Greetings, and welcome to the Reliance Steel & 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. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Kim Orlando with ADDO Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's fourth quarter and full-year 2021 financial results. I am joined by Jim Hoffman, CEO; Karla Lewis, President; and Arthur Ajemyan, Senior Vice President and CFO. 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.

Thanks, Kim. Good morning, everyone, and thank you for joining us today to discuss our fourth quarter and full-year 2021 financial results. I will begin with an overview of our 2021 performance and capital allocation activities. Karla will then speak to our operating results and demand trends by end market, and Arthur will conclude with a review of our financial results. Reliance finished 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, a core 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. 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 to 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, we performed value-added processing services on just over 50% of our orders, up 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 $236.6 million into our business through capital expenditures in 2021, more than half of which was for growth opportunities. Today, we are 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 Merfish United, a leading master distributor of tubular building products in the U.S. on October 1. We also completed three additional acquisitions in December. First, Nu-Tech Precision Metals, headquartered in Ottawa, Ontario, that enhances our product offering in specialty metals in the nuclear, aerospace and defense markets, along with others. Second, we acquired Admiral Metals, a distributor servicing the Northeastern United States. Admiral Metals expands our product offering into specialty non-ferrous 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 Rotax, a single location metal service center in Brooklyn, New York, that specializes in copper, bronze and brass. Each of these acquisitions aligns with both our business model as well as our strategy of investing in immediately accretive, high-quality businesses that expand our product, end market and geographic diversity. Those four additions to our family of companies increased the total number of acquisitions we have completed since our 1994 IPO to 71. Concurrent with our combined $676 billion 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 are 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 Arthur Ajemyan and Suzie Bonner for their well-deserved promotions. Arthur has been promoted from Vice President to Senior Vice President and Chief Financial Officer, following his 2021 promotion to CFO. Suzie has also been promoted from Vice President to Senior Vice President, 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 of our highly resilient business model, which is strategically designed to perform throughout industry cycles, generated record-setting financial results in 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. 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 model despite macroeconomic challenges and maintain our focus on continuous improvement to support our customers, suppliers and communities. We are confident that American needs Reliance to rebuild. Thank you for your time and attention today. I will now turn the call over to Karla, 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 the 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 by 5.7% 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 shutdowns and fewer shipping days in the fourth quarter. However, many of our customers shutdown or reduced shifts further than we anticipated in response to increased labor shortages that we believe are attributable to the Omicron surge in mid-December that continued into January and, although to a lesser extent, into 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 an important factor as 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 continued 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 that features limited exposure to commoditized hot-rolled sheet and coil products, our average selling price per ton set another quarterly record at $3,139, an increase of 9.7% from the third quarter of 2021, which exceeded our guidance of up 5% to 7%. 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 remain 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, help us maintain our gross profit margin within a robust sustainable range. While our fourth quarter non-GAAP gross profit margin of 31.5% remains 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. And despite the sequential decline, our non-GAAP FIFO gross profit margin remained near record levels, surpassed only by our non-GAAP FIFO gross profit margin in each of the first three quarters of 2021. I'll now turn to a high-level overview of our key end market trends on a sequential quarter basis. Demand for non-residential construction, which includes infrastructure and is 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 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 improved during the fourth quarter. As a reminder, roughly half of our exposure to aerospace is commercial, which saw a resurgence in activity with fourth quarter tons sold exceeding that of the prior quarter. Demand in the military, defense and space portions of our aerospace business remains solid. Finally, demand in the energy 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 in 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 products, contributed to record quarterly non-GAAP earnings per share of $6.83, exceeding our guidance of $5.05 to $5.15 per share. Despite headwinds from declining carbon flat-rolled product pricing and continued labor disruptions related to the pandemic, we reported 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 our rich diversity of products, 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 shipments, 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 $0.34 to our diluted earnings per share. Our non-GAAP gross profit margin of 31.5% for the fourth quarter was consistent with the third quarter despite a significant LIFO expense of $142.3 million or $1.68 per share. We 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 $187.5 million based on our $750 million annual estimate. Had we recorded our original LIFO annual estimate of $750 million for the year, our fourth quarter 2021 earnings per diluted share would have been $0.50 lower. Also, our income tax rate came in lower than expected, which provided a $0.23 incremental benefit to our fourth quarter diluted earnings per share. Even after adjusting for lower-than-anticipated LIFO and income tax expense, 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 $820.4 million, which will be available to benefit future period operating results and mitigate the impact of declining metal prices on our gross profit and pretax 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 in 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 1.8% 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 1.1% 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 pretax 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. Working 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 despite 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 $323.5 million in share repurchases at an average cost of $153.55 per share. We have $712.6 million of remaining share repurchase authorization on our 1 billion share repurchase program approved by our Board during the third quarter of 2021. Over the past five years, our stockholder returns have totaled nearly $2 billion and have comprised a little over 50% of our net income. We have paid regular quarterly dividends for 62 consecutive years. In addition, we have increased our dividends 29x since our 1994 IPO, including the most recent increase of 27.3% for 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 due to the normal seasonal increase in shipping volumes. However, our tons sold estimate 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 Omicron surge. Further, despite the significant declines in pricing for carbon hot-rolled coil and sheet products, 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 for the majority of our product and the end market into which we sell. Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $7.05 to $7.15 for the first quarter of 2022. In closing, we would like to again thank all of our Reliance colleagues for their contributions to these exceptional results. Thank you for your attention. At this time, we'd like to open the call up to questions.

Thank you. Our first question comes from the line of Sathish Kasinathan with Deutsche Bank. Please proceed with your question.

Yes. Hi, good morning. Thanks for taking my questions. My first question is on the shipment guide for first quarter. Is there any way you could quantify how much of the 5% to 7% increase in volumes is attributable to the four acquisitions? Just trying to gauge the impact of supply chain and labor disruptions from an organic or same-store perspective?

Yes. Hi, Sathish. This is Karla. 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 in our operations and also even more so at our customers and some suppliers in the last couple of weeks of December and then the first couple of weeks of January, a pretty hard hit from the Omicron surge that we all experienced. 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 it would be a small part of that.

Yes. Sathish, this is Arthur. And just a reminder, Merfish was our biggest acquisition, and they were in our numbers for all of Q4, and the other three acquisitions came in towards the end of it. So there's a 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 it based mainly on the current spot pricing? Or does it take into account the forward curve? And should we expect the LIFO income to increase if spot pricing continues to correct through the year?

Yes. Good question, Sathish. So as you heard us say today, we have a significant amount of products that are still experiencing price increases. So it is a net number. There's going to be some products that are going out, some products that are going down. And yes, we look at the same information you look at the forward curve, et cetera. But at the end of the day, one thing that's certain about our LIFO estimate that at the end of the year is going to be a number other than $100 million, right? So it's our best estimate at the time given what we know and given what we see in the current marketplace based on the product and pricing trends that we talked about.

And as we always have, each quarter, each month as we get a little more visibility into the year, we'll adjust it as appropriate each quarter.

Understood. Thank you, and congrats on a great quarter.

Thank you.

Thank you.

Thanks, Sathish.

Thank you. Our next question comes from the line of Emily Chieng with Goldman Sachs. Please proceed with your question.

Good morning, Jim, Karla, and Arthur, and thanks for the update this morning. My first question is just around your acquisition strategy. So if we take a look at the fuller recent acquisitions, it seems like there has been a little bit of a tilt towards non-ferrous, more so than what we've seen in the past. Could you perhaps discuss your strategy around this mix shift? What you're seeing in those end markets that you do like? And is non-ferrous a segment that we should continue to expect you guys to expand further?

Hi, Emily. Good question. No, we don't really sit around and say, 'Hey, we need to buy more aerospace companies or more non-res companies.' We just look for good companies, and there's a lot of them out there. And we spend a lot of time looking at some fine companies. Those three that you're – is it four, three that you're talking about. They just happen to be outstanding companies with really strong managers, with great track records, and they fit. So we got with them and it worked out. Now Merfish was a, we call it a Jason buy, outstanding company, got us into new products and into some new markets, kind of gets in that residential play a little bit. So yes, they are – when you're thinking about Reliance on M&A, we just look for really good companies. And those – that just happens to be those companies fell into that. Who knows? The next one or five we buy might be in a completely different market. But we'll keep looking for the 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 were some constraints there. Perhaps that was more broad-based across a number of different products. But anything that you're seeing currently around any sort of challenges in acquiring products in a timely manner? Or has the upstream supply chain challenges there? Have they been largely resolved at this point?

Yes, look, it's still tight. I mean, I know people like to talk about hot-rolled coil and flat-roll in general, and that's okay. But as you know, that's only 10% of our business. So that's loosened up quite a bit, which is okay, fine. Our model is designed to buy from domestic suppliers. And we've done it for years. We continue to do that, and we thank them every day for our success because 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 still tight right now, we're still getting what we need. We could probably get more if we wanted to. We really care about our cash, and we spend it wisely. But to answer your question, other than flat-roll, everything else is pretty still, if you want to get the quality of the domestic stuff, then it's still a little tight. So as far as we're concerned, other than flat-roll, it's going to businesses as it's been for the last, well, I'd say, last six months anyway. So we're good with where it is, and our domestics continue to support Reliance, and we continue to support our customers.

And I would just add, Emily, that with some of the improved demand we've seen in aerospace and energy markets, if that continues, we might see some more tightness in certain of the products, especially some of the specialty products that are sold into those markets.

Yes. And Emily, one other great differentiator, whether it seems tight or what have you from the outside looking in from the inside looking out, one of our great differentiators, we can buy within the family of companies. And that's helped us in good times and then a little slower times. We can move it around and again, spend our cash wisely.

Great. That's very helpful. Thank you.

Welcome.

Thank you. Our next question comes from the line of Seth Rosenfeld with BNP Paribas. Please proceed with your question.

Good afternoon. Thanks for taking our questions today. Congrats on a very good quarter. If I can kick off please with the question on CapEx? Obviously, your guidance for 2022 points to a significant increase year-over-year and the highest in recent record. How should we think about the allocation of that CapEx different parts of the growth profile? Any particular projects we should be aware of and the time horizon of those ramp-ups? I mean, looking forward longer term, should we think about this new guidance as being a more sustainable number we should consider long-term? Or is 2022 perhaps a uniquely elevated level? That’ll be some other one-offs? I'll start there, please.

Yes. Good question. We appreciate that. Our CapEx, it's based on what our customers are asking us to do, and we never know what that is. It seems to have happened over the last several years since we've really started focusing on value-added, our customers ask us to do more and more a lot of different things. Technology in the equipment world has continued to change. And we want to buy the best and the fastest and with the tightest tolerance as we possibly can get for our customers, which also allows us to sustain that value-added margin that we do. So we – 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 customers are going to ask us to do. $350 million is a big number. I think that might be a record ask. I believe it is. Karla is saying, yes. So – but 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 we're buying over 200 new pieces of equipment in that $350 million. Karla, you can expand on...

Yes. I would just add, I mean, our 2021 budget was $310 million. This year, $350 million, our largest we've had. As Jim said, the sustainability really kind of depends upon opportunities we see with our customers, but we've had a good pipeline for a few years. There's 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, 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 we're still funding and implementing some of our 2020 and 2021 CapEx budget items. And certainly, 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 ongoing incremental adds of the equipment as we continue throughout the year.

And remember, when we come up with that CapEx budget, that's done in a short period of time. 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'll continue to fund that. Also because of our size and our model and I mean the locations we have, it could change. We could have a two blazer in one place and it's not returned the way we want it to, so we'll move it to another place. We can do that and stay within the budget. But if something good comes along and it happens a lot, we can ramp up, and our Board has been extremely supportive of us when it comes to investing in our customers. So we've got a good thing going on when it comes to CapEx.

Okay. Thank you. And a separate question, please, with regards to working capital. Obviously, 2021 saw what I believe to be record working capital investment for the group. Of course, aligned with very strong metals pricing ending the year. Can you talk about what you'd expect for that in 2022? You already gave some guidance on LIFO release, although I think the quantum of release probably comes below what many people were expecting, perhaps reflecting a more bullish outlook for sustainability of high prices. What does that mean for the potential for working capital release in 2022, please?

Yes. Hi, Seth. This is Arthur. And certainly speak to – through Q1 and I think it's fair to say that working capital those will probably be at modest levels going into Q1, just more seasonality than anything. As prices are leveling off, you don't have the pricing component to require additional working capital investments. So from that perspective, I think it's fair to say that Q1 may end up looking like Q4 from a working capital build perspective.

Any sense over the ability to release greater working capital longer term, assuming some normalization of prices? Of course, sheet is only a modest part of your business, but how should we think about how this relates to the broader inventory management strategy in a normalizing price environment?

I mean, it all depends on what the pricing assumptions are, right, Seth. So if you assume stable pricing, then really there's a limited amount of working capital build, right? So I think that's how I would think about it.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Timna Tanners with Wolfe Research. Please proceed with your question.

Yes. Hey, good morning guys.

Hey, Timna.

Good morning.

Good morning.

I was wondering if you could answer first off, the comments on labor. I wanted to see like what – if you're seeing any relief there if you're seeing, if this is temporary due to Omicron? Or if you expect this to persist through the year or any chance of just some cost inflation as people decide to hire more? And then similarly along 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?

Yes. Timna good to hear from you. First on the labor shortages, certainly we're impacted by that, but we work real hard to first retain the awesome talent that we have in the FOCs. And we've done a good job at that. The next is to attract new talent and we're doing okay. We could always – we're always looking for talent. But it's not only us. That's having the problem. It's our customers that are having the 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. It's just a matter of getting everything kind of oiled up again and getting enough talent at our customer level, as well as our supplier level to keep this big machine going. But as far as Reliance is concerned, we're having the same issues that some people have. We track it and we're working real hard and coming up with innovative ways to retain the talent that we already have, but attract new talent. And in my opinion, we're doing well. I'm proud of all the recruiters and all the people that we have working there. But I just want to make sure it's just not Reliance, it's our customers. And if I could wave a magic wand and everybody could get who they needed, then we'll have some fun over the next couple of years. So, Karla, don't you go ahead.

Yes. I just add. Certainly a lot of what we talked about at the end of 2021 beginning of 2022, that's getting better every week was temporary from a labor disruption related to Omicron. But to follow on Jim's comments, certainly we could use 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 throughout the year, we 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 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 you probably saw more of an impact from that on our expenses this year, and that offsets some of the longer-term potential inflation on wage increases. But certainly we will have a bit of a bump in our wage expense this year.

Yes. Timna, just one more comment on people and Karla, you can address her second part on the customer inventory. This COVID thing has been difficult and we've changed the way we do things and we're – this investment we make in value-added equipment and material handling, and what have you, and the way we've realized our operations, we can run this, this beast with fewer people too. So we're not going to let that – let all the hard work and what have you strife that we worked through over the last couple of years go wasted. So we're going to continue to do things better, faster and more efficiently. So some of the bodies that were – that we don't have was that was by design. So we're – it's important for people to realize we did target that and it's working where we wanted to. Karla, she asked about inventory too.

Yes. As far as inventory our customers and Timna, I think you hit on it when you ask the question. The customers that we service a lot of it's when needed 40% next-day delivery. So our customers generally don't build up too much inventory. They rely on us to service them frequently. We have heard some stories that maybe some of the larger customers, metal buyers last year, double bought or went heavy, maybe brought in 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'm definitely guilty of it. Talk too much about hot roll coil. But actually, looking at your aluminum results, it's been a 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 the spot aluminum price, Midwest premium and how to think about the flow-through 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 more of a pass-through?

Yes. It's more of a pass-through, Timna. The way we look across all of our products is really on a kind of all-in cost basis, and which also includes value-added processing we're doing, logistics for us to deliver the product to our customers, any – if the Midwest spot is up. If it's stainless, nickel surcharges, all of that, we pass on that cost with a bump up to our customers for the value that we're providing to them. So we don't really sit there and break it apart in pieces and price that way. It's more of an all-in cost. So we expect to continue to pass that through. We do have, as you've heard us say in the past, on the aluminum side, 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 preserve the margin on that business as well.

Okay, great. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Phil Gibbs with KeyBanc Capital Markets. Please proceed with your question.

Hey. Good morning.

Hey, Phil.

Good morning, Phil.

I think I saw in your scripts, 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 more mojo relative to that level as a percentage of sales looking ahead?

Yes. Hey, Phil. This is Arthur. Actually, Merfish sets a little processing. So the answer is actually no. So from a mix perspective, that would probably bring it down just a tad bit.

But the other acquisitions, we're counting on them to stampede their way higher when it comes to value-add.

Love to hear that. And a question here because you guys would fit this mold pretty well in terms of what could come forth here on infrastructure. And curious what your teams are seeing? What they're preparing for? What they're hearing, that sort of thing?

Yes. Hi, Phil. So we've been waiting for this infrastructure build for quite some time. It feels like we're closer now, but we're not seeing a lot of actual activity yet. I think a few projects have happened in 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. It will create a lot of consumption of the metal being produced out there, which would help support prices as well.

Perfect. And then on the side of the dividend increase, obviously, happy to see the size of that increase to reflect the confidence that you all have in the cash flow generation and what you may do this year in terms of free cash. What guided the thought process in terms of the magnitude because I also know that you have a share repurchase program in place?

Well, exactly what you said, Phil. We have a very strong cash position. We look forward to continue to be strong. We're excited about our company. Our model is paying off. And we want to do the right thing for our shareholders. I can't tell you that we didn't look at the 2% and say that we probably ought to try to get in that yield are. But the number itself, it seems bigger than what we've done in the past, but it just made sense for us to do and just another example of what Reliance does. We're prudent with the way we distribute our cash. Arthur, you...

Sure. Yes, good question, Phil. And we've had some structural improvements in the business over the last few years and our earnings at elevated levels. And we're basically trying to just catch up with where our dividends are and align it with the company's scale and earnings power.

Yes. And as you all know, so when you look at dividends, you have to make sure it's sustainable, right? And that's one of the things we looked at. And we're very confident in what we see, what we're doing, what our model has turned into, how it's improved and how our customers see us. So we're bullish on a lot of different things at Reliance. And that – we just think that's a good nice bump and sustainable, and it fits within our model.

Last question for me, and I apologize if it's already been asked. But what's the targeted leverage or net leverage that you all aspire to through cycle?

Yes. Phil, we've been around 2x historically, around 2x debt-to-EBITDA. I mean, obviously, we're at below those levels, and it's something we look at and it is – and we want to make sure we – it's something that we can balance and have this balanced approach towards our capital allocation, and we're going to continue looking at that. And you've seen sort of the shareholder – the elevated levels of shareholder return activities that we've had, but – and the acquisition fund, that's live and well, and you see our CapEx record CapEx budget. So we're active on all fronts, whether that's organic growth, acquisition activity, shareholder returns, whether that's buybacks or right? So we're not necessarily trying to manage to a certain number, but 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.

Yes. Good morning. Just coming back around to the CapEx, I'm not sure how you categorize it internally. But how much of the $350 million for this year is allocated towards expanding your value-add capabilities? Thanks.

Yes. Hi, Alex. So on the value-add, in total, machinery and equipment usually makes up a little more than half of our CapEx budget, which is true again this year. Value-add, some of that's replacing existing equipment. But 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, whether it's tighter tolerances, smoother finishes, faster production on that equipment. And then there's also 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 buy domestic, but do you have any sense about where – what's currently going on with steel imports? Anecdotally, it does seem like imports are headed for potentially a significant fall over the next three or four months. I'm not sure if you have any views on that? Thank you.

Yes, we do. And we're still in that kind of 5% range when it comes to imports. Some of it's just to make sure we know what's going on to your point. Some of it’s because it just makes sense in certain parts of the country to do so. Yes, imports are increasing. I believe they're about 29% right now, which is higher than it had been. But historically, if you go back in time, that's kind of where it had been for a long period of time. And then over the last 10 years, it has ramped up to some crazy number, 38% or something like that. So where it is now, I believe I saw a note that the fourth quarter is actually a little lighter than the third quarter, but it's 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 West Coast. So that material will come in eventually. And the folks who want to play that game, they'll play that game. That's not our game. We like our domestics. They've been here for us for a long time. They continue to grow. They're profitable. They're reinvesting back into their businesses, and they're reinvesting in Reliance as well. So we'll – look, the numbers are the numbers, they'll come in and we'll just deal with it and the domestics will continue to support our efforts. Karla, do you have anything you want to mention on imports?

No, I think just – 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 of with what Jim said, we think a lot of that has been arriving late. And so the timing on the import is off a bit depending on what you read and when it actually hits the shores.

Thank you.

Thanks, Alex.

Thank you. Ladies and gentlemen, at 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. 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. Your outstanding operational execution and steadfast 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'll also be participating virtually with the Basic Metals Conference in the New York Stock Exchange Basic Metals Investors Access Day. We hope to see some of you there. Thanks for your continued support to Reliance. 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.