah. Good question, we appreciate the or Capex, it's based on what our customers are asking us to do and we never know what that is but.
But it seems to have happened over the last several years since we've.
It really started focusing on value out of our customers ask us to do more and more.
A lot of different things technology.
And the equipment World has continued to change and we want to buy the best the fastest and the most harvest tolerance as we possibly can get for our customers, which also allows us to.
Staying that are that are valued.
All your added margin that we do so.
You know it is what's it look like in the future I don't know you'd have to ask me in the future because we don't know what our customer is going to ask us to do $350 million is there's a big number I think that might be a record Pascal I believe it is short kroes said, yes, so but no longer.
We'll continue to do the right things for our customers and.
Support some of the things that they can't support this equipment today is extremely expensive and I think we're I know or by over 200, new pieces of equipment in that $350 million of girl you can expand on.
Yeah, I would just add I mean.
Our 2021 budget was $310 million. This year 350 million you know our largest we've had as Jen said you know the sustainability really kind of depends upon opportunities, we see with our customers, but we've had a good pipeline.
For a few years, you know theres a lot of good stuff going on in the U S economy, where we continue to see more opportunities and we're willing to invest to support that.
But it is a lot of individual items and the ramp up on those it varies because as Jim said, you know 200 different pieces of equipment will come in at various times throughout the year lead times continue to be extended from a lot of the equipment providers. We're working with so you know we're still funding.
You know and implementing some of our 2020 in 2021 Capex budget items and certainly at least we don't anticipate that we'll be able to get all $350 million of our current year budget completed this year, but there will be you know ongoing incremental <unk>.
As of the equipment as we continue throughout the year and I remember when we've come up with a cup of water. That's that's done in a short period of Doc. So that's the best information we have at that time and as time ticks on we get asked to do more and more and we will continue to fund that.
Also because of our size and our model and Omega locations. We have it could change we could we could go above two blazer in one place and then not return the way we want them through so we're moving to another place. We can we can do that and.
And you know what I'm starting to stay within the budget, but if something good comes along and it happens a lot. We can we've been ramp up and under our board has been extremely supportive of us when it comes to investing in our in our.
And our customers so we're.
Or are we know what we're going to we're doing a good thing going on when it comes to Capex.
Thank you and a separate question. Please with regards to working capital obviously 2021 saw when it Bluetooth record working capital investment for the group and of course a lot.
This very strong metals pricing in the year.
Can you talk about what you'd expect for that in 'twenty 'twenty. Two you already gave some guidance on LIFO release, although I think the quantum of released probably comes below what people were expecting.
So, let's do the more bullish outlook for sustainability pipe prices, what does that mean for the potential for working capital at least 2022. Please.
Yeah, Hi, this is out there.
Certainly speak to trend through Q1.
And I think it's fair to say that working capital will probably be at modest modest levels going into Q1, just more seasonality than anything as prices are leveling off you don't have the the pricing component to that.
Clarification on working capital investment so from that perspective, I think it's fair to say that Q1, you know may end up looking like Q4 from a working capital.
Got it.
And he said so for the ability to release greater working capital longer term, assuming some normalization of prices of course, she has only a modest part of your business, but how should we think about how this relates to the broader into pre management strategy in a normalized price environment.
Yeah, I mean, it all depends on what the pricing assumptions are right. So yeah. If you assume stable pricing then really there's a limited amount of working capital.
So I think that's in parallel to think about it.
Okay. Thank you very much.
Hmm.
Thank you, ladies and gentlemen, as a reminder, if he likes to join the question queue. Please press star one on your telephone keypad.
Our next question comes from the line of Timna Tanners with Wolfe Research. Please proceed with your question.
Yeah, Hey, good morning, guys.
Hey, Timna.
If you could answer first off on the comments on labor I wanted to see like what if youre seeing any relief there if you're seeing if this is temporary due to a con or if you expect this to persist through the year any Kansas just you know some cost inflation as people decide to hire more and then similarly.
Those lines are your customers talking also about having too much inventory because that's something we've heard but I know you tend to have smaller customers.
Yeah Timna good to hear from you first on the the labor shortages certainly we're impacted by that.
Work real hard to first retain.
The awesome talent that we have and our focuses and we've done a good job with that we've done a good job with that the next the next is to attract new talent and we're doing okay.
We could always.
We're always looking for talent.
It's not only off the top of the problem is our customers that are having a problem as well. So that's why we know and think that there's some pent up demand out there demand is strong we're excited but it's just a matter of getting everything done or you know oiled up again and didn't didn't goodin.
Talent at our customer level as well as our supplier level to to keep this big machine and go on but as far as reliance is concerned where we're having the same issues that.
Some people have worried we track it and we're working real hard on coming up with the <unk>.
Right of ways to retain the talent, we already have that attract new talent and the my opinion.
We're doing we're doing well I'm I'm I'm proud of all the recruiters and all the people we have working there, but I just wanted to make sure. It's just not reliance it's our customers and if I could wave a magic wand that everybody could get.
Do they need us and.
Well have some fun over the next couple of years. So girl with you. Once you go ahead, yes, I just add on it's certainly a lot of what we talked about at the end of 2020 one beginning of 2022 that's getting better every week with temporary from a labor disruption related to honour crime.
But you know to follow on Jim's comments, certainly we could use you know longer term a few more people in our operations and throughout the supply chain, but it hasn't been a significant impact we think most of the hit to us on that was fairly temporary but some of our customers are continuing to have.
Issues, we have made a you know throughout the year, we've probably made a few more wage increases we adjusted wages in certain areas depending on the local markets.
To remain competitive in those areas, we certainly want to pay fair wages are to all of our colleagues out there. So we've bumped it up we are fairly heavy performance based.
Compensation with incentives and things so he's probably saw more of an impact from that on our expenses this year and that offset some of the longer term potential inflation on on wage increases, but certainly you know we will have a.
A bit of a bump in our wage expenses I mean, just wanted to just one more comment on the payroll and Carl you can address your second part on the customer inventory.
You know this COVID-19 thing has been difficult and we've we've changed the way we do things and we're you know if this investment were making value added equipment and material handling and what have you and the way we've realigned our our our operations. We can we can run those those beast with a few of them.
People do so we're not going to we're not going to let that let all the hard work and what have you strikes.
We worked through over the last couple of years ago go waves that so we're going to continue to do things better faster and more efficiently. So some of the bodies.
We're there where we don't have that was by design so were.
It's important for people to realize that we are we did target that in and then it's working well.
We wanted to have Carlos Jestbook inventory through yeah, as far as inventory, our customers and Tim and I think you hit on it when you asked the question on you know the customers that we service a lot of it's you know when needed 40% next day delivery. So our customers generally don't you know.
Build up too much inventory they rely on us to you know service that are frequently we have heard some stories that maybe some of the larger customers and that'll buyers last year.
Double bought or wet heavy maybe Friday and have some import.
So we hear that but from our perspective, our customers are not over inventoried.
Okay helpful. And then if I could squeeze in another one I know, we and I mentioned definitely guilty about talking too much about hot rolled coil, but actually you know looking at your aluminum results and spend on monster a couple of months for aluminum and certainly off to a big start for Q1 can you help us connect the dots between kind of that the spot aluminum price Midwest premium and how to think about the float.
Two for your margins and so I guess in other words like this aluminum price how much is that a contributor to your margins or is it is it more of a pass through.
Yes, it's more of a pass through Timna I'm you know the way, we look across all of our products.
Israeli on a kind of all in cost basis, and which also includes you know value added processing, we're doing logistics for us to deliver the product to our customers any you know if the Midwest spot is up you know if its stainless and nickel surcharges.
All of that.
We pass on that cost with the with the bump up to our customers for the value that we're providing to them. So but you know we don't really sit there and break it apart and pieces and priced that way. It's it's more of an all in cost that we expect to continue to pass that through we do have as you've heard us say in the past on the aluminum side.
And that is the one area, where we have a few long term contracts. So those prices are locked in a little more but both on the buy side with our suppliers as well as on the sell side with our customers. So we you know we.
Preserve that margin on that business as well.
Okay, great. Thanks very much.
Sure.
Thank you. Our next question comes from the line of Silk Gibbs with Keybanc capital markets. Please proceed with your question.
Hey, good morning.
Good morning.
I saw in your script and I and I did get on a little bit later here that the value added sales were over 50% versus 49% last year.
Does your recent M&A give you guys, yeah, more mojo relative to that level as a percentage of sales.
Looking ahead.
Yeah, and this is Arthur actually Mercury Asia is a little processing. So the answer is actually no system makes perspective that would probably bring it down just a tad bit.
Yes.
But the other acquisitions, we're counting on them to stampede their way higher when it comes to value at.
Loved to hear that question here because you you guys would would fit this mold pretty well in terms of.
What could come forward here on infrastructure and curious what your teams are seeing what they're preparing for what they're hearing.
That that sort of thing.
Yeah, Hi, Phil So we've been waiting for this infrastructure build for quite some time.
It feels like we're closer now that we're not seeing a lot of actual activity yet.
And I think a few projects have happened and some bridges, but we have not seen a lot of activity. We think it will be coming and should be very good for reliance and for the industry are you know create a a lot of consumption of the metal being produced out there, which would help support prices as well.
<unk>.
Perfect and then on the side of the dividend increase obviously happy to see.
The size of that besides of that increase or to reflect the confidence that you you all have and the cash flow generation and what you might do this year.
In terms of free cash what what are what guided what guy to the thought process in terms of the the magnitude because I also know that you have a share.
Share repurchase program in place.
Oh exactly when she said true or are we have a very strong cash position. We look forward to continue due to.
Strong are excited about our company that our model is paying off.
And we want to do the right thing for our shareholders. Okay. It's already that we didn't look at the 2% and say that you probably ought to try to get in the yogurt or ever.
Number itself is it seems seems bigger than than what we've done in the past, but it just makes sense for us to do and it's just another another example reliance dose.
Prudent.
The way we are we are the distributor cash Arthur you're almost sure yeah. Good question, Phil and you know we've had some structural improvements in the business over the last few years and you know our earnings are.
And then at elevated levels and we're basically trying to just catch up with where our dividends are in alignment with the company's a scam and earnings power.
Yeah.
And as you know.
Oh no.
When you look at dividends you have to make sure there's sustainable right and that stuffs one of the things we looked at it and we are we're very confident in.
And what we see what we're doing what our model is turned into house improved and how our how our customers see off so we're.
We're bullish on.
A lot of different things with reliance and that's where we just think that's a good a nice bump in sustainable and.
It fits within our our model.
Last question for me and apologize if it's already been asked but what's what's the targeted leverage or not leverage that that you you all aspire to recycle.
Yeah.
You know we invest in around them.
Two times historically, you know around two times, our debt to EBITDA I mean, obviously with where we're at those levels and you know its something we look at and you know it is.
And we wanted to make sure. We you know it's something that we can balance that this balanced approach towards capital allocation and we're going to continue looking at that are on the <unk> and you've seen that the shareholder the elevated levels of shareholder return activities that we've had.
You know and you know the acquisition thought that's alive, and well and where you know you'll see our capex record Capex budget, So where we're active on all fronts, whether that's organic growth acquisition activity shareholder returns, whether that's buybacks sports.
So oh, we're not necessarily trying to manage to a certain number but that really make the best decisions for the company and the shareholders.
Thanks very much.
Thanks, Phil.
Thank you. Our next question comes from the line of Alex Hacking with Citi. Please proceed with your question.
Yeah.
Yeah. Good morning, just coming back around to the Capex I'm not sure how you categorize it internally, but how.
How much of the 350 million for this year is out.
Allocated.
Towards expanding your value add capabilities. Thanks.
Yeah, Hi, Alex.
So on the value add in total you know machinery equipment, usually makes up a little more than half of our of our Capex budget, which is true again this year.
You know value add some of that is replacing existing equipment that even when we're replacing existing equipment, we usually get more value out of what we're able to do and what we're able to provide to our customers you know, whether it's tighter tolerances smoother finishes faster production on that equipment.
And then there's also you know a good chunk probably about half of the equipment is incremental where we're adding new pieces of equipment within our network of service centers.
Okay. Thanks, and then just as a follow up on I know you guys by domestic but do you have any sense about where.
You know what what's currently going on with steel imports you know anecdotally. It does seem like you know imports are headed for for potentially a significant fall over the next you know three or four months.
I'm not sure if you have any views on that thank you.
Yeah, we do.
We're we're still in that kind of 5% range when it comes to our import some of them just to make sure. We know what's going on finger once almost because it just makes sense in certain parts of the country to do so yeah imports are increasing I believe there are about 29% right now which is higher than it had been but if it is.
Stork leave to go back in time.
That's that's kind of where it had been for a long period of time with them over the last 10 years and it ramped up through some crazy number 38% or something like that so where it is now I believe I saw a note that the fourth quarter was actually a little lighter than the third quarter, but it is coming in it's been sitting out.
Sitting out on the ocean for months and months and months and there's still a traffic jam.
Right out here on the on the West coast, so that that material will come in eventually.
You know the folks who want to play their game they play their game, that's not our game.
We like our domestic zero there'd been here for us for a long time, they continue to grow in a profitable and robust reinvesting back into their their businesses and the reinvesting in Oh.
And reliance as well so we'll.
The numbers are the numbers don't come in and we'll just deal with it.
Most search will continue.
To support our efforts currently do you have any one thing one question on imports I think just it's certainly there is a bit of a bump up in activity, it's not having a significant impact on our day to day business and kind.
Kind of with what Jim said, you know, we think a lot of that has been arriving late and so the timing on the imports is off at that too depending what you read and when it actually hits the shores.
Thank you best of luck.
Thank you Alex.
Thank you.
Ladies and gentlemen.
This time, we've come to the end of our question and answer session I'll turn the floor back to Mr. Hoffman for any final comments great.
Great. Thank you very much for your time and attention today I'd like to once again extend my sincere. Thanks to all my reliance colleagues and their continued success in attaining industry leading results.
Our outstanding operational execution and stood fast commitment to health and safety inspires me every day.
Lastly, I'd like to announce that in March we will be attending the Jpmorgan Industrial conference in New York City. We're also be attending our.
Japan virtually explained basic metals conference in the new.
New York Stock exchange basic metals investors backpacks and stuff, we hope to see somebody who theyre. Thanks for your continued support to relaunch be safe and be healthy. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.