Reliance Steel & Aluminum Co. (RS) Q4 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Reliance Steel & Aluminum Fourth Quarter and Full Year 2013 Conference Call and Webcast Presentation. [Operator Instructions] Now I'd like to turn the floor over to your host, Brenda Miyamoto. Ma'am, the floor is yours.

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss our fourth quarter and full year 2013 financial results. I'm joined by David Hannah, our Chairman and CEO; Gregg Mollins, our President and COO; and Karla Lewis, our Executive Vice President and CFO. Today, we are also joined by 2 of our Senior Vice President of Operations, Jim Hoffman and Bill Sales. A recording of this call will be posted on our website at investors.rsac.com. The press release and the information on this call 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, which may not be under the company's control, which 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 under the caption Risk Factors and other reports filed 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 David Hannah, Chairman and CEO of Reliance.

Good morning, everyone, and thank you for joining us today. Overall, demand in 2013 ended up essentially flat compared to 2012 with momentum building in the second half. Our tons sold on a same-store basis were up about 1%. However, pricing for all products was down with our average selling price per ton sold down 10% from the prior year. Pricing had a significant impact on our profitability, resulting in lower earnings for the current year on much higher sales when we include the results of our acquisitions during the year. During the fourth quarter, we experienced normal seasonal slowdown in demand from the prior quarter, but the fall-off was less than typical, supported by a continuation of the general trends of steady improvement in overall demand we experienced during the second half of the year. Unfortunately, pricing also declined, producing our profits more than we had anticipated. Our net income of $61.8 million and earnings per diluted share of $0.79 in the fourth quarter include nonrecurring charges related to the optimization of certain of our facilities. As we continue to evaluate certain Metals USA and existing Reliance family operations, we decided to close and merge selected facilities, resulting in an impairment charge, along with other restructuring charges. Adjusting for these fourth quarter activities, our non-GAAP earnings per diluted share were $0.92. Fourth quarter same-store tons sold increased 9.5% from the 2012 fourth quarter, while total tons sold were up 38.7% compared to the prior year fourth quarter. However, as has been the case throughout 2013, metals pricing in the fourth quarter was even weaker than we had expected with our average selling price per ton sold down 2% from the prior quarter and down 11.4% compared to the fourth quarter of last year. In spite of the soft pricing environment, strong performance by our managers in the field resulted in gross profit margins holding relatively steady on a sequential quarter basis and for the full year in 2013 versus 2012. Our consistent execution reflects our commitment to remain highly focused on managing all aspects of the business that are within our control, which continues to mitigate much of impact from these challenging market conditions. We continue to supplement our organic growth by profitably expanding through successful M&A activity, including acquisitions that we completed in 2013. Year-over-year fourth quarter consolidated net sales of $2.31 billion were up 22.1%, while full year net sales of $9.22 billion increased 9.3%. For the full year of 2013, total tons sold were up 21.4%. Our outperformance of the industry reflects our commitment to customer service, as well as our investments in organic growth and acquisitions. Since our IPO in 1994, we have completed a total of 56 acquisitions, including 2 in 2013. During the fourth quarter of 2013, we completed the acquisition of Haskins Steel Co., Inc. They were founded in 1955 and headquartered in Spokane, Washington. Haskins focuses primarily on carbon steel and aluminum products of various shapes and sizes, with a diverse customer base in the Pacific Northwest. Haskins will enhance our penetration into this geographic region, and we also expect to benefit from their in-house processing capabilities. As is the case with most of our acquired companies, Haskins' current management will remain in place. The highlight of our M&A activity in 2013 was the acquisition of Metals USA, which closed early in the second quarter, and is our largest acquisition to date. The integration of Metals USA into the Reliance family has been very positive. While the Metals USA businesses were well run prior to our acquisition, we continue to make incremental improvements of the operations in addition to enhancing the performance of our company-wide operations. Let me take a moment and update you on some of our progress. Since closing the acquisition in April, Metals USA contributed $1.24 billion to our consolidated revenue and they improved their FIFO gross profit margin to 23.1%, up over 50 basis points from pre-acquisition levels. Metals USA has converted approximately $84 million of inventory into cash, and improved inventory turns based on dollars to 4.3 from 3.4x. The addition of Metals USA has provided an opportunity to identify areas, where we could combine facilities, reducing our overall cost and allowing us to more efficiently service our customers. We're also implementing certain inventory management practices in selected areas across our family of companies to improve our overall inventory turns. Clearly, we're very pleased with the Metals USA integration process. Our acquisition strategy supports our ability to profitably grow Reliance, even when faced with economic and cyclical headwinds. Going forward, acquisitions will remain an important part of our overall growth strategy. We expect to continue to be a consolidator in our highly fragmented industry by making strategic acquisitions of well-managed service centers and processors with end-market exposures that supports our diversification strategy. In 2013, we generated cash from operations of $633.3 million. We're pleased that our solid financial position and strong cash flow provides us the flexibility to execute our growth strategies, while also returning capital to our shareholders through quarterly cash dividends. On February 18 of 2014, our Board of Directors declared a regular quarterly cash dividend of $0.35 per share of common stock. This dividend represents an increase of $0.02 per share, or 6%, compared to our prior rate. Reliance has paid regular quarterly dividends for 54 consecutive years, and we've increased the dividend 21x since our IPO in 1994. Our cash dividends per share paid in 2013 were up 57.5% compared to 2012. Turning to our outlook for the first quarter of 2014. As the U.S. economy continues its slow but steady recovery, metals pricing and demand are expected to demonstrate a measured improvement throughout the first quarter. As a result, for the first quarter ending March 31, 2014, we currently expect earnings per diluted share to be in the range of $1.20 to $1.30. As we've noted in the past, Reliance has a broad range of products, significant customer diversification and a wide geographic footprint. We've achieved industry-leading operating results on a consistent basis and we remain confident in our ability to continue our track record of success going forward. I'd also at like to note that earlier this month, Reliance celebrated its 75th anniversary. And later this year, we'll celebrate our 20th year as a New York Stock Exchange-listed company. I'll now hand the call over to Gregg to comment further on our operations and market conditions. Gregg?

Thank you, Dave, and good morning. As Dave pointed out, we were pleased with our results in the fourth quarter and year-end 2013. Our returns were basically flat as compared to 2012 on a same-store basis, however, a drop in pricing at 10% year-over-year had a negative impact on our earnings. Fortunately, what did help to partially offset the decline in pricing was our relentless attention to gross profit margins by our sales and management teams in the field. Gross profit margins improved in the fourth quarter to 25.6% on a FIFO basis, from 25.2% in the third quarter. This was in light of a 2% reduction in pricing in the fourth quarter compared to the third quarter. Year-over-year FIFO gross profit margins were flat at 25.4%. We are very proud of the efforts put forth to accomplish this. It was, by no means, an easy task given the economic environment. Inventory turn ended the year at 4.6x in tons on a same-store basis. Our branches continue to work closely with one another by way of sharing and transferring inventory to help maximize our turn. From a demand standpoint, we were pleased with our third and fourth quarter tons shipped on a same-store basis. Tons sold in the fourth quarter of 2013 were up 9.5% compared to the 2012 fourth quarter, and only down 3.1% compared to the third quarter of 2013, which is a small drop by historical standards. From an end-market perspective, the trends we saw in the fourth quarter were fairly consistent with what we experienced in the prior quarter. Relative demand strength was again led by the auto market, mainly through our toll processing operations and was still the only end market where volume increased year-over-year. We expect solid automotive end-market performance, again, in 2014. Aerospace remained relatively strong, although both pricing and volumes softened somewhat in the 2013 fourth quarter. We expect demand from aerospace to improve in 2014, with continued pressure on pricing from excess mill capacity and higher industry-wide aluminum plate inventory levels. Although energy, that being oil and gas, demand and pricing levels were lower in 2013 than in prior years, our businesses serving the energy markets continue to perform well relative to other end markets. We expect demand to improve in 2014, along with the slightly better pricing from current levels. Heavy industries, such as rail cars, barge and tank manufacturers and transmission towers, are strong. Agricultural equipment makers in North America are still busy, and we do quite well in that industry. Nonresidential construction continues along its path of a slow and steady recovery, with demand still well below peak levels. We are cautiously optimistic that this important end market will continue to grow throughout 2014. As for pricing and carbon steel products, price increases on flat-rolled products were announced in June of last year, followed by further announcements in the third and fourth quarter, and most recently in January. There has been some softness of late due to rising imports and domestic producers coming off third and fourth quarter maintenance outages, thus producing more product. Price increases on beams, mini-mill products and plate have also been announced. And these increases, so far, have held and are more meaningful to our results than flat-rolled prices. With the recent drop in the scrap prices, we'll wait and see how the mills react going forward. As for aluminum, Midwest spot ingot is currently trading at $0.97 a pound, up from $0.90 in the 2013 fourth quarter. Lead times on aerospace sheet and plate are 8 to 10 weeks. The inventory overhang with certain OEMs, as well as a few of our competitors, continues to exist with no concrete timeline as to when it is supposed to completely flush out, bringing supply and demand more imbalanced. Demand on general engineering plate is good, but remains competitive. Imports remain a problem as the U.S. is a prime destination for plate due to the economic conditions in Europe and elsewhere. Lead times are 5 to 7 weeks. Common alloy sheet demand is still quite strong and pricing on this product follows ingot. Stainless steel nickel surcharges have floated in the $0.63 to $0.67 a pound range over the past 6 months, much lower than we would like. However, the good news is, the 2 base price increases announced in the second half of 2013 have held, and demand in stainless flat roll is very strong. To conclude, we are excited about what lies ahead in 2014. Last year, we spent $168 million in capital expenditures and our Board of Directors recently approved our 2014 budget for $220 million for plant, property and equipment. This spending will support our internal growth initiatives going forward. We believe the major industries that we support will continue to improve, and our position with them will grow as well. We have tremendous respect and confidence for our management teams in the field and their ability to provide industry-leading results in both profitability and working capital management. I will now turn the program over to Karla to review the financials. Karla?

Thanks, Gregg. Good morning, everyone. As mentioned, our average price per tons sold in the fourth quarter of $1,645 was 2% lower on a sequential quarter basis and 11.4% lower year-over-year. This is reflective of recent trends in metal pricing, as well as shifts in our product mix, mainly from our acquisition of Metals USA back in April. Our same-store fourth quarter sales of $1.85 billion, which excludes the sale of our 2012 and 2013 acquisition were up 0.5% compared to the fourth quarter last year, with a 9.5% increase in tons sold and a 7.5% decrease in our average selling price. Same-store sales compared to last quarter were down 5.7%, with a 3.6% decrease in tons sold and a 1.6% decrease in our average selling price. Our gross profit margins of 26.2% for the fourth quarter and 26.0% for the year, were within our historical range of 25% to 27%, and were relatively flat with the prior quarter and prior year, but down from 27.8% in the fourth quarter of last year. The decline is mainly due to LIFO, which I will discuss shortly. On a FIFO basis, our 2013 gross profit margin was consistent with 2012, despite a weaker pricing environment due to the efforts of our local managers. Given the declining price environment, our LIFO adjustment contributed positively to our gross profit margin and earnings as it is intended to do, by reflecting our cost of sales at current replacement cost. Our LIFO adjustment for the quarter was a credit or income of $12.7 million, or $0.10 per share compared to income of $37.1 million or $0.30 per share in the fourth quarter last year, and income of $27.5 million or $0.22 per share in the prior quarter. Our 2013 LIFO income of $50.2 million was consistent with our expectation for the year. Our SG&A expenses decreased $5.3 million in the 2013 fourth quarter compared to the prior quarter, but increased as a percentage of sales to 18.4% from 17.6%, due primarily to the impact of lower sales levels. Lower metal prices have a significant impact on our SG&A expense as a percent of sales. Applying our 2012 average selling price of $1,894 per ton to our 2013 tons sold, would result in sales of $10.2 billion with 2013 SG&A expenses at 16.1% of sales, compared to our actual rate of 17.8% and down from our 2012 rate of 16.5%. Our current cost structure can support significantly higher volumes and we anticipate that our SG&A expense as a percentage of sales will begin to fall as our volumes improve and as prices increase. GAAP operating income for the fourth quarter was $113.3 million or 4.9% of sales, compared to $135.8 million or 7.2% of sales in the fourth quarter last year. Our fourth quarter GAAP net income attributable to Reliance was $61.8 million, or $0.79 per diluted share. This is compared to net income attributable to Reliance of $80.4 million or $1.06 per diluted share in the fourth quarter of 2012. For the year, 2013 net income of $321.6 million was down 20.3% from $403.5 million in 2012. The decline in overall metal pricing in 2013 from 2012 levels, as well as certain onetime charges, were the main drivers of our reduced profit. Our effective income and tax rate for the quarter was 33.0% compared to a rate of 33.4% in the 2012 fourth quarter, and 32.1% in the 2013 year compared to 33.0% in 2012. Included in the fourth quarter and annual results are certain onetime charges that make comparisons to prior periods difficult. So we are also presenting non-GAAP net income and earnings per share amounts to allow for a more meaningful comparison. The consolidation of facilities resulting from the Metals USA acquisition that Dave discussed earlier, included a pretax impairment charge of $14.9 million for the write-off of certain intangibles, as well as $1.5 million in restructuring charges, all included in the 2013 fourth quarter. These results in an increase to net income of $10.1 million, bringing 2013 fourth quarter non-GAAP net income to $71.9 million or $0.92 non-GAAP earnings per diluted share. Our annual results also include onetime transaction cost of $12.4 million, related to the Metals USA acquisition, as well as a $1 million charge for the consolidation of a Reliance facility earlier in the year. These results in an annual adjustment to net income for the 2013 year of $20.4 million for non-GAAP earnings per diluted share of $4.40. A reconciliation of GAAP basis earnings to non-GAAP earnings is provided in our fourth quarter earnings release issued earlier today. For the 8.5 months that we own Metals USA in 2013, they contributed FIFO pretax income of $58.4 million, excluding our interest expense on borrowings to fund the $1.25 billion acquisition price. Since the acquisition, Metals USA has realized direct synergies of about $11.2 million in line with our expectation of at least $15 million to $20 million per year. We remain very pleased with the integration of Metals USA, which was accretive to our 2013 earnings. We generated cash from operations of $633.3 million in 2013, including $120.3 million in the fourth quarter due to our continued focus on working capital management and profitable operations. Our accounts receivable day sales outstanding rate in 2013 was 41.0 days, improved from 41.4 days in 2012. Our inventory turn rate based on dollars was 4.2x, a slight improvement from our 2012 rate of 4.0x. On a tons basis, our 2013 inventory turn rate was 4.5x, leaving additional room to convert inventory to cash to reach our goal of 4.75 turns on a company-wide level. We invested $49.3 million for capital expenditures during the fourth quarter and $168 million for the year. Our 2014 capital expenditure budget is $220 million with the majority of this amount, once again allocated to growth activities. In 2013, we increased our quarterly dividend rate twice and paid out $96.9 million to our shareholders, up 61% from $60.2 million paid in 2012. We also collected $70.1 million of cash in 2013 upon the exercise of Reliance stock options, which contributed to the increase in our weighted average shares outstanding, reducing our 2013 diluted EPS approximately $0.11 from 2012 levels. During the quarter, we used our excess cash to pay down debt of $43.5 million, reducing outstanding borrowings on our $1.5 billion revolving credit facility to $480 million. Our total outstanding debt at December 31 was $2.11 billion and our net debt-to-total capital ratio was 34.3%, down from 39.4% upon closing the Metals USA acquisition in April 2013. That concludes our prepared remarks. Thank you for your attention. And at this time, I'd like to open the call up to questions. Operator?

[Operator Instructions] Okay. We'll take our first question from Michael Gambardella from JPMorgan. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Question, Dave, about the aluminum fee you gave. With the Midwest premium moving up so quickly since the end of 2013, bidding on a large, say, unrealized gain in your inventory of aluminum.[Audio Gap]

I'm sorry, Mike, I think you cut out there. Are you still there? Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Yes. I'm here. Can you hear me?

Yes.

Yes. I think, Mike, from an unrealized gain on the aluminum inventories, certainly, we stayed our inventories at the lower cost to market, so we wouldn't have any change in inventory. But because we pass our cost generally through to our customers, we would anticipate increasing our selling prices and potentially enhancing our gross profit margins on the aluminum that we sell at those higher prices. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: I mean, the transaction, when you consider the LME price plus the Midwest premium are up almost 10%, really, since the end of the fourth quarter. How big the impact have on you in the first quarter?

We would expect to -- I mean, basically, our gross profit margins it stayed pretty consistent, we would have, say, a 26% gross profit margin on a 10% higher sales price. The majority of that should fall down to our pretax earnings line.

We don't -- I'm sorry, Mike, we don't separate the premium from the LME from the base number. And there are some people out there that will do that, but we don't. So when that premium moves, to your point, when it goes up, it's just like any other element of cost that goes up for us, and we're going to get our margin on the total cost number.

And pass it through.

And pass it -- in effect, pass it through to the customers. So in January, we have seen -- by the way, January average pricing was up for the first time on a sequential basis. We haven't seen average prices up month over month, probably all year last year. I can't remember a month, but in January, we did. And I think the increase in the aluminum side, as well as some of the carbon increases that have started to flow through in the first quarter. And January have finally showed up and helped us increase our average prices. Michael F. Gambardella - JP Morgan Chase & Co, Research Division: Okay. And last question. More cost improvements do you have from the Metals USA acquisition?

We're still evaluating that. We did 3 mergers in, basically, the fourth quarter. Is there room to do a few more and reduce our cost and improve our service to our customers? That's -- we've only had the place for, basically, 9 months, so we're going to continue to evaluate that. But I think we made good progress in the fourth quarter with the 3 mergers that we made. We're very pleased with it. We didn't lose any sales, basically, and our margins were good and we've reduced our costs somewhat. So to answer your question, that's still under evaluation.

And we're still, too, Mike, looking for some improvement in gross profit margins. I think we've talked in the past about a target gross profit margin for Metals USA being up at about up the 25% level. And we're not there yet. They're approaching that, so we expect that we'll be gaining on that, as well as taking some more money out of the inventory. They've done a good -- a great job, actually, in the 9 months that we've owned them. Moving up their turns, but again they're still below where we, and they, expect to be. So that will also help us with the whole integration of Metals USA and the cost and the synergies and all of those things.

We'll take our next question from Phil Gibbs with KeyBanc Capital Markets.

I had a question just about the capital spending. I know that it's the richest that you've had in the history of the company. Just curious, if you could elaborate on that a little bit more, because I think folks are curious on that.

Well, on the CapEx spending, in particular, and last year we spent $168 million and that was not a record.

Yes. It was actually 2012, we spent $214 million. And we've been doing -- during the downturn like '09, '10, we had pulled back a bit on growth CapEx, but that's what we've accelerated more in the last couple of years.

And a big part of that, very honestly, is that when we acquired the PNA Group, there was a lot of leases that would have been...

Last year.

Yes, last year, associated with that. So we bought out some of the leases and then -- but for growth, from a growth point of view, the vast majority of the spending was over 60%, was for growth-orientated initiatives going forward. That's one of the reasons why we've done, I've mentioned on my report, that stainless steel flat roll was so strong. We spent a lot of money in building, putting new equipment in to 3 locations in particular, 3 companies with multiple locations, I should say. And where we're experiencing double-digit growth on the stainless flat-rolled side, and those are the type of initiatives that we plan to employ in 2014 and '15 going forward.

Yes. We've opened a few builds and opened a few new facilities in new geographic areas for certain of our companies last year, and we'll do that this year. We've also, in both years, built larger, more efficient locations where we've maybe moved out of a leased facility into that, what we think, more improved facility. And the bulk of the dollars actually go towards our processing equipment, which helps us service our customers better and we think pick up some market share with those investments that we're making in that equipment.

And when you look at the $220 million budget that was just approved, that includes the $35 million relative to Metals USA, which if you're comparing this year versus last year or the year before, you need to consider that $35 million. And typically, when companies are owned by private equity folks, they get what they absolutely need, but they don't get some of the things that they would like to have to improve their business. And just because of the cash flow tendency, so we've asked them what they would need, what they would like to have and what they think they can accomplish with different expenditures. And so we're excited about the $35 million that's included in that budget, relative to Metals USA.

And if you were to look at it on a same-store basis without Metals USA, last year's budget was $180 million. This year's, without Metals USA, I would be $185 million, so it's pretty comparable.

Yes. We just underspent the budget. A lot of these things, too, when we look at the wish list, so speak, that come in from the operations on what they like to have, sometimes circumstances change during the course of the year, so everybody doesn't run out as soon as we approve that budget and buy everything that was on the list that was approved. So there's some still continuing discussion on some of those items and sometimes, alternatives come up and things change. So typically, we underspend our budget.

Okay. Terrific. And Dave, just a general question. Any color you could give us on demand patterns that you're seeing in the early year, maybe relative to the fourth quarter? Or however you want to describe the progress?

Yes. I'm glad you asked that, Phil, because that's a bright spot, really, when you step back and look at things. We looked at January and -- there are certainly issues in the fourth quarter of last year and also the first quarter of this year because of how the holidays fell. With Christmas and New Year's on a Wednesday, it really kind of kills the week that those holidays are in, so it's hard to tell exactly how many good working days we have. And then there were weather issues. We're not going to point to weather for any fall down in -- or miss in earnings, but the weather -- if January was the end of the quarter, I'd tell you, we'd be talking about it. But despite all of that, our same-store tons sold in January were up 4.4% versus January of 2013, so I think the industry average was about flat, about 0.10%, I believe, was the MSCI number. And we do see some strength in the markets, the big markets that we serve. And we're encouraged by the January improvement in tons of just about 4.5%. And it's up 22%, our tons versus December of '13. So in average prices, as I've mentioned before, are up 1.5% and that was a good sign, because we haven't seen average pricing on a sequential basis go up in probably over the last 12 or 14 months. So we're encouraged. The demand looks better and it just feels better this year than it did last year at this time.

Has that continued into February, Dave?

Yes. Yes, I think we're just moving along. And we've had some weather issues, and we're all trying to figure out because we're -- it certainly impacts our people more back in that weather pattern area than it does the company as a whole, so it's nice to be able to continue to operate out West when there's stuff going on in the East. But yes, I think, overall, our average daily sales are holding in there in February compared with January.

We'll take our next question from Aldo Mazzaferro from Macquarie.

On a -- or maybe this is for Karla. I was just noticing the average price utilizations by product that you've disclosed. The statement side was much stronger than it's been in the last quarter, but I know over the last few quarters going back you've had quite a volatile pattern there of average pricing per ton. Do you think there's anything you could tell us about the reasons why the stainless price surged in the quarter versus the previous?

Yes. I'll let Bill talk -- Bill Sales talk about the actual pricing. But one thing with our stainless is that there's -- we get a big impact on our stainless pricing sometimes because of product mix. We carry -- we've got a lot of the stainless flat-rolled, and then we've also got more of the specialty stainless products like the long products that the EMJ and folks carry. So product mix in any one quarter can have an impact on that average selling price. But then Bill, if you want to talk about what's actually going on with the stainless pricing.

Before Bill does that, just to be clear, Aldo, we want to make sure that we're all looking at the same numbers. And I know, I think, you pointed us towards a table in the press release where the sequential average, the sequential change in the stainless price was down 2.7% in the fourth quarter. And Bill will tell us why.

Yes. Basically, it's primarily driven at the surcharge level. So last year, we saw surcharges in the first quarter in the high-70s to -- I think, March was the highest at $0.81. And then we saw fourth quarter levels in the mid-60s, predominantly driven by nickel pricing. And I think we'll see some improvement as we get into our Q1 pricing. We had 2 base price increases in the second half last year, those increases have stopped. And we're seeing some improvement on the surcharge side with nickel, in particular, going up from -- also has increased.

We'll take our next question from Timna Tanners with Bank of America Merrill Lynch.

So the question on the acquisitions always comes up and you've talked in the past about wanting more exposure to energy and energy pipe. Can you give us updated thoughts there and does that change with the recent decision from commerce on the dumping case?

We still do. If we had a wish list, and we've said it before and I think we're still feeling the same way, that improving our energy business and increasing our energy business, as well as increasing aerospace, are the 2 areas that would like to point to. The energy piece of our business, we've actually pretty much stayed away from the OCTG and the line pipe side of it. I think we have a very small piece of OCTG that came with the Continental acquisition. It's all up in Western Canada at this time. It's about $90 million to $100 million a year in revenue. And we have, and I know we've talked in the past, we have looked at some opportunities in the OCTG and the line pipe end of things, but we have stayed away.

And that's been for about the last 2 years.

For a couple of years. Yes. And I think certainly, that's still our position now. We'll still look at opportunities on their own merits, but there is still a lot of unknown. You have the OCTG issue with pricing, as you pointed out, with respect to the preliminary ruling anyway, it didn't really help. And on the other side, we have still a lot of capacity being built here in North America, in the U.S., in particular, which is yet to be completed and then observed by the market. So there is still some pretty big unknowns in that. And Jim might have more comments about that. Jim?

Yes. I mean, the OCTG part of our business is really a small part of our business, less than 1%. The rest of what we refer to as energy business is quite strong. And that -- and we anticipate that to continue to be strong in 2014. But the OCTG piece of it, it seems to get a lot of press, but for us it's not significant. I mean, we like what we have. The other side of the energy side, which incorporates alloy bar and board tubing and all these other things, is going quite well.

There's not a lot -- I'm sorry, Timna, in the OCTG side, it's a higher volume, lower margin kind of a business. And most of our energy-related business is high margin and high-value add, where we're doing a lot of cutting, machining, boring. So we're making parts and so it's completely different from just the lower margin, more commodity line pipe in OCTG business. And we like that higher margin, high-value add a lot better.

I got you, of course. I don't want to dwell on history, but if we look back at 2013, and I was just looking through some of my notes from this same time last year. It was kind of dejavu, right? We were talking about demand getting better and non-res cautiously optimistic and I remember writing down that carbon prices could only go up from where they were. And I mean, if we look back, it was a little disappointing in terms of prices and LIFO should have offset that a little bit, so I don't know if that's enough to explain last year. So I guess, 2 questions from that. One is, what do you think is different about this year versus last year, specifically? You said it feels better, can you talk through us about that? And what gives you more confidence about your earnings power this year maybe than last year?

Yes. You know you're right, Timna, it is dejavu all over again. We've been, probably, for at least 3 years, thinking the same thing. And I think there are some things that are different now. We're entering with prices for all of our products that we're selling pretty much at very low levels. I know we said last year we didn't think it'll go anywhere but up, but they're lower. Overall, on average price, they're 10% lower now than they were a year ago, so I think we're in a better spot from a pricing environment. And we're actually seeing, rather than just anticipating demand increases, we're actually seeing that in our order books now. As I mentioned before, January is improving. We saw sequential average price increase in January. There are some -- the aluminum side, we've got some increase in the premium, the Midwest spot, which is an increase in cost as far as we're concerned, and we like that. The aerospace side demand, the build rates are improving, so we're seeing some of that. And it's across a lot of different models. It's not just the 787 or the A380, which get all the attention, but there's a lot of other models that those companies are building. That build rates have improved pretty dramatically.

Record build rates.

Record build rates. And the backlogs are still high. So in the aerospace side, we're encouraged. On the energy side, last year, things did settle down a little. It actually started, I think, in the back half of 2012 to ease up, but I think in 2011, it was pretty strong on the energy side and the market got a little bit ahead of it itself, I think. There were some inventory overbuild. And that -- it feels like it's filtered through the system. And non-res we're actually seeing our bigger companies involved in non-res products have -- rather than us saying that the AVI is positive and all of these other -- residential is going and some of our suppliers are talking more positively about business. So we think that's going to translate into better business for us. We're actually seeing some of that materialize now. It's not taking off, so don't get us wrong, but it is actually getting a little stronger out there. Which I think, probably over the last 3 years, we didn't see actual strength, but we are anticipating that there would be strength. And then we had some political uncertainty here over the last few years. We had budget issues, we had debt ceiling issues, we have the election, we had tax issues. And I think we were derailed, I know in 2012 and 2011 midyear. Both years with a lot of that political uncertainty. So that seems to be a little more stable now than it was before. So you add that up, you listen to the marketplace, you look at a lot of leading indicators out there from purchasing managers and manufacturing, and it all just kind of feels different. It feels better and no matter how it feels, we like to see it in our orders, and that's the thing that's probably more different now than before.

But your earnings power and the same part of that question, if you could, and how that might be different or what's different this year than last year?

Well, the big difference is certainly Metals USA. That is -- we'll have them for the whole year and it's substantial.

It's another quarter's worth from now. And really, we've tried to demonstrate just the pricing power. So Dave commented that January, we've seen some positive reaction. If we can gain back what we lost in pricing last year, that's -- we're talking close to $900 million of kind of following to the pretax line, just if pricing would go back up by what we lost last year. So that's a huge factor for us on the pricing side.

She's not, by the way, predicting that, that's going to happen.

No. That's a what-if.

I wish she would, but no. We do expect some of that to come back, that's for sure.

We'll take our next question from Tony Rizzuto from Cowen and Company.

I've got a couple of questions here. Dave, in the past, you've shared with us your crystal ball. And I was wondering if you could do the same today and talk about tons sold as you see it playing out for the whole year, maybe kind of a guideline for us all.

Well, we can give you our feelings that -- as you know, Tony, our business, about half of it, almost half of it are customers calling us today and wanting metal tomorrow. So we don't have a big backlog, not even a 24-hour backlog probably. So -- but we're anticipating to have, on a same-store basis, because it does get to the store a little bit with Metals USA being in there for 12 months versus the 8.5 last year. But in that mid-single digit improvement in demand, in that 4%, 5% just pure demand improvement, I think, is something that we're comfortable with at this time. Hopefully, we are being conservative. We usually try to be conservative, but I think we're comfortable with that kind of overall demand improvement. And then we do, as Karla alluded to earlier, we do expect to get some pricing back that we've lost last year and the year before.

Does that include, David, the -- any share gains and any other product innovations or things like that? Is that kind of all-inclusive in that 4%, 5% number?

Yes. I think just without any of that, Tony, we'd probably be looking at around 2% or 3% improvement, just kind of in...

Just kind of normal run rate for us.

Yes. Just kind of normal. But I think, with some of the things we're doing that Gregg was talking about with respect to CapEx and facility expansions, I think that will get us up into that 4% or 5%, 6%. And again, we're trying to be conservative there.

Understood. Understood. And I know that you have, in the past, you've talked a desire to have more toll processing on the auto side but, generally -- or do you have any concerns at all? I heard you make the comment, I think Gregg made a comment earlier about -- I jumped on the call a little bit late, my apologies, but I think I heard Gregg mentioned that you're expecting strong auto demand in '14. It looks like inventories of autos on dealer lots have cropped up quite a bit. I think I heard a figure maybe closer to 100 days. How concerned are you guys by that? Do you think it's more transitional? But do you think that we could be staring down the barrels of some auto production cutbacks here in coming months?

We don't think so, Tony. And primarily, that's all done at our toll processing operations. And we have earmarked well over $10 million in CapEx spending because of the conversion from high-strength steel into aluminum, where we've expanded one of our facilities. We're probably going to expand another one. And we've invested in new laser equipment that's basically revolutionary. And blanking for the light gauge aluminum for outer body sheet and whatnot. So we think that the automotive industry is going to be very strong in '14. All indications are from our toll processing operations, both in the United States and in Mexico. They're both forecasting increased volume over 2013.

Gregg you said, out of your budget, out of your CapEx budget, is that a big component of that in terms of gearing up for the alloy to handle the alloy sheet?

We've got $220 million in our budget and -- of which, I believe, I don't have it front of me, but it's somewhere between $10 million and $15 million is earmarked for our operations in toll processing. And on our toll process, I'm going to have to tell you, Tony, okay, you have to realize that there's no metal there. So the revenue dollars really don't show, it's the earning power that -- the returns are awesome.

Absolutely. I appreciate that, Gregg. And the finally last question, and probably for you too is, where are guys seeing foreign hot-rolled landing at the ports these day? What kind of pricing levels are you guys seeing?

They're somewhere between...

Is it dropping that fast?

Well, it's not dropping that fast. I mean, the unfortunate thing is that we get price increases when we get them really quick and they're pretty substantial. And then what do the importers do, right? We have the highest priced metal in the world here in the United States, so what is it coming in at, probably $60 to $80 a ton below domestic.

Is that at the port, Gregg?

Yes.

All right. So to get it to some of the major manufacturing areas $30 to $50 a ton on top of that?

Yes. When you transport it to -- but at the port, okay, so let's just stick with the ports. Long Beach, Houston, Tampa, Baltimore, in those areas it's somewhere below 60 days $80 a ton landed at port.

We'll take our next question from Sam Dubinsky with Wells Fargo.

Just a follow-up from a prior question. Are mills, domestic mills still discounting steeply from CRU index or is that trend ended in 2013? And also, how are lead times from your suppliers trending today versus Q4?

And you're referring to what product, flat roll?

Flat-rolled carbon.

There is -- how do I put this? For the most part, the discounting on the crew has -- is over, okay. Now there are some -- and the reason why I hesitated to answer that is that there is some contracts that were negotiated a year ago that are 2-year agreements with those discounts in them, okay. So that's why I hesitated to be absolutely specific on that question. But as of contracts that were being quoted in the fourth quarter of last year, the crew index and discounting off of them was much less than it was the year prior. So some of the mills have taken a very, very firm position on those crew discounts and refuse to go below them. And others, one of which is being acquired as we speak, wobbled just a little bit. And our feeling is, just for the record, we'd like crew discounting to go by the wayside and stay by the wayside for the rest of our lives.

And where are lead times today for carbon products and how do they compare to Q4? And then I have a couple of follow-ups.

Basically, it's 4 to 6 weeks.

Is that unchanged?

It's unchanged. And the reason for it is that there was -- the mills had, virtually, every domestic producer had maintenance outages in the third and fourth quarter, okay, of '13. And all of those maintenance outages are no longer there, okay. So they're running flat out as best they can and their lead times have not changed.

Okay. And then on the aerospace side, best guess, how many months of plate inventory do you think are on the channel?

Bill?

We think we're probably going to see that plate overhang run through most of this year. There a lot of forecast that have it going through this year, maybe even touching into the first quarter of next year. Our experience has been that inventory can burn off a lot faster than we think. And so, personally, I'm still hopeful that they're going to see that burn off faster, it will get through it quicker and maybe see the benefit of that in the second half of this year.

Okay. And the last question. I know you guys are benefiting from the high aluminum price today, but do you have an opinion on the direction of regional premiums in coming months? Do to the new warehousing rules taking effect?

We do have a feeling on it. And we don't think that the current premium is sustainable. And that we think it will come down. I think a lot of the experts are saying that we'll see that maybe mid-summer. So if you look at today, I think we're running at just south of $20 -- or $0.20 and we think that we'll see that come back down maybe more like the $0.10 to $0.12 range midyear.

We'll take our next question from Sohail Tharani with Goldman Sachs.

I'm sorry, if you answered this question, I did not listen to the whole call. On the aluminum side, on the automotive on the aluminum side, I'm sure you guys are aware of what's going on in the environment [ph]. I'm just wondering if the margins for your tolling business on that product is better than the margin on the steel or is it the same tolling margin you get on that also?

It's better. It look better on the aluminum. There's -- frankly, there's not a lot of companies that are able to provide that product quality-wise, okay, as it would be on the carbon side. So there's less competition and it's a more profitable commodity for us than the one in the carbon product.

Okay. And Kaiser had mentioned that on the -- obviously, we all know about the destocking going on in the aerospace plate. But they're talking about a significant pressure, downward pressure on pricing, and I was wondering that lead times versus -- I recall you telling us between 16 weeks. Does that mean that you may have to -- I mean your guidance includes a sort of inventory loss on those products also because you do carry a lot of inventory on that because of lead time?

No. Our inventory on aerospace is actually in great shape. And I know some of the mills are seeing -- it has more of an impact on them. The inventory overhang is, for the most part, tied with the 2 large OEMs. And so there is more availability -- I think the mills have seen fewer orders. And -- but in terms of how we manage our aerospace business, our inventory is in great shape. We think demand is going to stay strong this year and our outlook for aerospace continues to be very strong.

We'll take our next question from Luke Folta with Jefferies.

A few question. Firstly, you guys do a decent amount of business with SBQ, you have some new capacity coming in at that market. Can you talk about how base prices are holding up into '14?

Actually, they're very surprisingly doing well. In fact, they came up with an increase, believe it or not. A lot of that product and a lot of that capacity hasn't really come up online yet. A lot of it has, but the automotive industry is strong. Those products, basically, go into 4 different industries, the automotive being the largest by far, energy, ag and mining. Last year, 3 of the 4 were down. This year, 3 of the 4 -- well, we think, maybe up. So the pricing itself, even with the additional capacity of the demand seems to be, at this point, holding up quite well.

What about lead times, Jim?

Good point, Gregg. Lead times are actually going out. Those products lead times now are in the 12 to 17 weeks, which is an interesting sign. Some of it is based on demand, some of it is based on difficulties in bringing these mills up. SBQ product, in general, it's a difficult product to make. And some of our suppliers are outstanding at it. Some of them are sucking a little bit, but on the whole, lead times are going out.

Nice. So I saw Timken just put out a price increase today. Have you seen any increases before that or you just -- were you referring to the one that just came out?

I was referring to that one. They all seem to follow.

Okay. All right. And then I guess, secondly, on SG&A, you talked about how the price moves impact the percentage changes. Holding prices constant, if we think about revenue growth in terms of volume only just for theoretical purposes, what's a good number to think of in terms of incremental SG&A for each incremental revenue dollar?

Yes. That's a tough one, Luke, just because of the variability within our different companies. So it's probably, if you look at our overall, let's say, pretax comes in at 6%, I would assume 6% of that should fall down to the bottom line where, if it's just pricing, we should get a little more than that because we would get leverage off of that SG&A line.

Okay. And just last question, your guidance, can you just talk about what the LIFO -- implied LIFO expectation is there?

Yes. At this point, it's pretty early for us to give you a good number for '14. Certainly, I think we've indicated we think prices would be up a bit and -- we're certainly hopeful for that, at the end of '14 compared at the end of '13, which is the measurement, which would imply some expense. But we're really not far enough into the year to put a number out there yet. So what we talked about is our reported gross profit margin has been pretty consistent in that 25% to 27% range. We've been hovering around 26% the last couple of years. So when you're modeling, I think that's the way to look at it is closer to that. We would have, to the extent pricing improves or demand improves enough to drive up prices, hopefully, our gross profit margin reported on LIFO basis would improve a bit. And the dollars should go up because prices would go up. In that, the range that we gave for the first quarter will only be $0.02 or $0.03 for any LIFO expense that we would anticipate. But as Karla said, it's kind of early now. Our average cost in inventory is actually, at the end of January, was down compared to what the average cost in inventory was at the end of December, which would indicate LIFO income if that was the end of the year, but it's not the end of the year and we do expect prices to kind of work through inventory and come up. So it's just a little early for us to come up with it, but I think we would anticipate expense for the year in maybe $0.02, $0.03 in the first quarter.

We'll take our next question from Michelle Applebaum with Michelle Applebaum Research.

I was going to get into the LIFO question but a little differently because, I mean, I guess these numbers are huge. But at the margin, when you're at the low end of the range, the $0.02 or $0.03 is going to make a difference. So in the first 6 months, you had $10 million of LIFO credit, then in the third quarter, you had $27 million of LIFO credit. But in the fourth quarter, you only had $12 million of LIFO credit, so less than half, right?

Yes.

So in and of itself, if you were shy by a couple of pennies, I don't have a calculator, but that's going to be a couple of pennies, isn't it?

Yes, it is. And Michelle, LIFO is really the change for the year, and the way our method works is at the end of each quarter, we have to estimate what we think the total will be for that current year. So we have to make some assumptions on what we think will happen with pricing and quantities from that point to the end of the year. So at the end of the first quarter of 2013, we thought we were going to have $20 million of LIFO income for the year, so we booked $5 million, which is 25% of that, a quarter's worth. And so -- and the same thing, we still felt good with that number at the end of the second quarter. But then, because we thought prices were going to come up, if you remember, there were some attempted price increases last summer, they didn't stick. So by the time we got to the end of the third quarter, and looking at what our actual calculation was through that point, we said, "gee, we actually think $50 million of LIFO income is a better number," so we had to catch up and book to 75% of the $50 million at September 30, so that's why we had that big bump of the $27.5 million, which meant we still expected $50 million net $12.5 million more. For the fourth quarter, we actually came in at $50.2 million for the year, $12.7 million for the quarter. It's probably the closest we've ever been, in a fourth quarter LIFO estimate. So it's because of the accounting methodology and estimation that has to go into it -- that does make some swings, it's the best we can do, with that we are going to have swings.

So if we're sitting here -- this is fascinating. Now if we're sitting here, your release was the end of October, your third quarter ended September 30, I think. So your sense of -- when you closed your third quarter, you already had a pretty good sense then that we'd see the kind of price declines. In fact, you were exactly spot on. Because when you closed your books in October, you were then accruing $12.5 million quarterly LIFO, the $27 million, bump for the third quarter, actually, you made a prediction on where prices would be and you guys hit it on the money because your fourth quarter LIFO credit is identical to the annualized LIFO credit as of the end of the 9 months, correct?

Yes. So we had the visibility of most of the year behind us, but...

Quite pretty good -- it's a lot better forecasting than most.

Yes, I mean we were -- it was pretty good but it's -- just to set expectations going forward, we've got a lot of different -- we have a lot of different products we carry and a lot of prices moving a lot of different directions, so maybe luck was in there somewhere too. So we try to make a reasonable estimate and certainly, the further we get into the year, the more confident we are with the estimate we're making at that point.

Okay, so than when we compare the fourth to the third, there's $0.025, $0.03 swing that is a penalty to the third -- I mean the fourth relative to the third. However, when you guided for the fourth, $0.92 a buck, you knew that your forecast implicit in that $0.92 a buck was $12.5 million.

Right, yes. That was -- it was actually an $0.11 swing. The third quarter of '13. We had $0.22 of income from LIFO because of the catch up. In a perfect world, with our $50 million estimate, we would have booked the $12.5 million that we booked in the fourth quarter, but we had to catch up on that. So it's actually $0.11 per share swing.

Okay. And that's also relevant in terms of the sequential comparison because as much as you're downplaying the full year LIFO forecast, your first quarter guidance has a specific LIFO forecast in it for the full year, which you're going to divide by 4 just for the first quarter and you're saying you're going to a LIFO charge, which going from the fourth quarter with a LIFO credit to a LIFO charge in the first quarter than actually understates the performance, the sequential performance in the first quarter, correct?

That's correct if you're looking at it stripping FIFO and LIFO apart. And what -- which is our -- we give the numbers because we're always asked about it. But in all actuality, we're on a LIFO costing method, so the reported gross profit margin of 26% is really our gross profit margin because the LIFO should level out what's happening in the market with pricing. But certainly, because we have to estimate LIFO on a quarterly basis, it can create some swings in that.

Okay. But in particular, when you're going into a new year, you're starting a new LIFO, okay? Starting fresh. And to the extent the analyst, I think, were higher than your guidance, I would suspect given that you've had LIFO credits all year, that the implicit in the analyst numbers are explicit depending on who's doing the work, there was a LIFO -- continuation of LIFO credit trends particularly because most of us are probably looking at prices declining recently, so no one's sticking their neck out. So I think implicit in your guidance for first quarter, it's on an apples-to-apples basis, if we're looking at a LIFO credit, and you're saying there's a LIFO charge, it's a bit more meaningful, that's all I can say.

Yes, that's a good point. There's the swing from LIFO. There's also, we kind of pointed out in our comments, our number of shares outstanding this first quarter compared to last first quarter is up and that accounts for an impact on the EPS this year also.

And Michelle, this is Dave, I hope that that's the case because it boggles my mind sometimes about how some of those estimates can be thrown out there and -- so I'm hopeful that, that was the case. They were -- the analyst that have some outlined estimates had some assumptions in there for LIFO income that we weren't aware of because I can't make any sense out of those numbers any other way.

Yes. Well, that's, I think, is a -- that is a good point, but I think the problem is that we don't have as many conversion types of companies to cover, so that the LIFO thing sometimes people eyes glaze over. So which brings me next question and then I have a third, which is are you taking seriously any discussion of moving from LIFO to FIFO? Or at least moving to quarterly LIFO? I think I've asked this before?

Yes. We are not entertaining that. We do think that LIFO makes our earnings, on an annual basis anyway, less volatile than it would on FIFO. And then, we think, although not great, we do kind of okay on the estimates from quarter-to-quarter. And if we were to change the way we did it, it would be a change in accounting method which, quite honestly, we're comfortable with what we're doing and don't want to go through that.

We may face the day that we have to change because the rules either the accounting rules or the tax rules change, but at this point, that doesn't seem imminent. So...

Okay, step down on what looks like might be interpreted as a weak guide for 1Q that might just be a LIFO thing. So anyway, okay. So my next question is in terms of the overall sector and consolidating the sector and big bites versus small bites, you guys have been enormously active. Remind me again if you could talk about the businesses that you're in and, in broad terms, you can define them how you want, if it's market or if it's region, you can do that, and what your share is in each of the businesses that you're -- top 4 businesses that you're in, so we can see incrementally what's left out there and do some growth forecasting with your guidance.

The way I -- you know, Michelle, I wish we could give that. It's hard for us to come up with a share number on an overall basis just because of the nature of the industry, and all the private companies, and some report and a lot don't. And to -- based upon the information that we use now, it looks like our share is somewhere, with Metals USA in it, is somewhere in that 6% to 7% to 8% range.

Of the overall metal processing and distribution space.

I wasn't as...

Yes, I think -- Michelle, we don't -- there's not good numbers out there to quantify total markets for us to come up with our share, I think. And even within our company, because of our customer base, a lot of times, we're not really sure what the end use of the product we're selling is. The things that we can identify fairly well would be aerospace, which in 2013, aerospace was about 6% of our total revenue dollars. Energy was about 8%, and those are -- 8% to 10% usually in there. Aerospace is a percent down a little bit, but that's because the rest of the company grew. Metals USA didn't have as much aerospace business as we did. Non-res construction, we think, is probably around 30%, probably a little shy right now, but when that comes back up, we would expect that to be about 1/3 of our business. And quite honestly, the rest of the end markets, we can't really quantify. We put in our disclosures, kind of by carbon steel plate structurals. Plate structurals of carbon continue to be our largest percentage of our sales dollars.

I apologize for not being clear. I was actually asking what your market share was.

We don't know.

No clue?

No.

No, we don't know.

How about if I told you if you could just say really tiny, and okay, and we own it, large factor, you can do that?

No, no. I think it's okay. We're happy with our share. We think that there's a lot of room for us to grow and every area that we operate, whether you're talking about geographic regions or you're talking about products, whether you're talking about end-use markets. I think we do a pretty good job in where we are, but we think there's a lot of room to grow in some of those areas. Pardon me?

As in every one of your businesses?

In every one of the businesses that we're in, I think that there's room for us to grow. Some are more difficult to grow in because there just aren't as many larger companies in those industries. Aerospace, for example, there aren't many large aerospace companies, pure aerospace companies out there. Same really on the energy side. There's a -- on the energy, there's a large number of smaller places, even on aerospace, there aren't as many, but they tend to be relatively small. So it takes more work to gain some share in those areas, but we're up for that work. We've been doing it for quite a long number of years now, but there's room, I would say, every business, every industry that we are inclined to want to grow in, there's room for us to grow.

Let me ask a tangential question, that's the businesses you're in. What about if you took the whole service center industry and made an index of 100? What percent of that 100 are you not even in at all? Because it's still a big number, isn't it?

Oh, gosh. No, we're in about everything to some extent. We're not as big as some other companies in carbon flat-roll or in stainless flat-roll or maybe even common alloy aluminum flat-roll. There are some people out there that do more than we do certainly and individually and collectively, there's a lot of other companies that participate in that, but...

I mean there's are still a few specialty products out there that we may not be in today, but that's going to be small portions. Like with Metals USA, we picked up the brazing sheet, right? So there are still things we can pick up here and there or specific parts of market. We also -- there's some service centers have grown by going a little more downstream and we try to stay out of our customers' businesses. We don't want to compete with them, so some opportunities that might be attractive to certain service centers may not be attractive to us.

Although, Karla having said that, we have recently, really over the last few years, got more into manufacturing, a little more downstream. On the energy side, we're making some parts at the request of our customers. On the aerospace side, more involved, more value add, I think on the fabrication side in certain areas, depending upon what our customer base looks like there. If you remember our acquisition last year or the year before, 2 years ago, I guess 2012, GH Metals was a fabricator. They did -- that's all they do. They're not really a service center. So we're doing more of that. We like the value add. We've always liked it, and we just do in certain markets, in certain areas, we have to be careful about getting into that. So we don't want, as Karla mentioned, to upset the customer.

We'll take our next question from Andrew Lane with Morningstar.

I really just have 1 question here. Looking forward, will you in any way be able to qualify the impact that severe weather conditions are likely to have on your first quarter performance? If you would, material disruptions, maybe if you could just discuss the mechanism, by which they'd impact your results?

I think, Andrew, we can't at this point. And we don't expect that the impact on the first quarter, unless these storms continue to occur between now and the end of March. The nature of our business is such that if we're closed down for a few days, which is probably the most we were closed down in any area, most likely, over the next 3 to 5 days, we're going to catch up and make those deliveries. So unless there's some big event right at the end of the quarter, I think I mentioned earlier that if January was the end of the quarter, then we'd probably be talking to you about some missed business regarding whether. But it's not and we do expect that it won't have a significant impact or maybe an impact on the first quarter.

And our locations typically operate around 2/3, 60% to 70% of capacity such as the extent that we would need to run longer to catch up on for any of our customers. We certainly have the existing capacity to work a little overtime to do that.

But I don't think Gregg and Bill and Jim, we had facility -- we didn't have any significant damage at any facilities because of the storms in this -- in January. We did have a problem with a tornado back in November, I believe it was, that took off the end of one of our precision strip buildings, one of our toll processing buildings.

But we just took the orders that we have on the book, okay, for that particular facility, and we just moved it to other facilities to take care of the needs of the customer. But when the storms get a lot of attention, I can certainly understand why. But at the end of the day, we're not losing business. We're not losing orders, okay? It's orders that we need to be able to ship at some point in time. Oftentimes, we're ready to ship and the customers are still closed, okay? So at the end of the day, as far as we're concerned, like Dave said, unless storms continue through the end of March, which we don't think is going to happen, we're still going to ship the same amount of product. We're going to bill it out and off we go, so for us, we see it at the newspapers and all that, but at the end of the quarter, it's kind of a nonevent.

Hopefully. Otherwise, we will be talking to you about it. But at this point, we don't anticipate it.

We'll take our next question from John Tumazos with John Tumazos Very Independent Research.

If I could bother you with a big picture question not about market shares on LIFO and similar stuff. Concerning your end game, would you want to sell the company if you had a bid for cash or for stock? Do you have any thoughts about whether a 50% or 30% or 70% premium is good enough to take to the board? Obviously, Dave, you've done a great job for a long time and your cost basis is nil, so if you sell for cash, 20% plus Obama medical tax surcharge kinds of stuff, plus state tax goes out the door. And I was just thinking that some companies -- like Nucor is deciding not to invest in gas of this year, but iron ore and coal mines and iron plants and building steel mills and buying steel mills and aluminum smolders and all these things haven't been such good investments and there's a lot of people who would rather be you. And the next time there's a big boom and they have extra money, they might not be chasing stelcos [ph] and scrapyards. So I just thought I'd ask you the and game question and forgive me if I'm -- if it's the wrong question.

No. You asked it, we'll do our best to answer it. But in terms of taking something to the board, we have a fiduciary responsibility to take whatever lands on our desk, whatever lands on my desk, into the board. So in terms of end game, we're not really thinking about an end game. I think all of us here realize that we have a lot more that we can accomplish. We think we can best accomplish that as an independent company. We think -- we've heard these questions for many, many years about mills owning service centers. And I think I've actually been surprised that lately I've been hearing more about the European model coming to the American model, as opposed to the Americans going to the European model, which -- it's enlightening because I think were much more efficient over here. And so I don't think that that's something that I would consider part of the end game. It's very risky for the mills to do that because none of us, Reliance included, are big enough to really make a huge difference to any mill out there in terms of the products that we sell because we're half nonferrous in all practical -- for all practical purposes, we're half nonferrous and half carbon and within that, we've a got a lot of different products within all of those different carbon, stainless, alloy, aluminum. So it would be, I think, a big risk on this side of a mill, even for us and being the biggest out there. But end game for us, there's just -- there's a lot more work for us we are enthused about it like a phrase in the industry would've think we need anything else to get it done. Just we're going to continue on and, as Jim Hoffman says, it's good to be us.

So there's no tax planning going on for the Hannah Foundation being bigger than the Gates Foundation or anything like that?

No, no. The Hannah family still has to work.

Okay, we'll take our next question from Aldo Mazzaferro with Macquarie.

Dave, I'm sorry I had another couple of questions, but I appreciate you taking all the time here. If you hadn't mentioned this on the call already, I'm wondering if you could just make a comment, as the largest steel buyer or one of the largest in the country, are you making any strategic shifts towards import purchases at this time?

Aldo, this is Gregg. The answer to that is no. We have always, through the over [ph] the last 20 years, we've tried to support the domestic producers. We've got -- strategy has not changed and as long as we're here, it's not going to change. So do we dabble in it? Yes, we do. Would we [ph] to do that? Yes, we will. Nature support is massive producers, period.

So if it's not -- I mean if you're not shifting full sale into imports and maybe others aren't as much as -- gets reported, what do you think is the drivers these days for pushing prices down? Is it all raw materials, you think? Or what is -- I mean, what is going on with the supply demand versus the cost support, would you say, for pricing?

Well, I just -- it depends on what product you're talking about. But typically, everybody is talking about flat-rolled, which represents 15% of our sales, so it's not -- carbon steel flat-rolled that is, 15% of our revenue dollars, so it's not a huge deal to us. But the drivers behind that is: a, overcapacity; b, imports; and c, raw material prices. So those are the key ingredients for driving prices up or down and automotive is doing extremely well, the biggest buyer of flat-rolled products, of any industry in the country, that's doing well, but you got -- also, you, have some, I should say, like with the TK Mill, that mill, they need to book that mill. There was a lot of money spent on that mill to make sure it was -- and I think it's 4.5 million-ton capacity and it was running like 2 million tons. So that was kind of a wild -- a wild card out there, okay? And right now with the eventual purchase, we believe by middle of that, we think that we're going to be better disciplined in the marketplace than there has been in the past. So I don't know what else to tell you other than, as Dave pointed out a few minutes ago, that we thought that the markets were going to improve, the prices were going to be firm and we've been wrong 3 years in a row.

The thing that can overcome the 3 things that Gregg mentioned which impact the prices, just demand strengthening to a point where those 3 things don't play as much into the pricing equation, where you get back with high demand and high prices. We're not there yet, so on an overall basis, but hopefully, we'll at least approach that as the year progresses.

You still have a pretty large exposure to the non-res construction market. Are you seeing anything change there or improve?

Yes, we are, as a matter of fact. And it's more on the light industrial, okay? So hospitals, schools, okay? We're -- the Northeast market appears -- it's stronger for us than other markets. We've got northern California is doing well. The Apple and Google buildings that are going there are big. We are seeing some improvement down in the Houston area. They're building some pretty large campuses for some of the oil and natural gas producers. We're looking forward to some of the liquefied gas projects to develop, which they have not as yet, but certainly we'll, sometime in the not-too-distant future. So yes, we're seeing some improvement in the non-res as recently as January. Dave and I were actually looking at some of our facilities that are very much involved in that, and we're very pleased to see the activity that they had in the fourth quarter, as well as January. So yes, we're seeing some improvement there. And, by the way, I might add that we've met with several of our largest suppliers on the long product part, the beams and structurals and whatnot, over the past 30 days and their attitude is by far and away more confident today then we heard them talk since 2008, so that's a good thing.

We'll take our final question from Timna Tanners with Bank of America Merrill Lynch.

I'm going to make it really quick. What is the appropriate level of dividend yield for your company as you think bigger picture, given your high level of the cash flow yield over the past couple of years? So what do you think about the dividend? And in light of that, free cash flow yield?

I think, Timna, what -- we've brought the dividend rate up substantially, as you know, over the last couple years. The payout ratio, we're looking at a payout ratio as opposed to a yield. The payout ratio last year was just about 30%, if you look at the amount we paid as regard to net income. We think somewhere around that number makes sense from a payout ratio. In that ballpark, 30%, by the way, is as high as it's been over the last well, probably, forever. But keeping that with our size and our strong cash flow, we think somewhere in that 25% to 30% as a payout ratio makes some decent sense. The yield is about 2% now and that -- one of the motivating things for us when we started to raise the dividend substantially about 18 months ago or thereabouts, was the fact that interest rates were so low and we thought that if we got the yield up to a more respectable level, that people would look at the stock for not only just the yield but the upside potential on the stock and I think that's -- I think it's worked. I think the improvement has had a positive impact on the stock. But we'll continue to evaluate our cash flow. We don't want to get the dividend to a point where we ever have to back off on it or to reduce it. We want to keep it at a sustainable level with all, with some upside potential.

Yes, that's what I think. The payout ratio, the 30%, certainly our earnings were down given the size of the company. And we would be monitoring what was going on. Because hopefully, our earnings level will come up substantially, which could cause that payout percent to be a little lower. It's also going to depend on acquisition and other types of spending that we're doing. We'll have to look at where our leverage is and what the appropriate payout level is.

Okay, I'm showing no further questions in queue.

Okay, great. Thanks, everyone again for all of your support and your questions and for participating in today's call. We do want to remind you that we'll be presenting in early May at the Wells Fargo 2014 Industrial and Construction Conference and later that month at the BofA Merrill Lynch Metals, Mining and Steel Conference. Hopefully, we'll see many of you there. Have a great day. Or as I mentioned earlier, we're feeling much more positive about things as we head into this year than we have over the last few years. So thanks, we'll talk to you again in a couple of months.

Thank you very much, ladies and gentlemen. This concludes today's presentation. You may disconnect your lines, and have a wonderful day. Thank you for your participation.