Russel Metals Inc. (OTCPK:RUSMF) Q4 2021 Earnings Conference Call February 11, 2022 9:00 AM ET
Company Participants
Martin Juravsky – Executive Vice President, CFO & Secretary
John Reid – Director, President & Chief Executive Officer
Conference Call Participants
Michael Doumet – Scotiabank
Frederic Bastien – Raymond James
Devin Dodge – BMO Capital Markets
Michael Tupholme – TD Securities
Alex Jackson – RBC Capital Markets
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Operator
0:07 Good morning, ladies and gentlemen. And welcome to our 2021 Year End and Fourth Quarter Results Conference Call for Russel Metals. Today’s call will be hosted by Martin Juravsky, Executive Vice President and Chief Financial Officer; and Mr. John Reid, President and Chief Executive Officer of Russel Metals, Inc. Today’s presentation will be followed by a question-and-answer period. [Operator Instructions].
0:34 And I would now like to turn the meeting over to Martin Juravsky. Please go ahead, sir.
Martin Juravsky
0:40 Great, thanks operator. Appreciate it. Good morning everyone. I plan on providing an overview of the Q4 and full year 2021 results. If you want to follow along, we’ll be using the PowerPoint slides that are on our website and just go to the investor relations section. If you go to page 3, you can read our cautionary statements on forward-looking information. Before I go into detail, let me just put up context around 2021 for a second. The financial results were incredibly strong by any basis of measure, but equally as important for us, the results go beyond the financial performance and include accomplishments related to employee safety and engagement, customer service, social responsibility and giving back to our communities. He was very broad-based in terms of what we think we accomplished in 2021 and we were very proud of that on all fronts.
1:32 From a financial standpoint, the 2021 revenues were our highest ever achieved at a little over $4.2 billion. But more importantly, we translated that into record EBITDA earnings and return on capital. Our initiatives over the past 12 to 15 months, allowed us to benefit from the strong market conditions that we experienced last year, but they also put us in a really great position and a springboard going forward.
1:56 So now let’s turn to page 5, market conditions. The market continues to be very good across our various regions in Canada and the US, and even though there’s more inventory in the supply chain today than there was three to six months ago, it is still at a reasonable level. In addition, we saw price realizations actually increase in Q4 versus Q3. Steel prices and margins have recently declined but remain above historical average and we continue to remain optimistic on the overall business conditions that we’re seeing for business in 2022.
2:30 In terms of the reallocation of capital investments, this has really been a transformational change for us. When we look at Russel’s profile today is very different than it was 18 months ago and expect it will continue to evolve in the years ahead. As we have discussed before, the objectives behind the portfolio changes were to both enhance returns and reduce risk over a cycle.
2:56 There’s a few initiatives that we completed, main one, the OCTG/Line Pipe monetization is now done with about $300 million of capital permanently removed from that business. One item to note is that the structure that we use to monetize the Canadian businesses worked out exceptionally well, as not only did we repatriate a significant amount of cash, but we also retained an equity interest in the joint venture that has performed well. The equity interest has given us earnings upside, but also kept the joint ventures working capital volatility, which can be quite extreme off of our balance sheet.
3:31 Item two, capital reinvestment and value added projects, it’s a multi-year process for us. We are seeing very good results from the recent investments, and we’ll be adding a series of new project in 2022 and the additional years ahead. In total, our CapEx for 2021 was around $29 million and we expect this to grow to closer to $50 million in 2022, with an increase focus on additional value added equipment projects throughout our system.
4:01 The third item is the M&A funds. We closed Boyd acquisition at the end of November, and we were very pleased with how the people and business from Boyd Fit within Russel’s culture and platform, even though it’s relatively early their financial contribution to Russel is noticeable.
4:20 In terms of the capital structure flexibility, from a financial standpoint, we’re in really good shape. Typically during a market upswing, like we have seen over the past year, the higher cost of inventory would be placing pressure on our liquidity. In our case, we’ve transformed the business so dramatically that we’ve been able to easily manage through the higher cost of inventories and maintain a lot of dry powder to take advantage of potential opportunities going forward.
4:48 Cash flow was strong with $156 million in Q4, and $639 million for all 2021. Liquidity $495 million is very strong and the upgrade that we received recently by S&P and the initiation of investment credit rating by DBRS. Will further lower the cost of our bank debt under the recently extended bank credit facilities and just put a little bit of add around context for the benefits. The cost of our bank debt today is currently less than 2%.
5:19 If we go to our financial results on page 6, let me start with providing a couple of data points from an income statement perspective at the top of the page. Revenues of over $1.1 billion in Q4 were higher than Q3 and the total of $4.2 billion for 2021, as I said earlier was a record. In Q4 gross margins and earnings did moderate from the records that were set in Q3, but we’re still in very high by any historical basis of measure.
5:50 There were a few items of note in Q4, a couple of which were positive and couple of which were negative that I just want to bring out now before I go into some more detailed operating information. Couple positives, we did, as I mentioned earlier, Closed Boyd at the end of November. So we had the income from Boyd for one month, for the month of December. And it was a positive contributor to us notwithstanding around $2 million of transaction costs and the accounting treatment that were recorded in Q4.
6:21 The trademark joint venture as I mentioned earlier has done well and has been an earnings contributed to us and had a similar level of profitability in Q4, didn’t Q3. Stock-based compensation was a negative as it had a mark-to-market expensive $3 million in Q4 versus a recovery of $3 million in Q3 and that’s really just a reflection of the change in our share price, the increase in our share price during Q4.
6:46 Lastly, we had a $2.6 million pretax non-cash impairment for one of our Canadian energy units. This is the only item that we do an add back when we distinguish between adjusted and unadjusted results. From a cash flow perspective, we use $136 million due to an increase in working capital. This was a built in inventory within the service centers and steel distributor segments. It’s not so much on tonnage, it is more a reflection of the cost of inventory. There was also a seasonal dynamic in accounts receivable, which came down due to the lower sales volume and higher collections in December. There was $157 million Canadian use for the cap – of cash related to the Boyd acquisition. Most of the purchase price was related to tangible net assets with inventory of $56 million receivables, $54 million, property plant equipment of $39 million, less around $25 million of payables.
7:47 CapEx was $9 million for the quarter and is continuously modest, but as you said earlier, we’ll increase our CapEx going into 2022 and it should be closer to $50 million for the year 2022, with a continuing emphasis on more value added equipment. From a balance sheet perspective towards the bottom of the page. Our volumes went from net cash of $42 million at the end of September to net debt of $162 million at the end of December. The biggest item in this $200 million swing was the use of capital on the closing of the Boyd acquisition at the end of November.
8:25 Our liquidity of $495 million, which I mentioned before, it is very strong, and our credit metrics are in really good shape. Lastly, we’ve declared our quarterly dividend for $0.38 cents per share.
8:36 We shift to page 7 and talk a little bit more about each of the individual business segments. We’ll start with the service centers. They did exceptionally well in Q4. But yeah, revenues were up to $780 million in Q4, which is a bit of an increase from Q3 as demand remained strong. Tons were down due to the seasonal dynamic in December, which we typically see at that time of year. But some of that December dynamic was offset by the contribution of the Boyd volumes in the month.
9:09 Overall, Boyd should represent around 10% of our total service center volumes in a typical month and so it will be a meaning contributor for us. Average price realizations were up 6% in Q4 versus Q3. Margins came down from the 31% that we saw in Q3 to 26% in Q4, but they still remain well above historical averages both in percentage terms and dollar per ton terms.
9:37 Bottom line results for our service centers were another strong earnings quarter with EBIT of $109 million. In energy, we are seeing positive market sentiments as well as the impact from the removal of our OCTG/Line Pipe businesses. Our energy revenues are comparable in Q4 versus Q3, but we generated higher margins and earnings. I’ve used the cliche before, but it truly is doing more with less.
10:06 Our same store revenues from the field stores were up in Q4 versus Q3 and our energy margins of 27% were very strong effects slightly higher than those in our service center segments. This highlights the margin in earnings [Indiscernible], not to mention the volatility that was created by the now divested OCTG/Line Type businesses. Going forward, we expect the energy field stores to generate a similar marginal return profile for that of our service centers over a cycle.
10:36 Distributors had another very good quarter. The revenues were continuing to a comfortable level in Q4 versus Q3, but margins and earnings did moderate to change market conditions. That said the current margins and earnings remain above historical averages and the backlog of business is continuing to be realized into Q1 2022.
10:59 If we carry on to page 8, I want to show this inventory trends slide as a frame of reference around the business transformation that we’ve made over the last three years. If you look back to late 2018 and early 2019, we carried about a billion dollars of inventory but around half of it was energy as you see depicted in the red bar. Today, our energy business is closer to 12% of the total inventory position of about a billion dollars. So at the same time that we pull capital out of the energy we’ve reinvested in our other segments.
11:38 In the fourth quarter we added to the service centers with the Boyd acquisition, as I mentioned before, which is around $50 million of inventory, plus the inventory in both service centers and distributors built with the cost of inventory growth. This realignment has resulted in more effective and efficient capital utilization as we put our money into higher and better uses. In the service center segment, the increase is in dollar cost rather than tons as we continue to hold our inventory levels in check and focus on maintaining high inventory turns. I’d like to commend our business unit leaders for their exceptional and ongoing work in working capital management through this market upswing.
12:19 And to put a little bit of this in context, in 2018, we had a comparable amount of total revenues toward 2021 revenues, but almost doubled the earnings in 2021 versus 2018. In addition, between 2018 and 2021, we’ve grown the service center business through acquisitions and steel prices have more than doubled. But the total inventory is still only about a billion dollars, which is the same level that we saw in 2018. So as a result of a much higher profitability in 2021 versus 2018, and a really strong and continuing disciplined working capital management, that has really resulted in exceptional return on capital in 2021.
13:03 If we are to roll this chart forward, a couple of observations, one as steel prices moderate down, we expect to generate a fair amount of cash from the release of working capital that is tied up in higher cost inventory. As an example, you can see on this chart, our historical service centers and steel distributors, inventories were about $300 million lower in past periods than they are today. As we’ve said in the past, their businesses counter cyclical, and we do generate a lot of cash and working capital when the cycle moderates. The second item, as we think about this chart on a roll forward basis is we are continuing to look at opportunities to grow by acquisition.
13:48 So if we go to page 9, you can see the overall impact on capital utilization and returns, we benchmark ourselves against our competitors, we have generated top quartile returns over a cycle with an overall goal around 15% EBIT return, we have far exceeded that on average, and we far exceeded it in 2021. As you can see on the red line 2021 has been off the charts with year-to-date average of over 50% and, as I mentioned before, on the earlier chart, this is really a function of really strong discipline in terms of working capital management, at the same time that the cycle has had really strong results. So it wasn’t just a function of market conditions. It was the market conditions in combination with the working capital discipline that has been applied over the last period of time.
14:42 Equally as important to the percentage returns are that the Q4, we’re able to actually redeploy capital in effective ways. Our investment capitals now around $1.4 billion and we have additional flexibility to continue to explore other investment opportunities. That being said, we remain disciplined with respect to those opportunities and only pursue those that meet our financial and operating criteria.
15:06 So in closing, on behalf of John and other members of the management team, I would like to express our appreciation to everyone within the growing Russel family. I believe that we have demonstrated significant progress and results through 2021 and we look forward to advancing the business in the years ahead. That concludes my introductory remarks. So operator, if you can now open the line for questions that would be appreciated.
Question-and-Answer Session
Operator
15:30 Thank you, sir. [Operator Instructions] And your first question will be from Michael Doumet at Scotiabank. Please go ahead.
Michael Doumet
16:02 Hey, good morning, John and Martin. Congrats on the quarter and strong close to 2021.
Martin Juravsky
16:09 Thanks, Michael.
Michael Doumet
16:09 First question, can you provide some color on the build-up in inventories for steel distributor? And maybe your expectations on how quickly you can turn that inventory?
John Reid
16:26 Thanks, Michael. This is John. We did have a build-up in inventory and still the stream is predominantly in our Canadian Division through work, which does sell the vast majority in the back to back situation. So it’s pre-sold, the timing of coming into the docks with the backup in the port to create some of that bill, we anticipate the capital release. We’re starting to see it now and continue through Q1 Maybe in the first month of Q2, but we should see is pretty strong release there’s that’s now come in inventory turning into receivables. And so we think that’s just a bit of a phenomenon due to the backup of the pool.
Michael Doumet
17:08 Makes sense and maybe just a higher level question and this goes back to your page 9 Marty, obviously this goes without saying it’s been an incredible year for us. So naturally, I would think that the 2021 EPS is going to be a challenge to replicate. Some hoping maybe EPS, analysts here who have to provide some EPS forecasts, maybe just help us kind of think about the earnings power for Russel. I mean, historically, Russel’s return on investment capital has averaged about 15%. So maybe that’s a little higher now, given the changes you’ve made, particularly on the energy side, but the steel prices moderate here from their highs, should we think about, earnings kind of coming back towards something that’s more reflective of that 15% rule? It’s just any, any guidelines, that would be helpful?
Martin Juravsky
17:59 Sure, let me give, it’s a really good question and I think it goes to my comment earlier about the business does look very different today than it did a year, two years ago. And that’s not just a function of the steel market. That’s a function of the transformation that we’ve made. And so a couple of data points when you talk about the 15%, that’s actually closer to 20%, of what we’ve realized, on average over the last five or so years. That being said, the drag that went with the OCTG/Line Pipe business cost us about 300 basis points, so that 20% return would have been closer to 23%, if not for the drag of the OCTG/Line Pipe business. And then you layer on some of the additional initiatives that where we’ve deployed capital. We’ve done some value add – we’re doing more value add equipment, those projects are incredibly lucrative from a return perspective, the individually, they’ve got three-year type paybacks.
18:59 We did the Boyd acquisition, and we think we did that at a fair value is going to generate an appropriate return for us as well, given our metrics. So I think when we – using your data points historically, all other things being equal, the go forward returns should be better than the historical returns by a meaningful amount, given the changes that have taken place within the portfolio. Plus, we’re continuing to look at opportunities going forward. So the story isn’t completely written yet at this point in terms of changes that we’ve made to the portfolio.
Michael Doumet
19:35 That’s perfect. Thank you.
John Reid
19:38 Okay. Thanks, Michael.
Operator
19:39 Thank you. Next question will be from Frederic Bastien of Raymond James. Please go ahead.
Frederic Bastien
19:45 Hi, good morning, guys. As expected the margins on metal service and aside and still distributors came off their peak levels in Q4. But you noted and I also noted that there was a considerable improvement in the margins on the energy product side, you quoted 27%, which was considerably more than I was expecting, can you provide a bit more color there?
John Reid
20:14 Yeah, when we pulled out the OCTG/Line Pipe again, much lower margin business, we pull that out and you look at our energy field store business, it really looks and feels like our service centers. From a margin perspective, earnings perspective, inventory turns perspective, so manages capital a very Sunridge, our service centers. So again, as Martin said, we got actually maybe you got smaller there, but we’re doing more with less. And so again, that is going to be pretty consistent reflection with our service centers, given the given the cyclical nature of the steel business in the energy business. So we think that’s going to give us a more normalized earnings bandwidth over the cycle. And take out some of the volatility we would think an OCTG/Land Pipe.
Frederic Bastien
21:04 Okay. And then, I mean, your banner 2021 was pretty much, the result of very strong steel prices and all the good initiatives you had on the go, but energy products did not – was not a big contributor to that. So how’s your outlook for that particular business in 2022?
Martin Juravsky
21:28 Directionally positive. And frankly, we actually saw that during 2021, not in a step function change. But from the beginning of the year to the end of the year, there was a noticeable uptick, both in terms of top line and bottom line results for our field store businesses. And we’re seeing that trend continuing into 2022. And one of the things that was interesting for us is when we kind of compare 2021, with about $4.2 billion worth of revenues to 2018, which also had about $4.2 billion worth of revenues. In 2018. There was much significant, much more contribution of the energy part of the business. So one of the things that we’re expecting going forward is that energy did better during 2021, but there is still more upside associated with that business and we saw that with the progress during the year. So the run rate at the end of the year was better than the run rate at the beginning of the year. So notwithstanding the cycle that we always see in some of the – some parts of our business that really wasn’t kicking in all cylinders in 2021. So we’re expecting a better 2022 out of our energy business than we did in 2021.
Frederic Bastien
22:44 Okay, thanks. Thanks, Marty. Caught on to the inventory bill on the steel distributor side, can you confirm that is all presold, you’re not going to see any pressure from sort of the movement, the volatility you’ve seen in prices? And how quickly should we expect this, this inventory to be translated into sales?
John Reid
23:10 So it’s on the Canadian side, it’s 90 plus percent so back to back, we confirm selling prices on that. So the volatility is very, very low and that’s why is US is more transactional. They’re not the big user of capital, they’re – they’ve maintained their capital than their inventory levels, at historic levels during this. I think you’ll see during Q1, maybe a little bit of a lingering effect into April. But let’s turn back into cash. And that inventory level back in Lambert has been historically.
Frederic Bastien
23:43 Okay. Great. And John, have you, cheap prices have come off their highs, but plate continues to show relative strength and that’s helped restore the premium that plate has historically held over HRC what’s providing more support to plate than it does for sheet?
John Reid
24:07 I think sheet actually was overpriced and I think it’s probably overcorrected on the downturn just a little bit. Plate is holding very strong as demand is very strong. Right now if we plate products, we have seen some softness anticipate a little bit of soften and plate not as dramatic as the cheap version. But again, the lack of import and the domestic mills maintaining pretty full run right, right now at the mill level with what we’re saying and all the end-used markets that we use for big plate users. We feel pretty bullish that plate will continue to get back into balance as you mentioned, credit of plate pricing to [Indiscernible] probably come flatline. Maybe come up a little bit plate may come down a little bit. But overall we say it is pretty solid.
Frederic Bastien
24:56 Okay, good. Go ahead Martin.
Martin Juravsky
24:57 Yeah, sorry, just to refine one comment earlier. Just a little bit more information. When you’re asking about the distributors in the inventory and John was talking about the worst the Canadian part of our business where it’s really back to back and there’s just a timing dynamic attached to that with relatively low risk. That part of our inventory is about 70% of the inventory. So it’s the vast majority of where that inventory is and when you see the shifts from September to December in terms of steel inventories, excuse me, distributors inventories, that is really that part of the business? It’s so it’s relatively low risk.
Frederic Bastien
25:36 Okay, cool. Now we’re halfway through Q1. I mean, you had a stellar year. I think Q1 is still a from last year from a year ago is a relatively easy comp. But it’s going to get tougher and tougher any color you can provide us or guideposts you can provide us with respect to where you expect sales and perhaps margins to settle in Q2 and heading into Q2, sorry, in Q1 and heading into Q2?
John Reid
26:10 So those far navigate again, it’s going to be very comparable, maybe slightly better demand is stronger than we saw in Q1 of a year ago, barring some of the temporary interruptions that we’ve seen, buyers are waiting to the last minute trying to make sure they’re getting to the bottom of pricing. You see, you compete right into the industry commentary. Some of the articles are talking about buying strikes, which typically means are over inventory. But you’ve also had the interruptions from Omicron, where plants have been shut down temporarily for four or five days. You’ve seen other delays just for lack of employment there and then pretty severe weather events from really from the southern US all the way through Canada, including what’s going on in BC. So those are temporary interruptions, and we think those will settle out so that caused some pent up demand there as well.
27:02 But overall, we feel like Q1 would be very comparable. But again, I think that the earnings potential and their revenue potential will probably be a bit stronger.
Frederic Bastien
27:14 Thanks for that color. I’ll pass it on to others. Thanks
Martin Juravsky
27:17 Thanks, Fred.
Operator
27:18 Thank you. And your next question will be from Devin Dodge at BMO Capital Markets. Please go ahead.
Devin Dodge
27:25 Thanks. Good morning. I wanted to start maybe with the dividend. Look at your balance sheet. Marty, I’d agree with you, it seems like it’s in really great shape, you seem to be constructive on the outlook for the business in 2022. Now, in the past, I think Russel’s targeted a payout ratio of around 80% over the cycle. Now, should we be expecting Russel to start, bumping up the dividend? Is there a willingness to do that? Or should we be recalibrating maybe to another target for shareholder distributions?
Martin Juravsky
27:58 Our focus right now is keeping our financial flexibility, so that we can be opportunistic with situations that present themselves. That’s how we think about our capital structure right now. It’s obviously a cyclical business, and sometimes the best opportunities are when the cycle turns down. And so we want to make sure that we have really good flexibility to take advantage of opportunities that present themselves. And if we don’t see the right opportunities in terms of M&A, then we’ll reconsider capital return scenarios at that point. But right now, our focus is really about maintaining our dry powder, keeping our flexibility and keeping our eyes open, to look at opportunities to generate appropriate returns on capital through growth opportunities.
Devin Dodge
28:49 Okay, thanks for that. You mentioned M&A like a few times already included on the last answer, or just can you comment on how that M&A pipeline looks right now? And can you give, give us a sense, what seller refutations are like, and if that bid ask spread is kind of widened out are given some of the strong profits across the sector in 2021?
Martin Juravsky
29:14 Well, there’s activity that is out there. And so we are seeing a deal flow, we’re seeing deal flow through 2021. And we’re seeing deal flow and opportunities in early 2022. That being said, we are extremely selective. And in spite of, you know, a fair number of opportunities that we looked at in 2021, we found one that meet our – that met our criteria and met the vendors expectations as well. So there’s a lot of dancing that takes place in order to find those right opportunities. So it’s hard to handicap exactly how things will shake out other than we are seeing deal flow. We saw deal flow last year, we’re continuing to see it this year. So we are optimistic that we will find opportunities, but we’re not driven to do something for the sake of doing it. It has to meet our criteria.
Devin Dodge
30:06 Okay, makes sense. Thanks for that. I just kind of ties into one of John’s answers earlier, but typically, in markets where steel prices are falling, or at least look vulnerable for a pullback, I think some of your smaller service center competitors, push hard to kind of lower their inventory position. The cycle is obviously a little bit different for a lot of reasons. But can you share with us what you’re seeing on the competitive front, for the service center business as we think about industry conditions for 2022?
John Reid
30:41 Sure, and really, you kind of hit on something there, this is a very different cycle. Remember going through 2021, that was really service centers were extremely thin on inventory had a hard time getting inventory. Going into Q4, we saw that start to rebound and people get to more historical levels for their inventory. So in a traditional downturn or historical downturn, we’ve seen these big inventory closes and the system those are not there right now that we’re seeing broad base across the board. So inventory levels are at a very, very reasonable turn level. So we’re not seeing as much pressure they’re reducing some of the service centers, there may be some around there apprised inventory and that’ll catch up in time. So there’ll be some short-term inventory price pressure. But we don’t see it as we did if you go back to the eight or nine period, where everybody was sitting on extended inventory and having to work through it so we’re not seeing that kind of pressure that we’ve seen in the past.
Devin Dodge
31:46 Okay, thanks for that. And the just one, last quick one. Marty, are you able to frame those there’s a lot of – there’s a lot of moving pieces on the on the net pricing basket, that you guys kind of sell into just can you frame how selling prices in January have compared to last year either relative to keep or average or year-over-year basis or however you want to frame it just any, any color there?
Martin Juravsky
32:09 Sure within service centers, our price realizations have held for the last number of months on an average basis, obviously different products to moving in different directions. But if you look across portfolio, it’s held for a number of months and so the margin compression that we’ve talked about in the moderation that we’ve talked about, that’s really a function of prices we’re holding. But the higher cost inventory that’s kind of takes a while to roll through the system, that was flowing into cost to goods sold. So that was sort of the dynamic of revenues were going sideways, the costs were coming up because the lag effect of flows through and that’s where the, the margin moderation was kicking in.
Devin Dodge
32:57 Okay, thanks for that. I’ll turn it over.
Martin Juravsky
32:59 Okay, thanks, Devin.
Operator
32:59 Thank you. Next question will be from Michael Tupholme at TD Securities. Please go ahead.
Michael Tupholme
33:08 Thanks. Good morning. Maybe just to pick up on that last question that you just addressed. Marty, are we now in the fourth quarter were you – were you sort of in an equilibrium as it relates to the higher costs flowing in and the margins that was generating in service centers? Or is this – is that still play out further in the first quarter, such that we should be thinking about some further margin pressures, and you’re obviously still well above our averages in given the fourth quarter in service center. So just trying to look at how we should think about that margin trending going forward here in the near term.
Martin Juravsky
33:44 Yeah. Your analysis is correct. If there is a lag effect of how that all flows through, as markets are moving through and not to be overly simplistic, but prices that are in the market take a while before they show up in our inventory and then they show up in our inventory before they show up in our cost of goods sold and then we have different timing dynamics about that lead time between Canada and the US. So by definition, when you see posted rates for steel prices, that doesn’t flow all the way through on day one. So there’s that lag effect, which basically means some of that price – steel price compression that we’ve seen over the last little bit, that won’t be flowing into our cost of goods sold in a meaningful way for a couple of months and it will be coming in in phases into the US first and then in Canada second. So that migration in terms of costs, they’ll start coming down over the next two to four months. All other things being equal.
Michael Tupholme
34:48 Okay, that’s helpful, and it feels like, or it seems like there’s sort of some different dynamics playing out with respect to margins across the various segments. So I think generally speaking, what you just described should sort of apply across the business. But obviously, there are different products in different segments in your, in the in the way the steel distributors segment works with respect to bringing some product, in sometimes from overseas, there’s different dynamics, I’m just wondering, as we look at the margin profile in both energy products, and steel distributors, any commentary you can provide around how to think about the progression there used to be what you just described in service centers in the near term.
John Reid
35:36 Service centers and steel distributors will move very similar. You’ll see the similar pricing dynamic, they’ll come off a little bit more and more closer to historical levels, probably and distributors. And when you look at energy, keep in mind that 2021 was not a banner year, things are starting to improve, rig count improving, oil prices also improving. So they’re actually going to see some margin improvement, we think in 2022. And so we saw that in the fourth quarter, we think we’ll continue to see that in first and second quarter. Again, all things remaining flat where they are today.
Michael Tupholme
36:14 Okay, I’ll put in and just – just to clarify that on your comments on – on energy, John, I get year-over-year improvement for full year 2022 versus 2021 because earlier in the year and ’21, if the margins were not particularly robust relative to what you just did in the fourth quarter, but you think we can see some further margin improvement in energy products in the early part of 2022, versus what you just did in the fourth quarter of 21? Is that what I’m understanding?
John Reid
36:46 There’s there could be some beginning to be modest. There could be some and again, keep in mind as we flushed out now, the OCTG/Line Pipe was predominantly done in Q4. So it should be similar modestly up going forward.
Michael Tupholme
37:01 Okay, that’s helpful. Thank you. You mentioned Marty a couple times the CapEx expectation for 2022, going up to about $50 million. The change versus the $29 million in 2021. Is that entirely driven by investments in value-added processing equipment projects or is there anything else going on there?
Martin Juravsky
37:25 Yes. It’s what you said it’s really our discretion – it’s all discretionary and increment is all associated with all virtually all related to projects that have attractive return profiles catch them.
Michael Tupholme
37:39 Okay, perfect. And just for, I mean, I know if we can look at the changing CapEx to get a sense for this, but certainly sounds like heavier investment in value added processing in 2022. Can you just give a bit of background there? I mean, I know this has been a strategic priority for the company for a long time. But what sort of how do we explain sort of the ramp up, are there just it a function of balance sheet is it, because just understand sort of why now, that sort of acceleration.
Martin Juravsky
38:17 It’s not a function of the balance sheet, we’ve, I think been consistent with value added investing, investing and value added equipment has been a core part of our strategy. And it doesn’t happen with the flick of a switch. And so a lot of the projects that are coming to the table in 2022, we’re in the planning stage in 2021, in 2020, so there – it takes a while for them to come to the table. And so it’s really a function of we see some good opportunities and some of them are just becoming available this year, in terms of when all the planning makes sense. So it’s really not driven by anything other than what is the right commercial time to be doing those sorts of projects. But it is a multiyear journey for us. So this is not something that is new for 2022. It’s just, we found more projects that are making sense for this year and the timing comes together. But we’ve been doing value added projects for several years now. And so this is just and if we kind of roll past 2022. Mike, we’re probably going to see some additional investments continuing in 2023 and 2024 as well. So this isn’t just a one-year phenomenon for us in terms of identifying opportunities, on value-added equipments.
Michael Tupholme
39:37 Perfect. Can you comment on – on anything you’re seeing in terms of wage inflationary pressures and labor availability? What sort of an impact you think that those factors could have in 2022, and how you’re managing those factors.
John Reid
39:57 Because you’ve got the inflationary pressures out there and again, obviously, you’re seeing that come out with recent reports. So we’ll see some wage pressure, again, keep in mind, how much of our compensation, again, is variable. And so we’ve seen the strong variable component this year, as we look through, though, there will be some wage inflation there, there’ll be somewhat of a reset industry wide and then what the cost parameters are, again, we don’t see it being a huge, huge impact. But again, the wage pressure is there. It’s real. When we talk about finding employment, employees, those types of things. It is challenging marketplace right now. But we’ve been successful again, running those decentralized models, we have them out in the field. So they’re dealing with an individual basis along with our corporate HR group is working very diligently to make sure we’re fully staffed.
40:50 So you have that based on the specific geographic that you’re in. But overall, we’re not seeing enormous pressure in that area. It’s getting more targeted what we’re seeing pressure. And so we’re not having problems filling our staffing requirements at this point in time.
Michael Tupholme
41:08 Okay, that’s helpful. I’ll get back in the queue. Thank you.
Martin Juravsky
41:11 Great, thanks, Mike.
Operator
41:13 Thank you. And your next question will be from [Indiscernible] at BMO. Please go ahead.
Unidentified Analyst
41:18 Hey, good morning. I just wonder if you could write any thoughts on their capital structure over the coming year, just recognizing your strong liquidity position and the fact the call putting another company have ’26 bonds that’s down next month? On your ’25 bonds are also called on October? So just any color on that would be very helpful. Thank you.
John Reid
41:37 Sure. I color on. You spoke a little too quickly there. I couldn’t quite follow what your question was.
Unidentified Analyst
41:43 Sure. Yeah. I was just wondering if you had any thoughts on the capital structure over the coming year. Just recognizing your strong liquidity position in your 2026 bonds that help rhenium steps down next month, and the 2025 bonds are callable in October?
John Reid
42:00 Right. As they mentioned to somebody who asked the question earlier in terms of our capital allocation, we like maintaining our flexibility and a dry powder. So we have no plans right now on changing anything in terms of our capital allocation. And so, you correct that those notes do step down in terms of recall premium next month and we haven’t made any decisions on what to do all that sense.
Unidentified Analyst
42:27 Understood, thank you very much.
John Reid
42:31 Great, thanks.
Operator
42:31 Thank you. [Operator Instructions] And your next question is from Alex Jackson at RBC Capital Markets, please go ahead.
Alex Jackson
42:46 Yeah, Morning, guys. Most of might have been asked, but just curious, in terms of the steel distributors segment. What’s visibility like right now for ’22? Like, are you still seeing those opportunities that you had in ’21, in terms of, you know, generating strong margins and strong volumes?
John Reid
43:06 Because the volume, the volumes haven’t changed a lot. Margins were again, predominantly from the US side, we’ll see some compression margin, we’re pretty stable on the Canadian side. So again, we’ll watch what the pricing does. Dynamics have shifted a little bit as to supply – in supply chain and where it’s coming from. But overall, again, demand is very, very stable for them.
Alex Jackson
43:33 Got it. Thanks.
John Reid
43:35 Thanks, Alex
Operator
43:36 Thank you. Next is a follow up from Michael Tupholme at TD Bank — I’m sorry, TD Securities. Please go ahead.
Michael Tupholme
43:43 Thanks. Yeah, just two follow ups. First off in the outlook in the release, when talking about improved availability of steel continuing to 2022. You do note though, there are still some constraints, specifically COVID related staffing constraints, but also transportation issues, the kind of transportation issues is that reflective of what we’re seeing just sort of recently now, in the last few weeks here? Or is this something broader that you’re referring to?
John Reid
44:20 A couple, you have got transitory issues, it’s in recent weeks that I think will obviously abate and sometime in the future. But you’ve also got the frayed issues with the cost of freight coming in from overseas are shipping. And so those costs have been plated. And so we can pass those through typically. But that does occasionally have some strain on the lead times that the box for their issues unloading. So it’s taking a little longer to get material that has in the past. So that was our primary pointing.
Michael Tupholme
44:53 Okay, that’s helpful things. And then secondly, wanted to go back to something, I think you mentioned earlier on the call, Marty, if I caught this question, I thought I heard you say that you may not be done with portfolio changes. And I just want to clarify, I think you’re also talking about M&A as part of that comment. So is this a comment about potentially seeing sort of more transformational changes like you undertook with respect to getting out of OCTG/Line Pipe and reassessing the overall business in the portfolio? In that sense, are you are you more talking about growing the business through M&A? I’m just trying to understand sort of what the comment was there?
Martin Juravsky
45:34 Yeah. Thanks, Mike. Yeah, actually, that’s a good question. Good clarification. It’s the ladder. It’s — we’re – we’re not looking at hiving anything off. That was done last year with OCTG/Line Pipe, and we’re done with that exercise. So this is more about growing within our existing portfolios.
Frederic Bastien
45:54 Okay, that’s helpful. Thanks.
Martin Juravsky
45:57 Okay. Thank you.
Operator
45:59 Thank you. And at this time, Mr. Juravsky, we have no further questions. Please proceed.
Martin Juravsky
46:03 Great. Thank you, operator. And thank you, everybody for joining our call today. We very much appreciated if you have any follow up questions, just feel free to reach out at any time. Otherwise, we look forward to staying in touch during the quarter and we’ll touch base with everybody soon. Thank you.
Operator
46:22 Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
Martin Juravsky
4:09 Okay, thanks, operator.
Operator
4:10 You’re welcome.
Martin Juravsky
4:12 Bye bye.
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