RS
#My question was on the operating expense.
I think we noticed the fourth quarter expenses were up quarter-on-quarter when you had seasonally weaker volumes.
I would assume some of that is bonus accruals because you guys had a great year.
But can you talk about the baseline operating expense environment, excluding what the comp may have ---+ comp component may have been, just because we're noticing that freight, other costs of doing business are higher.
And then we're also trying to get a good run rate in terms of what we should be using for the first quarter.
Phil, so on the SG&A expenses, fourth quarter is usually not as predictable as the other quarters of the year just because year-end true ups and things.
But overall, because we do have in the fourth quarter holiday pay during that quarter.
So even though we're not shipping as much, we're still paying our employees for the holidays.
So that always effects the fourth quarter a bit.
Other than that, certainly, yes, some of the freight costs are up, but ---+ and that hits our SG&A expense line, but we also pass ---+ that's part of what we charge our customers for, that's one of the services we provide, is delivering our product to them.
And the majority of our delivery is done on our own trucks.
So it's with our drivers that are our employees.
So I think we're not seeing the squeeze that you hear from some other companies in our industry who are outsourcing it more to third parties.
But certainly, fuel and some of those items are up.
But again, in our model, we try to pass that through to our customers.
So it hits the SG&A line, it could be a little higher, but the revenue line should also be a bit higher to cover that.
Run rate going forward, if you look at like Q1, Q2 of last year, those are probably better normal type of SG&A run rates.
We do ---+ we did again in 2018 as we have done consistently is provide wage increases to our employees.
So you should expect our Q1 '18, or quarterly run rate in '18 to be a bit higher than in '17, just because of the inflationary factors related to wage increases, healthcare increases, et cetera.
Okay.
That's helpful.
And I noticed in your, I think your nonferrous script, Bill, you had talked about some of the business that you're setting up outside the U.S., I think in Korea and maybe China.
And I know semiconductor spending, I think, we've talked in the past, can be extremely volatile.
It can be very strong at the good times and very weak at the bad times.
So I'm just trying to balance out the timing of the investment that you all are making.
And then what gives you confidence that you're making it at the right time given where the cycle is.
Yes, Phil, you're right.
It does tend to be somewhat volatile, but the outlook is really positive.
We saw last year on the semiconductor side, it was extremely strong and that looks like it's going to carry through this year.
The investments that we're making in Korea and China and some here in the U.S. are focused on the semiconductor market.
And then the other investment, the new facility is All Metal Services in India, which is aerospace focused.
And the outlook is very positive for all of that, which is one reason we're very comfortable making those investments.
And in South Korea, Phil, we've been in that market, I think, about 15 years.
So we're not a new player.
We're not just jumping in because of the current outlook.
We've been there in steel, we know that market pretty well.
And we've been in China for a while now as well.
So we do feel comfortable making those further investments in those operations.
Basically, in South Korea, we've been there, as you pointed out, about 15 years, but we're basically doubling the size of our production capacity there, right, okay.
So it's a good investment, but it's paying dividends as we speak.
And I think, we're putting the money in at the exact right time.
Are these for new customers or existing customers.
I'm just trying to gauge the pole.
Both, both.
For some major customers that are expanding their operations and there's some new business in that also.
But the vast majority is on existing customers expanding their production.
And this is for industrial aluminum plate for the most part.
Is that what we're talking about here.
Some of that investment is the electro polish tubing that goes into the vacuum chamber industry.
So it's not all plate driven.
And the major investments that we're talking about in Korea and China are more tubing oriented than plate.
And that's stainless steel.
Yes.
Yes.
We will.
But the main question is, how much can we get capture like immediately upon announcement.
As you know, the vast majority of our business, in particular, on carbon steel products, okay, spot business.
So very little contractual business on that.
So we literally take the position that when the announcement is made, as Jim just mentioned, $50 a ton on carbon steel plate was ---+ we learned about yesterday.
That $50 a ton will be on our price books effective this morning.
We'll get that with ---+ our work average order size is a little over $1,600 per order.
So obviously we're doing business with a tremendous amount of job shots, smaller companies placing smaller orders.
And those companies, okay, whether you're charging them $1,600 for an order or $1,650 or $1,700 it's not that big of a deal.
So we can get a lot of those price increases at time of announcement.
The more sophisticated companies, the large ag producers and what not, they recognize the fact that we've got 3 months on our floor inventory position.
And it's not likely that they're going to pay at the time of announcement, but we'll get it, okay.
It's just a matter of do you get it today or do you get it in 60 days from now.
But at the end of the day, we get it.
And that's where, <UNK>, you mentioned potentially trailing the indexes.
And one of the things you have to think about is our product mix, and factor that in when you think about whatever indexes you're looking at and to what <UNK> was talking about, some of the mill increases that are effective in Q1, we already got in Q4 of '17.
So depending on how you're comping us against the indexes out there, you've got to take that into consideration also.
Let me tell you what I know about the 232 cases.
I don't know anything about the gotdang 232.
I'm so confused by the son of a gun.
It was supposed to go into effect in June, didn't go end of June.
It was supposed to go effect in August, it was supposed to go into effect in ---+ who the hell knows, okay.
All I know is that Jim says we don't run our company based on hope.
We run it based on what we know.
And all we know is that imports are lower.
We think they're going to be ---+ they're going to continue to go down somewhat, not probably at the percentage that they went down in, basically, the fourth quarter of the year, okay.
But we think there's room for imports to continue to decline.
We're hopeful that there's more price increases because we like prices higher than lower.
But at the same time, we are ---+ we hope that the mills use some discipline so the spreads don't become so great that imports come in more.
But if you want to get a really good answer to your 232, you better call the White House.
You're barking up the wrong tree here.
And <UNK>, just one thing to add, regardless of what they're calling it, there's countries who are cheating.
I mean, there's laws on the books, and they're flat-out cheating and dumping product into The United States.
That's a fact whether we decide to enforce the laws that're already on the book or add new laws that they're cheating and dumping product into the country.
I think I just had a follow-up question on the LIFO, <UNK>, in terms of what your assumptions are behind that.
Are you assuming that your pricing guidance levels for Q1 basically hold through the course of the year.
Yes, so, we do have to make an estimate for the full year.
So the $80 million expense is based on our current estimate with our outlook.
So we do think that current pricing will hold and that there is room for further upside.
Certainly, we've been in this business a long term.
Prices go up and they go down.
But our $80 million, we think does leave a little room for some fluctuation throughout the year.
But overall, we expect our prices at the end of the year to be higher than they were at the beginning of the year.
And we kind of compare ---+ the $80 million estimate is ---+ of expense is a little more than our actual 2017 expense of $73.3 million.
So you can kind of use that as a guide of what pricing did in '17 to be what our expectations are for '18.
And sorry, Phil, and also remember though, our inventory cost on hand at December 31, '17, which is our starting point, because the time lag doesn't ---+ did not reflect all the price increase announcements.
So some of the price increase LIFO effect we'll get in '18 is based on Q4 '17 price increases as well.
On behalf of our team here at Reliance, I'd like to thank all of you for participating in today's call.
I'd also like to extend my gratitude to all our employees, customers, suppliers and stockholders for their continued support and commitment to Reliance.
We look forward to a successful year ahead and have a great day.
Thank you.
