Brenda Miyamoto - Director of Investor Relations Gregg Mollins - President and Chief Executive Officer Jim Hoffman - Executive Vice President and Chief Operating Officer Bill Sales - Executive Vice President, Operations Karla Lewis - Senior Executive Vice President and Chief Financial Officer.

Chris Terry - Deutsche Bank Martin Englert - Jefferies Novid Rassouli - Cowen Inc Phil Gibbs - Keybanc Capital Markets Aldo Mazzaferro - Mazzaferro Research.

Greetings and welcome to the Reliance Steel & Aluminum Fourth Quarter and Full year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would not like to turn the conference over to your host, Brenda Miyamoto. Thank you. You may begin..

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss our fourth quarter and full-year 2017 financial results.

I'm joined by Gregg Mollins, our President and CEO; Karla Lewis, our Senior Executive Vice President and CFO; Jim Hoffman, our Executive Vice President and COO; and Bill Sales, our Executive Vice President of Operations. A recording of this call will be posted on the Investor 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 and 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 statement.

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, 2016 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 Gregg Mollins, President and CEO of Reliance..

Good morning, everyone, and thank you for joining us today to discuss our fourth quarter and full-year financial results. 2017 was a fantastic year for Reliance. Our strong annual gross profit margin of 28.7% is near the high-end of our target range of 27% to 29%, and produced the highest gross profit dollars in our company's history of $2.79 billion.

Continued modest growth and demand along with the positive pricing environment throughout most of the year enabled us to grow our 2017 net sales by $1.11 billion over 2016 to reach $9.72 billion, the second highest ever for Reliance.

Our tons sold increased 3.8% in 2017, given a generally favorable macro environment that continues to improve throughout the year. Although metals pricing fluctuated throughout the year, the environment was positive overall resulting in 9.1% increase in our average selling price in 2017 compared to 2016.

Our managers in the field did an excellent job managing pricing fluctuations, growing our value-added services to our customers, controlling expenses and managing working capital. All of which resulted in our second highest annual diluted earnings per share of $5.44 surpassed only by 2008.

Our $5.44 earnings per share amount are non-GAAP and exclude the $2.82 per share benefit from the impact of tax reform that Karla will discuss in a minute.

Our tons sold in the fourth quarter were down 4.6% from the third quarter of 2017 due to normal seasonality associated with the typical slowdown in shipping volumes resulting from fewer shipping days attributable to holiday-related customer closures.

This reduction in tons sold was in line with our expectation of 4% to 6% decrease compared to the third quarter. However, overall demand remained strong with our shipments up 6.3% compared to the fourth quarter of 2016.

We expect to see further demand improvement in 2018 as overall customer sentiment continues to improve in nearly all the end markets we serve with longer-term incremental upside possible from the administration's infrastructure plans. In Reliance's product mix, we are well positioned to benefit from an increasing infrastructure activity.

The spring and summer months of 2017 were characterized by a high level of uncertainty related to the pending section 232 investigation, which contributed to a heightened level of imports in the marketplace, pressuring metal pricing.

However, the improving demand environment, along with increased raw material pricing and trade-faced resolutions in the second half of the year supported higher pricing levels on nearly every product we sell.

As a result, our 2017 fourth quarter average selling price was up 1.8% compared to the 2017 3rd quarter, ahead of our expectations of flat to down 2%. Our higher selling prices resulted from continuing mill price increases in the 4th quarter that have continued into 2018 and contributed to our stronger than anticipated earnings.

On a year-over-year basis, both shipment levels and average selling prices were up for all of our commodity categories including stainless, carbon, aluminum and alloy.

Since October 2017, there have been more than 10 price increases announced for carbon steel products, these price increases were not fully reflected in our fourth quarter results and as such, we expect them to have a positive impact on our first quarter 2018 results.

Turning to our balance sheet, we are comfortable with our inventory position, which supports our ability to provide just-in-time delivery to our customers, often in 24 hours or less. For the year, we achieved an inventory churn rate of 4.5x consistent with 2016.

Inventory management will always be a key focus at Reliance, as we believe that maintaining the efficient inventory levels is one of the main drivers of our industry-leading gross profit margin. Other crucial components include pricing discipline and value-added processing capabilities.

Together, these factors have enabled us to generate significantly more gross profit dollars in recent years that dropped to our bottom line. In regard to value-added processing, we will continue to make strategic investments in equipment and facilities to drive organic growth.

Our 2018 capital expenditure budget is $225 million with the majority of these investments growth related. We also expect to continue to grow and drive our earnings higher by acquiring well run businesses that expand our existing footprint, compliment our diversification of products and services or increase our value-added processing capabilities.

While it is still early in the year, we are seeing an increase in the number of acquisition opportunities in the market in 2018. As a result of increased profitability and effective working capital management we generated $399 million in cash flow from operations in 2017.

To support our growth we spent $161.6 million on capital expenditures and completed the acquisition of Ferguson Perforating Company in October 2017. Ferguson is a niche player in the perforated smarter providing highly engineered specialty products and has been operating in line with our expectations and was accretive to our 2017 earnings.

We also paid $132 million in cash dividends to our stockholders and repurchased $25 million of our stock in 2017. In addition effective for the first quarter of 2018 we increased our regular quarterly cash dividend by 11.1% to $0.50 per share for an annual dividend of $2 per share.

Reliance has paid regular quarterly dividends for 58 consecutive years and this is our 25th dividend increase since our 1994 IPO. These stockholder return activities demonstrates the confidence, our Board and management team have in our business model and our outlook. In summary, 2017 was an exceptional year for Reliance.

We are encouraged by the positive pricing momentum and improved demand environment that we saw in 2017, that has continued into 2018.

In addition to higher metal pricing, our strong gross profit margin enabled by the fantastic performance of our managers in the field, allowed us to generate higher earnings, while some uncertainty still exist in the market we believe that overall customer sentiment and demand are continuing to substantially improve and we anticipate an ongoing reduction in imports will continue to support higher metal pricing.

We believe these factors, as well as the potential for meaningful infrastructure spending will increase metal demand and pricing, which we expect will enhance our profitability and a strong cash flows.

Over the past five years, we have invested $2.26 billion to further our growth through capital expenditures and acquisitions, and we have returned over $1 billion to our stockholders. Through dividends and share repurchases. We look forward to returning even greater value from these investments and continuing our strong stockholder return activities.

I will now hand the call over to Jim to comment further on our operations and market conditions.

Jim?.

Thanks Gregg, and good morning, everyone. First off, I would like to recognize our folks in the field who contributed to our strong 2017 results. We thank you for your hard work and dedication that helped us achieve another year of strong operational performance.

Now, I'll discuss demand in pricing of our carbon steel and alloy products as well as our outlook on certain key end markets, we sell those products into. Bill will then address our aluminum and stainless steel products in their related end markets.

Demand for automotive, which we service mainly through our toll processing operations in the US and Mexico remain strong throughout the fourth quarter. We continue to make investments to expand our facilities and equipment to increase our capacity to both carbon and aluminum processing for automotive market.

Our facility in Monterrey, Mexico has now been operational for a full year and continues to perform in line with our expectations. In addition, we complete the construction of a new facility in Kentucky in the second quarter of 2017 to support increased demand for both aluminum and steel processing in that region.

In the fourth quarter of 2017 we are operating at approximately 50% of expected capacity in this location and we look forward to continuing to ramp up the Kentucky facility processing capacity in coming months.

Demand in heavy industry which includes railcar, truck trailer, shipbuilding, large manufacturing, tank manufacturers and wind and transmission towers began to improve from low levels in the second half of 2017. In particular, we continue to experience an increase in construction equipment spending.

Looking ahead to the first quarter of 2018, we're optimistic the demand in heavy industry will continue to strengthen. Demand in non-residential construction market, including infrastructure grew at a steady rate throughout 2017, but still remains far below peak levels experienced in 2006.

We are cautiously optimistic, that the domestic infrastructure spending will continue to improve with incremental upside possible from federal infrastructure spending.

Extreme winter weather conditions in the East also played a small role in delaying certain fourth quarter non-residential construction projects, pushing them into the first quarter -- first half of 2018. We remain well positioned to support increased volume in our existing footprint as this end market continues to gradually improve.

Demand for the products we sell into energy market, which mainly is oil and natural gas steadily improved in each successive quarter in 2017. We continue to see growth in the rig counts and drilling activity with mill lead times extending and completion activity gaining strength.

Importantly, our businesses servicing the energy market contributed positively to our earnings in every quarter of 2017, after hitting what we believe was the bottom in 2016. The increased activity in energy is an encouraging sign, we are well positioned to support demand growth as this market continues to recover.

Which is in line with our expectations for a stronger 2018. No pricing for carbon steel products we sell into these end markets were stronger than we had anticipated in the fourth quarter.

As we noted on our last call, we experienced fairly significant price reductions for certain of our carbon steel products late in the third quarter that we expected would negatively impact our average selling price in the fourth quarter.

However, as Gregg had mentioned, there were a number of price increases for carbon steel products announced throughout the quarter, all of which were supported.

As a result, we were able to maintain our pricing and pass a portion of the announced price increases along to our customers during the fourth quarter before receiving the higher cost level into our inventory. This resulted in a slight improvement in our gross profit margin for carbon steel products versus the prior quarter.

So far in 2018, there have been continued no price increases for carbon steel products that are being supported. And we are optimistic there is room for further increases due to an overall reduction in import offerings with pending section 232 decision; higher demand and increasing raw material prices.

Price for alloy products has been improving as demand in energy market continues to recover. We believe the further improvement in activity levels in the energy market should help support increased pricing going forward. In summary, we are confident about our positive 2018 outlook as it relates to both demand and pricing trends.

We are experiencing continued strength in our tolling business, servicing the automotive industry and we are pleased to see steady increases and demand for energy, non residential construction and heavy industry markets.

We remain committed to investing in value-added processing equipment for the businesses that support these end markets and believe we are well positioned to absorb increased volumes in our existing footprint, in cost structure as these market continue to strengthen. Thank you for your attention today.

I will now hand the call over to Bill to comment further on our non-ferrous markets.

Bill?.

Thank you, Jim. Good morning everyone. First, I would also like to thank our folks in the field for their excellent operating performance in 2017. Thank you all for a job well done. I'll now review pricing and demand for our Aluminum and stainless steel products, including the key industry trends in these markets we sell the products into.

Aerospace demand remained strong in the fourth quarter. To date, lead times for aluminum aerospace plate are steady compared to the third quarter at approximately 7 to 10 weeks. The backlog for orders of commercial planes is strong and we expect bill rates to continue to improve in 2018, led by single-aisle planes.

We continue to see increased activity from many of our defense customers. Our production activity related to our participation in the 5-year $350 million joint strike fighter program that began in 2017 is now fully ramped and we expect production levels to remain fairly steady for the foreseeable future.

Further, our entry into the aerospace market in India through our all-metal services subsidiary is now expected to become operational by the end of the first quarter of 2018. We maintained our positive outlook for the aerospace market and look forward to increasing our market share in this area as overall demand continues to growth.

As it relates to the semiconductor market, global activity remains strong.

Because of the optimistic global growth outlook and our strong position in this market, particularly in the US and Pacific RIM regions, we are in the process of expanding our operations in South Korea to supports the semiconductor industry and adding new manufacturing capacity in the US and China to support higher production needs.

We maintain a positive outlook for the semiconductor market in 2018 based on solid demand trends and an encouraging outlook from our customers. Moving on to pricing, the majority of our sales into the aerospace market consistent of heat-treated aluminum products, especially plate as well as specialty stainless steel and titanium products.

Demand for heat-treated aluminum plate has continued to improve. The most recent price increases for aluminum heat-treated products that took effect in January have been fully supported by the mills. Looking ahead to the first quarter of 2018, we are optimistic that Aerospace pricing will continue to strengthen.

Most of our common alloy aluminum products are sold to sheet metal fabricators that support a variety of the end markets. Demand for common alloys aluminum sheet remained relatively stable in the fourth quarter with lead times remaining at 8 to 12 weeks. Currently, we are seeing demand strengthens with lead times, extending to 12 to 16 weeks.

From a pricing standpoint, the announced conversion price increases for common alloy aluminum sheet have support. The conversion price increases combined with an increase in the Midwest spot price should lead to higher prices for commonality aluminum sheet in the first quarter.

Lastly, demand for our stainless steel flat products, which are primarily sold into the kitchen equipment appliance and production end markets has remained solid.

Our average selling price for stainless steel products increased during the fourth quarter, driven primarily by September in November price increase announcements, each a two point reduction of the discount for commodity stainless flat products which were supported in the market. Demand for stainless steel remain strong.

The January price increase of another two point reduction in discount has domestic support and we believe, there is a potential for further price increases. Thank you for your time and attention today. With that, I'll now turn the call over to Karla to review our fourth quarter 2017 financial results.

Karla?.

Thanks, Bill, and good morning, everyone. Our net sales in the fourth quarter of 2017 were strong at $2.3 billion, up 15.3% from the fourth quarter of 2016 with our tons sold up 6.3% our average selling price per ton sold up 8.8% year-over-year.

Compared to the third quarter of 2017, our net sales were down 3% with tons sold down 4.6% and our average selling price up 1.8%. As discussed previously, the pricing environment in the fourth quarter of 2017 was stronger than we had anticipated.

The combination of overall higher prices and increased shipping levels across all of our commodity categories resulted in $315 million more sales dollars in the fourth quarter of 2017 compared to the fourth quarter of 2016.

For the full year, our net sales were the second highest in our company's history at $9.72 billion, up 12.9% from $8.6 billion in 2016. Tons sold were up 3.8% and our average selling price was up 9.1% compared to 2016.

Our gross profit margin in the fourth quarter of 2017 was 28.6%, down from 29.8% in the fourth quarter of 2016, and up from 28.0% in the third quarter of 2017. Our full-year gross profit margin was 28.7% in 2017, compared to 30.1% in 2016.

We are proud of our 2017 gross profit margin that was at the high end of our target range of 27% to 29% and resulted in record gross profit dollars at $2.79 billion. As a result of higher metal prices in 2017, our year-end cost of inventory on hand was higher than at the end of 2016.

This resulted in a net LIFO inventory evaluation charge or expense of $30.7 million for 2017 compared to the credit adjustment or income of $27.4 million in 2016. Our actual LIFO expense for 2017 was $73.3 million that was offset by $42.6 million from the full reversal of our lower cost or market reserve.

At this time, we anticipate metal prices will increase in 2018, which means our year-end inventory cost on hand will be higher than at the end of 2017. As a result, we currently estimate LIFO expense of $80 million to the 2018 year or $20 million for the quarter.

As in prior years, we will update our expectations quarterly based upon our inventory costs and metal pricing trends. As a percentage of sales, our fourth quarter SG&A expenses were 20.2% down from 21.4% in the fourth quarter of 2016 and up from 19.2% in the third quarter of 2017.

For the year, our SG&A expenses were 19.6% of sales, down from 20.9% in 2016. The year-over-year decreases were primarily due to higher selling prices in 2017 compared to 2016, which increased our net sales.

Interest expense for the year decreased by $10.7 million in 2017 compared to 2016 mainly due to the November 2016 refinancing of our 6.2% senior note with bank debt. In 2017, we recorded $4.2 million of impairment charges compared to $52.4 million in 2016 that were mainly related to our businesses servicing the energy end market.

These amounts are included in our non-GAAP adjustments which can be found in our earnings release issued earlier today. Our non-GAAP pre-tax income for 2017 was $582 million, up $87.2 million or 17.6% from 2016, resulting in a pre-tax margin of 6.0%.

The enactment of the Tax Cuts and Jobs Act or tax reform in December 2017 resulted in a provisional income tax benefit of $207.3 million in the fourth quarter or a benefit of $2.81 per diluted share.

Tax reform impact reflects a one-time provisional tax on accumulated overseas profits and the revaluation of deferred tax assets and liabilities, excluding the impact of tax reform our effective tax rate would have been 20.1% for the fourth quarter and 29.1% for the full year of 2017.

While we will continue to assess the impact of tax reform, we currently expect our effective tax rate for 2018 to be in the range of 24% to 25%, reducing our annual cash taxes by approximately $50 million. Net income attributable to Reliance for the fourth quarter of 2017 was $301.4 million or $4.09 per diluted share.

Excluding the impact of tax reform, net income was $94.1 or $1.28 per diluted share. Non-GAAP earnings per diluted share or $1.22 compared to $0.84 in the fourth quarter of 2016 and $1.32 in the third quarter of 2017. For the full year, net income attributable to the Reliance was $613.4 million or $8.34 per diluted share.

Excluding the impact of tax reform, net income was $406.1 million or $5.52 per diluted share. Non-GAAP earnings per diluted share, was the second highest annual diluted earnings per share in the company's history at $5.44 compared to $4.48 in 2016.

Turning to our balance sheet and cash flow, as a result of our higher average selling prices and shipment levels, along with our strong gross profit margin and effective working capital management, we generated $399 million in cash from operating activities during 2017.

We invested $161.6 million in capital expenditures, -- $37.8 million for acquisition, repurchased $25 million worth of our common stock at an average cost of $74.27 per share, and paid $132 million in dividends to our stockholders, while also paying down debt.

At December 31, 2017, our total debt outstanding was $1.91 billion, resulting in a net debt to total capital ratio of 27.2%. Our net debt to EBITDA multiple was 2.0x in line with our targeted financial profile. As of the end of the fourth quarter, we had over $900 million available on our $1.5 billion of revolving credit facility.

As for outlook, given the strong start to 2018, we are optimistic with regard to business activity levels and on pricing in the first quarter of 2018. We estimate that our console would be of 6% to 8% in the first quarter of 2018 compared to the fourth quarter of 2017.

Further, we expect our average selling price in the first quarter of 2018 will be up 46% compared to the fourth quarter of 2017, as recent increases in metal pricing have been supported thus far. As a result, we currently expect earnings per diluted share will be in the range of $1.97 to $2 for the first quarter of 2018.

In closing, we are very pleased with our overall financial and operational performance in 2017, which is directly attributable to outstanding execution by our managers in the field. Our strong balance sheet provides us the foundation to continue executing our growth and stockholder return activity.

Our repurchase of $25 million of our common stock during the fourth quarter of 2017, and the 11.1% increase in our quarterly dividend affected in the first quarter of 2018 reflect the confidence on our Board and management team have in our outlook and ability to execute in the current favorable environment for both demand and pricing.

That concludes our prepared remarks. Thank you for your attention and at this time, we would like to open the call up to questions.

Operator?.

[Operator Instructions] Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question is from Chris Terry from Deutsche Bank. Please go ahead..

Hi guys. Thanks for taking my questions, well done on a solid result. First question I had is just on the CapEx, I think you said $225 for 2018.

You able to talk through the different growth projects and how that, how that CapEx is expected to be split?.

Yes. As far as our growth initiative of the $225 million, that we reported about 59% of that or $132 million is in growth related initiatives..

And that's made up of quite a few different projects, Chris. We've got a lot of its based on growth through new value-added processing equipment, so we can expand our capabilities in various of our existing operations. But as many different projects for us or different -- we don't have $100 million dollar individual CapEx projects.

So it's quite a bit spread across our company..

Yeah, Chris, this was Jim. And then a lot of those dollars go into new operation, so we can get closer to our customers. As we've said before on other calls, our customers are asking us to do a lot more and sometimes we need to expand our locations are actually going to build a brand in new location closer to them.

As Karla mentioned, lot of, lot of our higher technology, better tolerance equipment that we're adding. So there's a lot of big project, a lot of smaller projects as Gregg said 59% of that 224 was, what we would consider growth in the rest was kind of maintenance, replacement..

Okay. Sure. And then just on the M&A outlook, you commented on that a little bit before, but given that the pricing backdrop and the overall sector it seems quite strong. Can you just comment on the ability to actually execute deals at the moment, I assume companies not really willing going to sell given the positive environment..

Well, I don't know about that, our activity, okay is actually picked up her in 2018, as compared to 2017. So obviously, there is, there is some move on sellers' parts to get themselves lined up with the potential acquirer.

So our activities better there, that doesn't mean we're going to be knocking home runs out, we have to take a look at each one on its own merits, look at your profitability, management teams and our cultures, et cetera, et cetera. But from an activity point of view, we're actually encouraged by what we've since first year..

Okay, thanks. And then the last one from me. Just on, I think you talked a bit about the stainless market, but can you just, can you elaborate on the outlook there. And then specifically on the plates market where there's been strong price rises.

I guess since the October timeframe of last year, can you chat through that market a little bit as well? Thanks..

You want to take first..

Yeah, on the carbon plate side, the demand is looking good, a lot of price increases have been coming through, all way up until yesterday there is a $50 of slight price increase based on demand, some input charges. The mills are busy.

The last figure I saw their capacity rating is in the 74.5% range which is good for them, I'm sure they'd like to be busier. One big uptick -- the mill actually has people on controlled order entry, which is a sign of good demand and in some supply issues. So on the plate demand side; it's better than it was..

Chris, a very similar story on the stainless side, demand we saw it all through 2017, we've seen demand strengthened and lead times have moved out from 6 to 8 weeks, to about 8 to 10 weeks. The January increase seems to have support, there seems to be more pricing discipline in the market based on the strengthening demand.

So the outlook, there is very positive..

Our next question is from Martin Englert from Jefferies. Please go ahead..

Hi, good morning everyone and congratulations on the strong results there. One is, are you able to discuss what your 2017 tolling volumes were? And how that's changed maybe from the previous year, as well as the changes in participation within carbon and aluminum and how you may have grown some market share there..

So, on the tolling business, our tons sold and we've said this for few years now. We actually processed more tons in our tolling businesses than we sell our tons sold for the rest of the company. So it's a substantial amount of volume that we're handling there.

We've seen that with the investments we've made to grow our capacity in both carbon and aluminum processing, in our tolling businesses. We do see those tons continue to increase year-over-year. We are seeing a bit more of a mixed shift to aluminum from carbon but the aluminum tolling that we've had has been a new business for us.

So we didn't lose carbon business and have the aluminum in place of that. So we are seeing that aluminum tolling business continue to grow for us. As we said, we've made some recent investments there.

And based on discussions, we expect the aluminum business to continue to improve at the same time that the carbon steel processing is still very important for us, and we continue to see solid business out of the carbon side as well..

The new plant that we built in Kentucky was specifically brought onboard because of aluminum usage in those particular areas. So our customers asked this to be closer to them, which we've done. I think it's working -- it's running at capacity wise, Jim. About 50%. So we've got a ways to go there but we've got strong backlog for that.

So, but we haven't seen much of a drop off on our carbon steel usage through our total pricing -- operations -- other than the fact that some of the builds have had some outages and what not. But on a same store basis regular volume basis, we really haven't seen a drop in our carbon steel.

But we've seen vast improvement in our aluminum processing so far..

Okay, excellent. Thanks for all the detail there. And if I could, one other. Maybe if you could provide some comments regarding the company's leverage to non-residential construction, infrastructure, recalling some of the prior acquisitions such as P&A group and others that may have expanded capabilities since the last sub cycle..

Yes, this is Jim. We're seeing nice demand. It's kind of a slow burn up over the last two or three years. We've got a nice gradual increase in non-residential construction. We anticipate that to continue through 2018. We still have a long way to go to -- back to the top, which is probably 2006, 2008 timeframe.

And if we does get up there, we're well positioned to take on additional work without adding a lot of things other than probably some couple of bodies, but our brick and mortar and the equipment is -- we're in a good shape there and we've continued to upgrade the throughout the recession. So we're in good shape with that..

Roughly about a third of our business is in the non-residential construction, and that also includes infrastructure. So it's a big part of mix. And we have had as Jim just pointed out, some steady improvement over the past two or three years.

But we've got, as Jim said, we've got equipment in place, facilities in place, brick and mortar, et cetera, et cetera and then we can take on a lot more tonnage and add very little expense to our bottom line..

Where do you think the non-resi infrastructure was as a percentage of overall sales during the last sub cycle?.

Yes, it's hard for us to tell because of our customer base and where product is going. So we kind of look at our product mix and just the businesses we have out there. But as Gregg said, we generally think it's about a third of our business on a dollar -- percent of revenue dollars. We really can't get much more granular than that..

Okay..

If you move out non-residential construction and infrastructure growing, it's just -- it's the largest consumer of carbon steel products of any industry in the country. So it drives all the carbon steel products. And with that, generally we see price increases, because demand is so much stronger in all the different products..

Our next question is from Novid Rassouli from Cowen & Company. Please go ahead..

Good morning, Gregg, Karla, Jim and Bill. Congrats on the strong results. Good morning, sticking with non-res, can you just give us a sense of how things are tracking relative to this time last year.

And does the story remain kind of the same gradual incremental growth but nothing kind of dramatic or off the charts without some sort of action from the current administration..

Yes, I agree with that. It feels about the same as we did last year. It's incrementally better. It's positive. We're getting the quotes we think we earned. As we've said in the past, we're not that guy that does 40, 50-storey building, we are the guys who does the four story assisted living home or the college campus expansion. That's our sweet spot.

And that's what we continue to see. That's what we continue to get. We guess drive, we know, when you come back a recession, the customer is going to ask us to do different things. We invested in the value added equipment then. And as they come online, we're able to do more for them, which helps our bottom line.

So yes, I agree with your assessment of -- kind of feels like last year at a nice gradual pace off..

We were pretty optimistic and certainly it would be very, very helpful if the administrative stuff got in bed and started throwing some cash at him, given the private sector do invest as well. But that would have a very, very positive impact on us.

We've all been waiting for that for about a year and hopefully that will be -- we'll see something happen, that we can actually put our fingers on it in the next few months. But nonetheless, that would have a very positive impact, but as it is today, as we're sitting in this room.

Some of the most profitable companies we have in the corporation are committed to the non-residential construction market..

Got it. Very helpful. And then switching gears towards gas side, I am just wondering, if you guys can be a little bit more specific with respect to the -- maybe the products that you are seeing kind of the quoting and overall activity picking up forward.

If there is any standout, if it's across the board -- just try to get a sense of how this kind of recovery that began in 2017 is starting to look as we get further along. Thank you..

Yeah. I can -- it's kind of across the board. We have to remember -- we're not in line pipe or OCTG, those are the two big heavy hitters that get a lot of attention. We're in the drilling and the completion of it. And we've got companies that do a lot in completion and then a lot in drilling and everything in between.

So the products that are doing well so far have been mostly on the drilling side, but we are seeing more and more activity in the completion side.

So it's every -- its product, everything from heavy wall alloy tubing to alloy bars to a lot of different higher alloys, higher price material that goes into everything from drill collars to Christmas trees to pump jacks..

Primary alloys are in bottom line on the carbon steel end..

Our next question is from Phil Gibbs from KeyBanc Capital Markets. Please go ahead..

Good morning. A question was on the operating expenses. 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 as bonus accruals because you guys had a great year.

But can you talk about the baseline operating expense environment excluding what the 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?.

Hi, 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 up and things. But overall because we do have in the fourth quarter, holiday pay during that quarter. So even there we're not shipping as much. We're still on paying our employees for the holidays.

So that always affects 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 passed, that's part of what we charge our customers for, that's one of the services we'll provide, its delivering our product to them.

And the majority of our delivery is done on our own trucks, so with our drivers you know that our employees. So I think we're not seeing the squeeze that you hear from some other companies in our industry or outsourcing of more to third parties.

But certainly fuelling some of those items are up, but again in our model, we try to pass that through to our customers. So it's the SG&A line, 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 the Q1, Q2 of last year, those are probably better normal type of SG&A run rate. We do, we did again into 2018, as we have done consistently is provide wage increases to our employees.

So you should expect our Q1, 2018 our quarterly run rate in 2018 to be a bit higher than in 2017, just because of the inflationary factors related to wage increases, healthcare increases, et cetera..

Okay. That's helpful. I noticed in your, I think your non-ferrous -- you had talked about some of the business that you're setting up outside the US, I think in Korea and maybe China. I know semiconductor spending, I think we've talked in the past, could be extremely volatile, can be very strong and 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, what gives you confidence that you're making at the right time, given where the cycle is?.

Yes, 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 US 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, so 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, 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 that operation..

Basically in South Korea, we've been there as you pointed out, about 15 years, but we've basically doubling the size of our production capacity there. Okay. So it's a good investment but its paying dividends as we speak and I think we're putting the money and add things right time..

Are these are these for new customers or existing customers? I'm just trying to gauge the pull?.

Both, for some major customers that are expanding their operations and there are 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 we're talking about here?.

Some of that investment is the electro polish tubing that goes into the back in chamber industry. So it's not, it's not all plate driven. And the major investments that we're talking about in Korea and China are more tubing oriented in play. That's stainless steel..

Our next question is from Aldo Mazzaferro from Mazzaferro Research. Please go ahead..

Hi, good morning. I have two questions Gregg, the first one on the pricing-; you mentioned your forecast on pricing 46% higher in the sequential quarter. And that will probably trail some of the indexes.

I'm wondering, are you able to pass on all the dollar for dollar increases that you're getting at this time on the ton?.

Yes, we will. But the main question is how much we can get capture like immediately upon announcement. As you know, the vast majority of our business in particular in carbon steel products okay is spot business. So we have very little contractual business on that.

So we literally take the position that when the announcements made, as Jim just mentioned $50 a ton on carbon steel plate was we would learned about yesterday, that $50 a ton, will be on our price books effective this morning. We will get with --our work average order size is little over 1,600 bucks per order.

So obviously we're doing business with the tremendous amount of job shops, smaller companies placing smaller orders and those companies, okay, whether you're charging them $1,600 or 1,650 bucks or 1,700, it's not that big of a deal. So we can get a lot of those price increases at times of announcement.

There are more sophisticated companies, the large Ag producers and what not; they recognize the fact that we've got three months on our floor, inventory position. And it's not likely that they're going a pay at time of announcement. But we will get it, okay, it's just a matter of; 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 why -- Aldo 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 what Gregg was talking about some of the mill increases that are effective in Q1, we already got in Q4 of, 2017.

So depending how you're coping us against the indexes out there, we've had a take that into consideration also..

Great. Yes, I'm just kind of thinking that you're always going to be trailing a little bit, right. So with the things we're seeing in the first quarter now in terms of announcements, means you probably going to have some catching up to do into the, into the second quarter towards it go.

But my bigger question is Gregg, do you think the market, do you think the steel market can take any more trade protection? I mean given the fact that we're facing some lower imports, now we got demand picking up, and you have President Trump with the section 232 potential in front of him, but other than big friendly countries and maybe semi-finished steel, what could you do without causing major disruption in the market.

I'm just wondering if you think he is going to do-- do you think the market have risk if he does nothing?.

Yes, let me tell you what I know about 232 cases. I don't know anything about regarding 232. I'm so confused by the son of a gun, most to go into effect in June, didn't go in June, suppose to effect in August, supposed to go -- 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 there going to be, they're going to continue to go down somewhat, not at the, probably at the percentage that they went down and 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 is 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 are barking up the wrong tree here. .

And Aldo, just one thing to add, regardless of what they're calling us, there is countries who are cheating. I mean, there are loans on the books and their flat out cheating and dumping product into the United States. That's a fact, whether we decide to enforce the laws that are already on the books or add new laws.

They are cheating and dumping product into the country..

Our next question from Phil Gibbs from KeyBanc Capital Markets. Please go ahead..

Yes. I think I just had a follow-up question on the LIFO. Karla, 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? Thanks..

Yeah. So we do have to make an estimate for the full year. So the $80 million of 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 time, prices go up and they go down.

But our $80 million -- we think does leave a little room for some fluctuations throughout the year. But overall, we expect 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 are of expenses 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 2017 to be what our expectations are for 2018. .

That's very helpful. Thank you..

And Phil, Sorry, I also remember that was -- our inventory cost on hand at December 31, 2017 which is our starting point. Because a time lag it doesn't -- did not reflect all the price increase announcements. So, some of the price increase LIFO affect will get in 2018 is based on Q4, 2017 pricing increases as well..

This concludes the question-and-answer session. I'd like to turn the floor back over to Mr. Mollins for any closing comments..

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 the stockholders for their continued support and commitment to Reliance. We look forward to a successful year ahead and have a great day. Thank you..

This concludes today's teleconference. Thank you again for your participation. You may disconnect your lines at this time..