Reliance Steel & Aluminum Co (RS) Q3 2021 Earnings Call Transcript

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Reliance Steel & Aluminum Co (RS 0.02%)
Q3 2021 Earnings Call
Oct 28, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Reliance Steel & Aluminum Company Third Quarter 2021 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Madeleine Crane, Investor Relations. Thank you. You may begin.

Madeleine Crane -- Investor Relations

Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's third quarter 2021 financial results. I'm joined by Jim Hoffman, CEO; Karla Lewis, President; and Arthur Ajemyan, Vice President and CFO. A recording of this call will be posted on the Investors section of our website at investor.rsac.com. The press release and the information on this call may contain certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors, including the impacts of the COVID-19 pandemic and related economic conditions on our future operations, which may not be under the company's control and may cause the actual results performance or achievement of the company to be materially different from the results, performance or other expectations implied by these forward-looking statements.

These factors include, but are not limited to, those factors disclosed in the company's annual report on Form 10-K for the year ended December 31, 2020, under the caption Risk Factors, disclosures in our press release this morning, and other documents Reliance files or furnishes with the Securities and Exchange Commission. The press release and the information on this call speak only as of today's date, and the company disclaims any duty to update the information provided therein and herein. I will now turn the call over to Jim Hoffman, CEO of Reliance.

James D. Hoffman -- Chief Executive Officer

Good morning, everyone, and thank you for joining us today to discuss our third quarter 2021 financial results. I will begin with a high-level overview of our third quarter performance and capital allocation priorities. Karla will then speak to our operating results and demand trends by end market. And Arthur will conclude with a review of our third quarter 2021 financials. I continue to be inspired by the outstanding operational performance by my colleagues throughout the Reliance family of companies. Our resilient business model favorable metals pricing trends and excellent execution combined to produce another quarter of record-setting financial results. Beyond execution of our business model, operational excellence includes our top priority of ensuring the health and safety of all of our Reliance colleagues, and I'd like to extend my gratitude to each and every one of them for their unwavering commitment to operating safely despite the many challenges that have persisted during the ongoing pandemic. I would especially like to recognize our teams that were directly impacted by Hurricane Ida last month. While Ida had a minimal impact on our operations, some of our colleagues were impacted personally. We're very happy that everyone is safe and that our employee-funded and company match program, Reliance Cares was available to support those who are impacted and in need of assistance. Reliance Cares is an inspirational example of how the Reliance family of companies come together and meaningfully take care of each other. Turning to our results.

The trends of strengthening metals pricing persisted through the third quarter, which featured multiple mill price increases, most notably for carbon and stainless steel products. The favorable pricing environment, along with fundamentally strong underlying demand in many of the key end markets we serve drove record quarterly net sales of $3.85 billion. In addition, strict pricing discipline by our managers in the field helped us generate a strong gross profit margin of 31.5%, which, when combined with our record sales, resulted in a record quarterly gross profit dollars of $1.21 billion in the third quarter of 2021. Despite various supply disruptions and continued increases in metals pricing that drove LIFO expenses of $262.5 million in the third quarter, our record quarterly net sales, along with record gross profit dollars and our continued focus on expense control led to the third consecutive quarter of record quarterly pre-tax income of $532.6 million. As a result, our earnings per diluted share of $6.15 were also a record, representing an increase of 21.1% from our record EPS achieved in the prior quarter and substantially exceeded both our guidance and analyst consensus.

We attribute this performance to our highly resilient business model, which is strategically designed to perform throughout changing macroeconomic circumstances. First, we are highly diversified by end markets, products and geographies. Second, our decentralized structure leaves the decision-making and resources close to the end customers. We rely on our managers in the field to appropriately price the value of the products and services we provide, which is particularly important in times of tight metal supply and volatile pricing. In this localized and entrepreneurial environment, our focus on small order sizes with quick turnaround has also proven particularly effective. Further, our ability to purchase inventory in the spot market through our long-standing, strong relationships with our domestic mills coupled with our unique ability to cross-sell inventory among the family of companies allows us to source the metal we need despite tight supply. We were pleased our inventory turn rate for the third quarter came in just below our companywide goal, which indicates that our inventory is properly balanced with current demand levels as we continue to secure the raw materials we need to meet customer demand.

Third, our significant investment in organic growth and innovative technology has significantly expanded our value-added processing capabilities, empowering us to focus on higher quality high-margin business and enabling us to increase our estimated sustainable gross profit margin range. To expand on that last point, I'd like to emphasize that the strong cash flow generation our model provides fuels our flexible and dynamic capital allocation strategy that supports concurrent investments in growth and stockholder return activities. We believe that it is our resilient business model and our execution of our capital allocation strategy that sets Reliance apart. We estimate that approximately half of our $310 million capital expenditure budget this year will be directed toward new, innovative, value-added processing equipment, along with enhancements to existing equipment to strengthen our value proposition and overall service offerings. As I highlighted earlier, these investments helped support our increased sustainable gross profit margin range as they provide our managers in the field the ability to offer additional value to our customers.

As discussed last quarter, our 2021 capital expenditures will also be focused on opening new facilities as well as expanding, upgrading and maintaining existing operations, including renewable energy investments at many of our facilities. As our focus on growing the company is two-pronged, we also remain highly focused on M&A. On October 1st, we completed our acquisition of Merfish United, a leading master distributor of tubular building products in the U.S. The company is based in Massachusetts and services 47 states through 12 strategically located distribution centers. The Merfish acquisition aligns with our strategy of acquiring immediately accretive companies with strong management teams and significant customer, product and geographical diversification. The Merfish transaction is a bit unique, in that Merfish is not a traditional metal service center and yet the transaction is one of the larger acquisitions that we have completed in our history, as Merfish had approximately $600 million in annual net sales in the 12-month period ending September 30, 2021.

However, Merfish's broad product offerings expands Reliance's exposure into copper and plastic products among others, which Merfish sells to wholesale distribution customers in adjacent end markets in the commercial, residential, municipal and industrial building spaces. We expect Merfish will help position Reliance in the broader industrial distribution space as well as provide a platform for further growth in this area, both organically and through further acquisitions. During the third quarter of 2021, we also returned $174.7 million to our stockholders through the payment of $43.7 million in dividends and the repurchase of $131 million of Reliance common stock at an average cost of $147.89 per share. In the last five years, Reliance repurchased 11.7 million shares of our common stock at an average cost of $89.92 per share for a total of $1.05 billion. We are extremely pleased to have the capital and the flexibility to simultaneously focus on both growth and stockholder returns and expect to maintain our dynamic approach moving forward, remain prudent allocator of capital. Before I conclude, I'd like to announce that Reliance will be relocating our corporate headquarters from Los Angeles, California to Scottsdale, Arizona in the first half of 2022.

The Scottsdale office will serve as Reliance's new principal executive office and the company's senior corporate officers will have offices there. Reliance is a Delaware corporation operating through approximately 300 divisions and subsidiary locations in 40 states and 13 countries outside of the United States, and the relocation of Reliance's principal executive office to Scottsdale reflects our growth and expansion as well as our evaluation of post-pandemic business opportunities and related operating practicalities. We will, however, maintain a presence in Los Angeles with revamped and innovative office offerings that reflect and complement the redefined post-COVID workplace and meet the needs of our corporate and administrative colleagues who remain in California. In addition, I'd like to extend a warm welcome to our two new independent Board members, Dave Seeger and Frank Dellaquila. Dave has been a strategic and valued partner to Reliance for more than 30 years for his involvement in the metals industry, and Frank is a seasoned and respected public company senior executive and Chief Financial Officer. We look forward to benefiting from both of their unique perspectives, experience and expertise. With the addition of Dave and Frank, Reliance's Board consists of 12 members, 10 of whom are independent.

In summary, I am once again highly pleased to share our record-setting third quarter financial results and commend all of my colleagues for their hard work and unwavering focus during the quarter. despite the challenges of the ongoing pandemic, supply chain disruptions and tight labor markets and limited metal availability, we sustained our efforts to ensure that we continued to provide value customers with the products they need, often in 24 hours or less. At the same time, we also continued to successfully execute our growth strategy while generating strong earnings and returning value to our stockholders. As we look ahead, we look forward to remaining a key contributor to the value chain through the ongoing support of our colleagues, customers, suppliers and communities and remain confident that America is going to need Reliance to rebuild. Thank you for your time and attention today. I will now turn the call over to Karla to review our operating results and demand trends. Karla?

Karla R. Lewis -- President

Thanks, Jim, and good morning, everyone. I would like to begin by extending my heartfelt thanks to all of my colleagues within the Reliance family of companies for delivering another consecutive quarter of record performance. I'd also like to thank our suppliers for their continued support as well as our customers for their ongoing loyalty and trust in Reliance through these extraordinary times. I'll now turn to our third quarter operational performance. Once again, we believe that underlying demand was stronger than our third quarter 2021 shipment levels reflect. Our tons sold decreased 4.6% and from the second quarter, which was below our guidance of down one percent to up one percent, mainly due to more typical seasonality than we had anticipated combined with various supply chain issues. Reliance, our customers and our suppliers all continue to experience supply disruptions, including limited metal availability, coupled with labor shortages that temporarily slowed demand for metal in the third quarter, and we believe Reliance is well positioned to satisfy the pent-up demand in future periods.

While disruptive from a demand standpoint, limited metal availability in the market helped support ongoing metal price escalation during the third quarter for many of the products we sell most notably carbon and stainless steel products. Our average selling price per tons sold in the third quarter reached another all-time high of $2,862, an increase of 18.4% compared to the second quarter of 2021 and significantly in excess of our guidance of up seven percent to nine percent. There is speculation that certain carbon steel products, namely flat rolled, may be at or near their peak. I would like to remind you that only 11% of our sales are from hot-rolled coil and sheet. We continue to see strong pricing for many of the other carbon steel products. Stainless pricing remains very strong, and we are also seeing increased pricing for aluminum products. Our product diversity reduces pricing volatility on our earnings, and we expect continued strong average selling prices at Reliance into 2022. The favorable pricing environment, coupled with outstanding execution by our managers in the field, contributed to record quarterly gross profit dollars of $1.21 billion in the third quarter of 2021 and a strong gross profit margin of 31.5%. On a FIFO basis, which we believe better reflects our current operating performance, we achieved a record gross profit margin of 38.3% marking our third consecutive quarter of record FIFO gross profit margin.

We applaud our managers in the field for their unwavering effort, relentless focus on high-quality, high-margin business and effective implementation of price increases at the time of no announcement, which enabled us to capture an incremental margin benefit in excess of already strong levels, and further supporting these efforts, with the enhanced cooperation across our family of companies to ensure we meet our valued customers' needs as well as selectively servicing new business opportunities. I'll now turn to a high-level overview of our key end market trends on a sequential quarter basis. Demand for nonresidential construction, which includes infrastructure and is the largest end market we serve, remained at solid levels. Our third quarter tons sold were down slightly compared to second quarter shipments, but remain near pre-pandemic levels. We continued to experience solid quoting activity for projects in the areas of distribution and fulfillment centers, data processing and manufacturing facilities as well as utility infrastructure. Due to supply constraints and increased pricing, we also continue to see an uptick in smaller projects that can be completed quickly.

Given our healthy backlog, solid quoting activity, positive customer sentiment and favorable key industry indicators, we are optimistic nonresidential construction demand will continue to steadily improve through the remainder of 2021 and into 2022. Demand for the toll processing services Reliance provides to the automotive market fell slightly from second quarter levels due to normal seasonality as well as temporary shutdowns at certain automotive manufacturers due to the semiconductor chip shortage. Our recent investments, which include purchasing a new facility in Michigan and opening a new tolling facility in Indiana as well as our other greenfield tolling expansions in Kentucky and Texas have allowed us to perform well despite challenging market conditions by increasing our capacity to support our customers' increased transportation and storage needs. We are optimistic that underlying automotive demand is solid and will recover in 2022 as the impact of global microchip shortages on production levels in certain markets subside. Longer term, we are confident our toll processing business will remain strong, given the significant level of investments we are continuing to make to support our growth and innovation in this area. We continue to see new opportunities to expand our tolling presence for automotive, appliance, packaging and other end markets, some of which are already underway and will benefit us in 2022 and beyond.

Demand in heavy industry for both agricultural and construction equipment declined during the third quarter following exceptional growth during the second quarter from a combination of seasonal shutdowns at many customers, along with broad customer supply chain challenges and labor constraints. That said, third quarter shipments remained above pre-pandemic levels, and underlying demand remains strong, and we expect demand from the heavy equipment and manufacturing industry to be delayed, not lost, and improve in the quarters to come. Semiconductor demand during the third quarter remained strong. While our third quarter shipments were somewhat impacted by global supply chain issues, the semiconductor space remains one of our strongest end markets in 2021, and we expect this trend to continue well into 2022. With regard to aerospace, demand in commercial aerospace, which is roughly half of our aerospace exposure, was impacted by normal seasonal factors in the third quarter. Looking ahead, we expect demand in commercial aerospace to slowly improve throughout 2022 as build rates increase and excess inventory in the supply chain continues to decline.

Demand in the military, defense and space portions of our aerospace business remains solid with strong backlogs and exceeded our pre-pandemic shipment levels. We anticipate strong demand in the noncommercial aerospace market will continue into 2022. Finally, demand in the energy sector, which we define as mainly oil and natural gas, continue to slowly improve, supported by higher oil and natural gas prices. Looking ahead, we anticipate that increasing rig counts along with customer inventory replenishments will result in a modest improvement in demand levels into 2022. In summary, the first three quarters of 2021 were distinguished by consecutive quarters of record financial performance. And today, early in the fourth quarter of 2021, we see a positive landscape heading into 2022 with strong and improving underlying demand in most of the markets we serve, continued elevated metal pricing even if certain products may begin to decline and the best team in the industry. Our proven, resilient and opportunistic business model, along with our diversity, scale and solid long-term relationships with our suppliers and our customers have set us apart in dynamic markets before and positions us once again to optimize our performance and deliver strong results. I'll now turn the call over to Arthur, who will review our financial results. Thank you.

Arthur Ajemyan -- Chief Financial Officer & Vice President

Thanks, Karla. Good morning, everyone, and thank you for joining us. I'll start with our sales trends. Favorable metals pricing fueled by limited availability and solid demand trends in the vast majority of key end markets we serve resulted in record quarterly sales of $3.85 billion, up 12.5% from the second quarter of 2021 and up 84.5% from the third quarter of 2020. Strong pricing momentum contributed to the 18.4% increase in our average selling price per tons sold over the second quarter of 2021. In comparison to the same period of the prior year, our average selling price per tons sold was up 77.9% due to increases in metal prices, but the vast majority of the products we sell, notably carbon and stainless steel products. As Karla noted, Reliance has limited exposure to the more volatile and lower-margin hot-rolled coil and sheet products that made up only about 11% of our third quarter sales. While benchmark pricing for hot-rolled coil products was up over 275% from the third quarter of 2020, Reliance's average selling price per tons sold for the same period was up 77.9%.

This level of broad product diversification along with strong pricing discipline and significant investments in value-added processing capabilities have been instrumental in our ability to maintain both stable and industry-leading gross profit margins in both rising and falling price environment. These factors collectively resulted in record quarterly gross profit of $1.21 billion and a strong gross profit margin of 31.5% in the third quarter of 2021 despite including a significant LIFO charge. Our non-GAAP FIFO gross profit margin of 38.3% in the third quarter of 2021 was a record and exceeded the prior quarter by 80 basis points and the prior year period by 650 basis points. Please refer to our earnings release where we provide a reconciliation of LIFO to non-GAAP FIFO gross profit margin for each reported period. We incurred LIFO expense of $262.5 million in the third quarter of 2021 compared to $200 million in the second quarter of 2021. LIFO expense in effect reflects our cost of sales at current replacement costs and removes inventory gains from our results in an environment of rising metal costs and conversely, removes inventory losses from our results in times of declining metal costs. Our guidance for Q3 2021 assumed LIFO expense of $150 million based on our $600 million annual estimate. As a result of higher-than-anticipated costs for certain carbon and stainless steel products in the third quarter of 2021. We revised our 2021 annual LIFO expense estimate from $600 million to $750 million. Accordingly, we had to true up our third quarter 2021 LIFO expense by incurring an incremental charge of $112.5 million, which increased our total third quarter LIFO expense to $262.5 million.

Based on our revised annual LIFO expense estimate, we now project LIFO expense for the fourth quarter of 2021 to be $187.5 million or $2.21 per share and $750 million or $8.73 per share for the full year. As in prior years, we will true up to our actual annual LIFO expense calculation based on our on-hand inventory cost at the end of the year. As of today, the LIFO reserve on our balance sheet at the end of this year is expected to be $865.6 million based on our revised $750 million annual LIFO expense estimate. This provides $865.6 million available to benefit future period operating results, significantly mitigating the impact of declining metal prices on our gross profit and pre-tax income. Now turning to our expenses. Our third quarter SG&A expense increased $43.5 million or 7.7% compared to the second quarter of 2021, and increased $157.6 million or 35.1% compared to the prior year period. The bulk of the sequential and prior quarter increases were attributable to higher incentive-based compensation resulting from our record gross profit and pre-tax income levels. Additionally, inflation continued to contribute to increased variable expenses, most notably for fuel and freight as well as packaging costs.

Overall, our headcount increased slightly compared to both the second quarter of 2021 and the third quarter of 2020, but is nonetheless down approximately 11% from pre-pandemic levels at the end of the third quarter of 2019. As a reminder, approximately 65% of our total SG&A costs are people related. Our pre-tax income of $532.6 million in the third quarter of 2021 was the highest in our company's history. Our pre-tax income margin of 13.8% was also a record. Our effective income tax rate for the third quarter of 2021 was 25.5%, up from 22.6% in the third quarter of 2020, mainly due to higher profitability. We currently anticipate an effective income tax rate of 25.5% for the full year 2021. We generated record quarterly earnings per share of $6.15 in the third quarter of 2021 compared to $5.08 in the second quarter of 2021 and $1.51 in the third quarter of 2020. It's worth emphasizing again that our third quarter 2021 results were impacted by LIFO expense of $3.06 per share.

Turning now to our balance sheet and cash flow. Despite significantly higher working capital needs attributable to ongoing rising metal costs, our operations continue to fuel our cash flow. Our third quarter cash flow from operations was $142.2 million after servicing over $325 million in additional working capital requirements. As of September 30, 2021, our total debt outstanding was $1.66 billion with a net debt-to-EBITDA multiple of 0.6 times. We had no borrowings outstanding on our $1.5 billion revolving credit facility and had $638.4 million of cash on hand, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy, including funding our acquisition of Merfish United on October one and our record 2021 capex budget. I'll now turn to our outlook. We remain optimistic about business conditions in the current environment with solid or recovering underlying demand across most of the key end markets we serve. However, we expect factors impacting shipment levels in the third quarter of 2021, such as metal supply constraints, labor shortages, and other supply chain disruptions will continue to persist in the fourth quarter of 2021.

In addition, we anticipate demand will be impacted by normal seasonal factors including customer holiday-related shutdown and fewer shipping days in the fourth quarter compared to the third quarter. As such, we estimate tons sold will be down 5 percent to eight percent in the fourth quarter compared to the third quarter of 2021. We expect pricing for certain stainless and aluminum products to increase in the fourth quarter, offsetting the impact of declining prices for certain carbon steel products. Also, as metal prices at the beginning of the fourth quarter are higher than the average for the third quarter, we estimate our average selling price per ton sold for the fourth quarter of 2021 will be up by seven percent. Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $5.05 to $5.15 for the fourth quarter of 2021. In closing, we are extremely pleased with our record third quarter operational and financial performance against the backdrop of challenging market dynamics despite ongoing strong pricing and healthy demand trends.

Our record financial performance and strong cash flow enabled us to continue allocating capital to simultaneously invest in the growth of our business and return value to our stockholders. Thank you again to all of our colleagues in the field for your continued outstanding execution. That concludes our prepared remarks. Thank you for your attention. And at this time, we'd like to open the call up to questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Martin Englert with Seaport Research Partners. Please proceed with your question.

Martin Englert -- Seaport Research Partners -- Analyst

Hi. Good morning everyone.

Arthur Ajemyan -- Chief Financial Officer & Vice President

Hello, Mark.

Martin Englert -- Seaport Research Partners -- Analyst

Given Reliance's breadth across products and end markets, can you touch on some of the long lead time products where you're seeing some backlogs into end markets like construction or other leading indicator product lines? Are you getting -- I mean, in the prepared remarks, you provided a fair amount of commentary qualitatively on maybe how things are progressing into next year. But any sense of what this looks like on an overall demand environment, whether this is like close single digits or mid-single digit growth?

Karla R. Lewis -- President

Hi Martin, it's Karla. So I think it's really hard for us to tell because of the diversity of the products, as we talked about the end markets and also our business where we focus on our small order sizes with next-day delivery. So we don't have that much visibility, which is typical for us. But certainly, we're seeing certain products like carbon flat rolled is becoming a little more available than it had been, but it's still pretty difficult. There are a lot of different issues impacting the supply chain out there. And so metal continues to be tight in most products that we sell. Lead times continue to be out there extending for some products, decreasing for others. But overall, we think underlying demand continues to be really strong, and we expect that to help us and others as we go into 2022.

Martin Englert -- Seaport Research Partners -- Analyst

Okay. Thank you for the caller there. Across the product lines, where you're seeing elongated or extending lead times and where you're seeing some contraction?

Karla R. Lewis -- President

I mean, for the most part, we're seeing extended lead times for all the products. As I mentioned, carbon flat rolled is the one area where it's improved a bit recently, but still longer than what we've seen historically.

James D. Hoffman -- Chief Executive Officer

Yes. Martin, this is Jim. Just one other comment, tagging on to what Karla said that the most important thing is our customers are busy. And they're continuing to stay that way. Lead times, pricing, we don't control that. We just listen to our customers and provide values.

Martin Englert -- Seaport Research Partners -- Analyst

Okay. That's helpful. If I could, one last one there. Within the release, you did note that the chip shortage inhibiting auto production and activity there. But do you get the sense that the semiconductor shortage is reducing demand across other end markets, like heavy industrial equipments, yellow goods, green goods, that sort of thing?

Karla R. Lewis -- President

Yes. So we are certainly seeing the semiconductor chip shortage impact more than just the automotive industry. I think automotive has had the most coverage about it and maybe have been the most impacted. But we're also seeing in other end markets that we sell into. It's not just the semiconductor chips where there have been some supply shortages. Various different components are hard to get these days. So we're seeing impact across a lot of different customers of ours. But again, the underlying demand is strong. So we view that as positive for future periods on shipments, even though we're impacted a bit right now.

Martin Englert -- Seaport Research Partners -- Analyst

Okay. Thank you for all the detail there. Congratulations on the result, guidance and navigating the supply chain headwinds.

Karla R. Lewis -- President

Thank you very much.

James D. Hoffman -- Chief Executive Officer

Thank you.

Operator

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

Emily Chieng -- Goldman Sachs -- Analyst

Good morning, Jim. My first question is around sort of forward-looking guidance on shipments. I know there's usually a normal seasonal factor impact in the fourth quarter, and you mentioned fewer numbers of shipping days during the quarter. But can you perhaps highlight what the percentage impact from the various different buckets of labor, metal supply and supply chain disruptions could be impacting that number? And is there a way to think about which one of those three is sort of the gating hurdle here?

Karla R. Lewis -- President

Yes. Hi. So I think as we look into the fourth quarter, the first off, in the third quarter, which we just reported on, we -- when we gave our guidance for the third quarter at the end of the second quarter, we thought that we were going to have less seasonal shutdowns in Q3 than typical, that ended up not being the case. And we did see kind of the normal seasonal falloff in demand in Q3 versus Q2 even though we had thought that we wouldn't see as much because of the strong underlying demand. But we think because of all the different factors out there, labor, supply chain, logistics, et cetera, that we did end up with customers doing their normal shutdowns. So our volume guidance going into Q4 does reflect primarily just the normal seasonal trend going down. Since we saw it being more normal in Q3, that's what we're guiding to in Q4. We typically -- we know we have fewer shipping days because of certain holidays where our locations are shut down, but we never really know is what our customers are going to do.

And sometimes it will be the last minute, they decide to shut down for a week or two weeks or they only do two days. We can't quantify really the different elements that are impacting businesses or driving our customers' decisions. So our overall guidance was for a more typical Q4.

Emily Chieng -- Goldman Sachs -- Analyst

Got it. That's really helpful context there. And maybe just a follow-up around the Merfish acquisition. Congratulations on completing that one now. It's interesting to note that they do have a plastics and a little bit more of a copper exposure than what Reliance has in your existing portfolio. Can you maybe talk about your plans to perhaps grow that? Or how do you view those sort of incremental businesses that you've now acquired?

James D. Hoffman -- Chief Executive Officer

Yes. Emily, well, first and foremost, it's a really cool company. And we're glad we got to bring them to the family of companies. It's a little different, but it's still distribution, some different products. They go to market differently. And as you well know, we don't buy good companies and change the name and screw them up in any way. We like them for a reason. So we think this is a really good company. We have opportunities to perhaps do acquisitions. We'll see how that all works out. But they complement our company because they serve the same markets, but they do it differently. It's an adjacent business. I've said that before. I hope nobody takes that as that's all we're going to do. We're going to continue to look for really fine companies. And this happens to be one of them. And we hope that they'll grow and they have a great management team and the way they go to market is a little bit different, and that's OK.

But the products they sell are into the similar markets, the rest of the FOC sells into, but the products are different. You mentioned copper and plastic. They also do conduit and a couple of other things into the -- not only just nonres, but they also do residential and those type of things. So I mean that would be my comments. But Karla runs it, so if you could probably add to that.

Karla R. Lewis -- President

Yes, and we're excited about the business, but also, as Jim said, being able to grow it. We think where they operate is also a very fragmented industry. So we think there's a lot of potential opportunity for growth through acquisitions, but also organically, them on their own expanding into more locations, more products, but also getting to know our other Reliance companies and seeing how they can leverage each other and create some growth opportunities there. But it's early on, we just closed it October 1, but we're excited to look for more opportunities to grow them.

Emily Chieng -- Goldman Sachs -- Analyst

Great. I appreciate that, Looking forward to it.

Operator

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

Sathish Kasinathan -- Deutsche Bank -- Analyst

Yes. Hi. Good morning. Thanks for taking my question. My first question is on the auto tolling business. You mentioned that the tolling volumes declined slightly in third quarter. I was just wondering if you could provide a bit more color in terms of whether your current shipping volumes match with the actual automotive production rate? Or do you sense some inventory building of intermediate parts by the OEMs before it is being assembled into a finished vehicle?

Karla R. Lewis -- President

Yes. Sathish, I don't know that we can answer that broadly because I think each of the end-use customers that we sell into from our tolling businesses with a good portion of that being automotive, they've each been impacted a little differently. They've taken different approaches. So certainly, when they have shut down production, that's impacted us a little bit. But we're generally on the more popular platforms of the different vehicles that they sell, a lot of the trucks and light-body SUVs. And so we feel that it's been a little less than impact. We will say that in the U.S., the impact has been less than what we've seen in Mexico. In Mexico, our tolling operations are servicing more of the small sedans, and we've seen a bit more of an impact there from the chip shortage, but they seem to be working through it fairly well. For certain of those end-use customers, we have a low inventory built up, others, we don't.

So it's hard to say broad-based plus our tolling companies are seeing a lot of opportunities, not just in automotive, but also in other end markets where there's very strong demand that they've been able to fill some of the lost production, so to speak, from automotive with other opportunities. So minimal impact on us. We think in the U.S. that we're -- that the outlook is improving, that we'll have fewer shutdowns going forward.

Sathish Kasinathan -- Deutsche Bank -- Analyst

Okay. Thanks for the caller. My next question is on the SG&A, which increased 8 percent quarter-on-quarter versus a five percent decline in shipments. Is there any way you can bifurcate the increase between higher incentive-based comp and inflationary pressures?

Arthur Ajemyan -- Chief Financial Officer & Vice President

Yes. Sathish, this is Arthur. Good question. So half of that increase, we said -- a majority of it is incentive-based comp, and that's just attributable to the increase in pre-tax income levels and gross profit. And then when you look at the remainder, a lot of that is just different factors. You have some slight increase in headcount. You have some inflationary pressures on shipping, packaging costs. That's probably a portion of that remainder, and then you -- perhaps you have some additional extra expense from higher utilization on our health benefit plan, just people starting to go in front of the doctors. So I think overall, the sequential increase, I think it's fair to say, predominantly incentive comp driven. And as we noted in our commentary, our headcount levels have stayed relatively flat over the last 12 to 18 months, and we sold about 10% to 11% below pre-pandemic level.

Sathish Kasinathan -- Deutsche Bank -- Analyst

Okay. Thank you. And congrats on a great quarter.

Arthur Ajemyan -- Chief Financial Officer & Vice President

Thank you.

Operator

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

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hi good morning.

Arthur Ajemyan -- Chief Financial Officer & Vice President

Hi Phil.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

On the tolling side, just in automotive specifically, are you anticipating that the fourth quarter for the auto segment in general is going to stabilize? Or is the fourth quarter in your mind going to be kind of the last of the downdraft in the supply chain?

Karla R. Lewis -- President

Yes. Phil, so fourth quarter, we do expect the normal seasonal impact, where there'll be shut downs in front of the holidays. We're anticipating some continued disruption from the semiconductor chip shortage through the fourth quarter, but we believe in the U.S., that's going to start to subside as we go into 2022. Mexico, we're not sure yet, and if we're out of that are not.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Thanks Karla. On the new plants in Kentucky and Texas, where do those stand in terms of construction and completion? And when do you think you could start getting some earnings stream from those?

James D. Hoffman -- Chief Executive Officer

Yes. Good question, Phil. We're pleased with both of them. The one in Kentucky is up and operational and doing quite well. The one in Texas is coming along as anticipated. I literally can't tell you when it's going to be up and operational. But we're on our game and so are they. And as soon as that thing starts cracking, we will too. Karla, you have something more color, I'm sure.

Karla R. Lewis -- President

Yes. I mean, Texas, we've been able to start to process some metal down there. But certainly, as we're on campus with one of our key suppliers and as they ramp up, we'll continue to ramp up more. But we're ready and we're processing a small amount of volume there currently.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Okay. That's helpful. And then I missed the first part of the call, but in terms of Merfish, is there anything that you can provide us in terms of what you expect either the EBITDA or the earnings accretion to be from this? Obviously, big in terms of revenue, but it's a different business and it's obviously, when you want to get your arms around. So just curious in terms of thoughts on that as we try to model profit expectations.Thank you.

Karla R. Lewis -- President

Well, I mean, we certainly expect it to be good or we wouldn't have done it. So it is a bit of a different model. They're not doing the value-added processing to the extent that we do in a lot of our operations. But -- and as is typical, we haven't really disclosed it, but it's very profitable, strong EBITDA. They sell a lot of metal products that are at high price levels right now, the same as our businesses. So we're seeing really strong earnings from them throughout this year, and we expect that to continue. But you have to make -- unfortunately, you have to make your own assumptions right now on their contribution.

James D. Hoffman -- Chief Executive Officer

But Phil, they will add to our mojo.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

[Indecipherable] Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Alex Hacking with Citi.Please proceed with your question.

Alex Hacking -- Citi -- Analyst

Yes good morning. And thanks for taking the question. In terms of metal shortages, is that still predominantly concentrated in carbon flat rolled? Or are you starting to see that creep into some of the other categories as well? Thanks.

James D. Hoffman -- Chief Executive Officer

Alex, good question. No, it's all products. I mean, everybody has got the same issues. It's going to be Reliance because we have this model that we've been improving for decades and literally have added to recently. And when you support the domestic folks like we have, they support you. But it's basically every product. Karla, do you have anything to add to that?

Karla R. Lewis -- President

Yes. I mean, not really. As we said, carbon flat rolled is the one area where lead times came in just a little bit recently. But most of the other products are extended on lead times. There's still tight supply. There's a lot going on in the aluminum world now, even if carbon started to loosen up a little bit. Stainless is still very, very tight and has been. And on the aluminum side with some of the issues going on. Globally right now, we're expecting more tightness in price increases there as well.

Alex Hacking -- Citi -- Analyst

Okay. Thanks. And then on the value add, I mean, I think you've discussed before, and I assume this is still accurate that the current environment is probably conducive to your customers looking for Reliance to do more on the value-add side, given all the issues with labor and everything. Are you looking to accelerate investments in value-add to meet the needs of your customers? Thanks.

James D. Hoffman -- Chief Executive Officer

Yes, a good question. The answer is yes. I mean our capex budget this year is $310 million. We'd love to spend it all. But unfortunately, because of interruptions in the supply chain on equipment, it's just -- it's hard. But it all evolves around our customers asking us to do more. I can tell you they continue to ask us to do more, and we're going to be there for them. We obviously have a lot of dry powder, if you will, cash, and we are -- that's one of our buckets where we spend money. It's an internal growth strategy, and it's worked so far, and we're going to keep feeling it. Karla, have you got anything else? No, we're -- so far so good. And so why change now, right?

Alex Hacking -- Citi -- Analyst

Yes. Thanks. And congrats and goodluck in difficult operating plan. Thanks.

James D. Hoffman -- Chief Executive Officer

Thanks.

Operator

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

Timna Tanners -- Wolfe Research -- Analyst

Hi. Good morning everyone. Hope you well.

James D. Hoffman -- Chief Executive Officer

Good to hear from you.

Timna Tanners -- Wolfe Research -- Analyst

Seems like some big announcements, and I just wanted to delve into a little bit more. First, you're moving to Arizona from LA. And the second I think you're changing your name to Reliance Steel & Aluminum Plastic or maybe something shorter. But I just wanted to get, how big a deal is this the Merfish departure? I mean, what's the addressable market if you do start to think about acquisitions more broadly? I ask, of course, because you have the high-quality problem of being relatively underlevered and just wanted a little bit more about your thought process about potential further acquisitions outside of your traditional metals universe?

James D. Hoffman -- Chief Executive Officer

Well, Timna, great question. On the first part, that's not really a big deal. It's -- nobody is moving. We just decided and learned a lot through the pandemic on what -- how do you retain and attract talent. And we decided that being flexible is the best thing to do. And we researched it and didn't take it lightly. We did a lot of work, trying to figure out where to move. It just seemed like the Scottsdale seemd like the best place to do it. Now Merfish, Karla, you can talk about Merfish. All I can tell you, Timna, is you know our company well. We don't buy bad companies. We bought a really good company. I'd say it's a cool company because it's a little bit different. But we think it's a good platform for us to add to that and kind of do that adjacent business.

Karla R. Lewis -- President

And I would just add, Timna, so Merfish United, they had been two separate companies. They actually merged together through acquisitions by their prior owner in 2019. They were able to consolidate some facilities and gain efficiencies while maintaining their market share. So it was really positive for them to do that. In that space, we're aware of other companies that are out there, as I mentioned earlier, is still fairly fragmented. They were one of the larger companies, I think the largest within their space after the acquisition. And so similar to what we've done at Reliance for many, many years, where we find good companies and bring them into the family, we think there is opportunity to do that for Merfish United and in their space and that we'll see opportunities for growth there. Also organically, we've got the ability to invest in them and let them either open more locations to get a broader geographic reach or to invest in equipment or other things that they may need to fuel their growth.

Timna Tanners -- Wolfe Research -- Analyst

So if I were to conclude that this is a signal that Reliance is looking beyond, like I said, it's traditional metals universe for broader industrial distribution opportunities. Would that be a fair conclusion?

Karla R. Lewis -- President

That's part of the plan. But we just look at good companies. This just happens to be a really good company, but there's plenty of really fine companies in traditional metals distribution value adders. There's plenty of those, but this one just came up and it's a good company, and they're in the distribution business. And we've made a practice of not going upstream and competing with the folks, who actually make metal. But in our space, we're going to keep looking. This just happens to be a good company. And when you buy one good company in the space, our experience has been you get opportunities to buy more, and we'll just keep looking at a really good company.

Timna Tanners -- Wolfe Research -- Analyst

Okay. Thank you.

James D. Hoffman -- Chief Executive Officer

Thanks, Timna.

Operator

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Jim Hoffman for any closing remarks.

James D. Hoffman -- Chief Executive Officer

Yes. Hey, thanks, everybody, for your time and attention today. Before I wrap up, I'd like to take a moment to thank all of our Reliance colleagues for their continued hard work and daily dedication to promote health, safety and well-being of our company. Our record-setting financial results literally -- they're not possible without you all. So thanks. And I'm just inspired at the performance every day. And lastly, I'd like to announce we'll be participating virtually in the Goldman Sachs Global Metals and Mining Conference on November 18. Love to see you face-to-face, but it's not going to happen. It's virtually, but we'll look forward to seeing you on screen. And thank you very much for your support and your commitment to Reliance. Stay safe and stay healthy.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Madeleine Crane -- Investor Relations

James D. Hoffman -- Chief Executive Officer

Karla R. Lewis -- President

Arthur Ajemyan -- Chief Financial Officer & Vice President

Martin Englert -- Seaport Research Partners -- Analyst

Emily Chieng -- Goldman Sachs -- Analyst

Sathish Kasinathan -- Deutsche Bank -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Alex Hacking -- Citi -- Analyst

Timna Tanners -- Wolfe Research -- Analyst

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