Russel Metals Inc

TSX:RUS

Earnings Call Transcript 2021-Q4

[Operator]

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]And I would like to turn the meeting over to Mr. Martin Juravsky. Please go ahead, sir.

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Good morning, everyone. I plan on providing an overview of the Q4 and full year 2021 results. If you want to follow along, I'll be using the PowerPoint slides that are on our website, we just go to the Investor Relations section. If you go to Page 3, you can read our cautionary statement on forward-looking information.Before I go into detail, let me just put 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. It was very broad-based in terms of what we think we accomplished in 2021, and we are very proud of that on all fronts. 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.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 U.S. And even though there's more inventory in the supply chain today than there was 3 to 6 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 recently declined but remained above historical averages, and we continue to remain optimistic on the overall business conditions that we're seeing for our business in 2022.In terms of the reallocation of capital investments, this has really been a transformational change for us. When we look at Russell's profile today, it 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.There's a few initiatives that we completed. Like the 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 used to monetize the Canadian business has 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 of working capital volatility, which can be quite extreme off of our balance sheet.Capital reinvestment in value-added projects, it's a multiyear process for us. We are seeing very good results from the recent investments, and we'll be adding a series of new projects 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 increased focus on additional value-added equipment projects throughout our system.The third item is the M&A front. We closed the Boyd acquisition at the end of November, and we are very pleased with how the people and business from Boyd fit within Russell's culture and platform. Even though it's relatively early, their financial contribution to Russell is noticeable.In terms of capital structure flexibility, from a financial standpoint, we're in a 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. Cash flow was strong with $156 million in Q4 and $639 million for all of 2021. Liquidity, $495 million is very strong and the upgrade that we received recently by S&P and the initiation of investment-grade rating by DBRS will further lower the cost of our bank debt under the recently extended bank credit facilities. And just to put a little bit of that around context for the benefit, the cost of our bank debt today is currently less than 2%.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 a 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 very high by any historical basis of measure. There were a few items of note in Q4, a couple of which were positive and a couple of which were negative that I just want to bring out now before I go into some more detailed operating information.A couple of positives. We did, as I mentioned earlier, close Boyd at the end of November. So we had the income from Boyd for 1 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. The TriMark joint venture, as I mentioned earlier, has done well and has been an earnings contributor to us and had a similar level of profitability in Q4 has been in Q3. Stock-based compensation was negative as ahead of mark-to-market expense of $3 million in Q4 versus 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.Lastly, we had a $2.6 million pretax noncash 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 used $136 million due to an increase in working capital. This was a build in inventory within the service centers and steel distributor segments. It's not so much on tonnage, and it's 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 CAD157 million of cash related to the Boyd acquisition. Most of the purchase price was related to tangible net assets with inventory of about $56 million, receivables $54 million, property, plant, and equipment of $39 million, less around $25 million of payables. CapEx was $9 million for the quarter, and it continues to be modest. But as I 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 borrowings 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. Our liquidity of $495 million, which I mentioned before, is very strong and our credit metrics are in really good shape. Lastly, we've declared our quarterly dividend of $0.38 per share.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. Did exceptionally well in Q4. Revenues were up to $780 million in Q4, which is a bit of an increase from Q3 as demand remains 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. Overall, Boyd should represent around 10% of our total service center volumes in a typical month, and so it will be a meaningful 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. 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 were comparable in Q4 versus Q3, but we generated higher margins and earnings. I do the cliche before, but it truly is doing more with less. Our same-store revenues from the field stores were up in Q4 versus Q3, and our energy margins of 27% were very strong, in fact, slightly higher than those in our Service Center segment. This highlights the margin and earnings drag, not to mention the volatility that was created by the now divested OPG line pipe businesses. Going forward, we expect the energy field stores to generate a similar margin or return profile to that of our service centers over a cycle. Distributors had another very good quarter. The revenues were continuing at a comparable level in Q4 versus Q3, but margins and earnings did moderate due to changed 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.If we carry on to Page 8, I want to show this inventory trend slide as a frame of reference around the business transformation that we've made over the last 3 years. If you look back to late 2018 and early 2019, we carried about $1 billion 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 $1 billion. So at the same time that we pulled capital out of energy, we reinvested in our other segments. 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 to 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 in the 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. 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 double the earnings in 2021 versus 2018. In addition, between 2018 and 2021, we have grown the service center business through acquisitions and steel prices have more than doubled. But the total inventory is still only about $1 billion, which is the same level that we saw in 2018. So as a result of the 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.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, our business is countercyclical, and we do generate a lot of cash to 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 via acquisition.So if you go to Page 9, you can see the overall impact on capital utilization and returns. When we benchmark ourselves against our competitors, we've generated top quartile reserves over a cycle with an overall goal of 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 a 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 is the market conditions in combination with the working capital discipline that had been applied over the last period of time.Equally as important to the percentage returns are that in Q4, we were able to actually redeploy capital in effective ways. Our invested capital is 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.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 Russell 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.

[Operator]

[Operator Instructions] Your first question will be from Michael Doumet of Scotiabank.

[Michael Doumet, Analyst]

John and Marty congrats on the quarter and the strong close to 2021. First question, could you provide some color on the buildup in inventories for steel distributor and maybe your expectations on how quickly you can turn that inventory?

[John Gregory Reid, CEO, President & Director]

This is John. We did have to build up in inventory for steel distributors, predominantly in our Canadian division through work, which does sell the vast majority in a back-to-back situation. So it's pretty solid. The timing of coming into the docs with the backup of the port did create some of that build. We anticipate the capital release. We're starting to see it now and continue through Q1, maybe into the first month of Q2, but we should see this pretty strong release there that's now come in inventory turning into receivables. So we think that's just a bit of a phenomenon due to the backup of the port.

[Michael Doumet, Analyst]

And maybe just a higher-level question, and this goes back to your Page 9, Marty. Obviously, this cost saying has been an incredible year for us. And actually, I would think that the 2021 EPS is going to be a challenge to replicate. So I'm hoping maybe you could up the analyst here who have to provide some EPS forecast. Maybe just help us kind of think about the earnings power for Russell. I mean, historically, Russell's return on invested 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 is still prices moderate here from their highs, should we think about earnings kind of coming back or is something that's more reflective of that 15% or like just any guidelines there would be helpful?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

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 or 2 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. One, you talked about the 15%. It's actually closer to 20% of what we've realized on average over the last 5 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 deploy capital. We've done some value add. We're doing more value-add equipment. Those projects are incredibly lucrative from a return perspective. But individually, they've got 3-year type paybacks. We did the Boyd acquisition, and I think we did that at a fair value that's 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, but both 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.

[Operator]

Next question will be from Frederic Bastien at Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

As expected, the margins on metal service center side and steel distributors came off the 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 Gregory Reid, CEO, President & Director]

Fred, when we pulled out the OCTG line pipe again, much lower margin business, you 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 turning perspective, so it manages capital very similar to service centers. So again, as Marty said, we got -- actually, maybe you got smaller there, but we're doing more with less. And so again, that is going to be a pretty consistent reflection of these services given the cyclical nature of the steel business and in the Energy business. So we think that that's going to give us a more normalized earnings bandwidth over the cycle and take out some of the volatility we see from the OCTG line pipe.

[Frederic Bastien, MD & Equity Research Analyst]

And then, I mean, your banner in 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 is your outlook for that particular business in 2022?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

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 continue 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 more contribution out 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's 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 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, MD & Equity Research Analyst]

Caught on to the inventory build on the steel distributor side. Can you confirm that this is all presold, you're not going to see any pressure from sort of the movement, the volatility you're seeing in prices? And how quickly should we expect this inventory being translated into sales?

[John Gregory Reid, CEO, President & Director]

So on the Canadian side, it's 90-plus percent so back to back. We get confirmed selling prices on that. So the volatility is very, very low on that side. The U.S. is more transactional, but they're not the big user of capital there. They've maintained their capital and their inventory levels at historic levels during this. I think you'll see during Q1, maybe a little bit of a lingering fit into April. But let's turn back into cash and buy that inventory level back in line for those historically.

[Frederic Bastien, MD & Equity Research Analyst]

And John, why have you -- sheet 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 Gregory Reid, CEO, President & Director]

I think sheet actually is 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 for the plate products. We have seen some softening anticipate a little bit of softening in plate, not as dramatic as the sheet pricing. But again, the lack of import and the domestic mills maintaining a pretty full run rate right now at the middle level with what we're seeing in all the end use markets that we use are big plate users. We feel pretty bullish that plate would continue to get back in imbalance, as you mentioned, Fred though, plate pricing and cold -- the hot rolled coil probably come more flat line, maybe come off a little bit. When they come down a little bit, overall, we see it as pretty solid.

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Fred -- sorry just to refine one comment earlier. Just a little bit more information. When you're asking with the distributors and 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 shift 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, MD & Equity Research Analyst]

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 guidepost 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 Gregory Reid, CEO, President & Director]

So thus far, coming out the gate again, it's going to be very comparable, maybe slightly better. Demand is stronger than we saw in Q1 a year ago, barring some of the temporary interruptions that we've seen, buyers are waiting to the last minute trying to make sure their gains have bottomed up pricing. We could be providing an industry commentary, some of the articles are talking about buying strikes, which particularly in the over inventory. But -- you've also had the interruptions from Omicron where plants have been shut down temporarily for 4 or 5 days. You've seen other delays, just for lack of employment there and then some pretty severe weather events from really from the Southern U.S. 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 there's probably some kind of demand there as well. Overall, we feel like Q1 will be very comparable. I think that the earnings potential and the revenue potential will probably a bit stronger.

[Operator]

And your next question will be from Devin Dodge at BMO Capital Markets.

[Devin Dodge, Analyst]

I wanted to start maybe with the dividend. Look, your balance sheet, Marty, I 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 has targeted a payout ratio of around 80% over the cycle. Should we be expecting Russell 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 Leb Juravsky, Executive VP, CFO & Secretary]

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. So 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, Analyst]

You mentioned M&A, I think, a few times already, including the last answer there. Just can you comment on how that M&A pipeline looks right now? And can you give us a sense what seller reputations are like? And if that bid-ask spread has kind of widened out or given some of the strong profits across the sector in 2021?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

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 a fair number of opportunities that we looked at in 2021, we found one that met our criteria and met the vendor's 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 a deal for 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 be in our criteria.

[Devin Dodge, Analyst]

This 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 hard to kind of lower their inventory position. Now the cycle is obviously a little bit different for all 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 Gregory Reid, CEO, President & Director]

Sure. And really, you kind of hit on something there. This is a very different cycle. If you remember the inventory in 2021, that was really service centers were extremely in on inventory had a hard time getting inventory. Going into Q4, we saw they start to rebound and people get to more historical levels of their inventory. So in a traditional downturn and historical downturn, we've seen the inventory colleges in the system. Those are not there right now that we're seeing broad-based across the board. So the inventory levels are at a very, very reasonable turnover. So we're not seeing as much pressure there. We do see some of the service centers that will be selling around their high-priced inventory into our catchup in time. So there will be some short-term inventory price pressure. But we don't see it as we did -- if you go back to the '08, '09 period where again, everybody was sitting on the extended inventory and having to work through it. So we're not seeing that kind of pressure that we saw over time.

[Devin Dodge, Analyst]

And maybe just one last quick one. Marty, are you able to frame -- look, there's a lot of moving pieces 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 the keeper average or year-over-year basis or however you want to frame it, just any color there?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Sure. Within service centers, our price utilizations have held for the last number of months on an average basis. Obviously, different products are moving in different directions. But if you look across the portfolio, it's held for a number of months. And so the margin compression that we talked about in the moderation that we've talked about, that's really a function of prices were holding, but the higher cost inventory that kind of takes a while to roll through the system that was flowing into cost of goods sold. So that was sort of the dynamic of -- revenues were going sideways, the costs were coming up because the lag effect that flows through, and that's where the margin moderation is kicking in.

[Operator]

Next question will be from Michael Tupholme at TD Securities.

[Michael Tupholme, Research Analyst]

Maybe just to pick up on that last question that you just addressed, Marty. Are we now -- in the fourth quarter, were you sort of in an equilibrium as it relates to the higher cost flowing in and the margins that was generating in service centers? Or does that still play out further in the first quarter, such that we should be thinking about some further margin impression, you're obviously still well above your averages and even in the fourth quarter in service centers. So just trying to look at how we should think about that margin trending going forward here in the near term?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Yes. Your analysis is correct. It -- 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 markets 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 U.S. So by definition when you see posted rates for steel prices, that doesn't flow all the way through on day 1. So there is that lag effect, which basically means some of that price -- steel price compression that we've seen over the last a 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 phases into the U.S. first and then into Canada second. So that migration in terms of costs will start coming down over the next 2 to 4 months. All of the things being equal.

[Michael Tupholme, Research Analyst]

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 and your -- and the way the steel distributor segment works with respect to bringing some products in, sometimes from overseas, there's if dynamics. So 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 vis-a-vis what you just described in service centers in the near term?

[John Gregory Reid, CEO, President & Director]

Service centers and steel distributors will move very similarly. You'll see the similar pricing dynamic that will come off a little bit more and more closer to historical levels probably in distributors. And when you look at energy, keep in mind that 2021 was not a banner year, things are starting to improve, rig counts are improving, oil prices are 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 the first and second quarter. Again, all things remaining flat where they are today.

[Michael Tupholme, Research Analyst]

And then just to clarify on your comments on energy, John, I get year-over-year improvement for full year 2022 versus 2021, because earlier in the year in '21, the margins were not particularly robust relative to what you just did in the fourth quarter. But do 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 Gregory Reid, CEO, President & Director]

There could be some gain to be modest. There could be some. I think in keep in mind as we flushed out now of the OCTG line pipe was predominantly done in Q4. So it should be similar modestly going forward.

[Michael Tupholme, Research Analyst]

You mentioned, Marty, a couple of times the CapEx expectation for 2022 is 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 and projects? Or is there anything else going on there?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Yes, it's what you said. It's really -- it's all discretionary and increment is all associated with virtually all related to projects that have attractive return profiles attached to them.

[Michael Tupholme, Research Analyst]

And just for -- I mean, I don't know if we can just look at the changing CapEx to get a sense for this, but it 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 a function of the balance sheet? Is it -- I guess just trying to understand sort of why now the sort of acceleration?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

It's not a function of the balance sheet. We -- I think inconsistent with value-added -- investing in value-added equipment has been a core part of our strategy. And it doesn't happen with 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 the -- 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 made 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's 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, like, we're probably going to see some additional investments continuing in 2023 and 2024 as well. So this isn't just a 1-year phenomenon for us in terms of identifying opportunities on value-added equipment.

[Michael Tupholme, Research Analyst]

Can you comment on anything you're seeing in terms of wage inflationary pressures and labor availability, what sort of an impact do you think that those factors could have in 2022 and how you're managing those factors?

[John Gregory Reid, CEO, President & Director]

You get the inflationary pressures out there. And again, obviously, you're seeing that come out with recent reports. So we'll see some wage pressure and keep in mind how much of our compensation we get is variable. And so we've seen a strong variable component this year. As we look through that, there will be some wage inflation there. It'll be somewhat of a reset industry-wide and what the cost parameters on. Again, I don't see a huge impact. But again, the wage pressure is there. It's real. When we talk about finding employment, employees, those type of things, it is a challenging marketplace right now. But we've been successful again running those decentralized models that we have them on in the field, so they're dealing with it on an individual basis along with our corporate HR group is working great diligently to make sure we're fully staffed. 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 more targeted where we're seeing pressure. And so we're not having problems filling our staffing requirements at this point in time.

[Operator]

And your next question will be from Steven Page at BMO.

[Unknown Analyst]

I was just wondering if you could provide any thoughts on the capital structure over the coming year, just recognizing your strong liquidity position and the fact the call premium on the 26 months steps down next month and your 25 bonds are also called in October? So just any color on that would be very helpful.

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Sorry -- I -- color on -- you spoke a little too quickly there. I couldn't quite follow what your question was.

[Unknown Analyst]

I was just wondering if you had any thoughts on the capital structure over the coming year. Just recognizing your strong liquidity position and your 2026 bonds that call premium steps down next month and the 2025 bonds recallable in October?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

As I mentioned to somebody who asked the question earlier in terms of our capital allocation, we like maintaining our flexibility in our dry powder. So we have no plans right now on changing anything in terms of our capital allocation. And so you're correct that those notes do step down in terms of the call primarily next month, and we haven't made any decision to do on that front.

[Operator]

[Operator Instructions] And your next question is from Alex Jackson at RBC Capital Markets.

[Alexander Jackson, Assistant Vice President]

Most of mine have been asked, but just curious, in terms of the steel distributor segment, what's visibility like right now for '22? Like are you still seeing those opportunities that you had in '21 in terms of generating strong margins and strong volumes?

[John Gregory Reid, CEO, President & Director]

The volumes haven't changed a lot. Margins, well, again, predominantly from the U.S. side, we see some compression. Margin will be pretty stable on the Canadian size. So again, we'll watch what the pricing does. Dynamics have shifted a little bit as to supply and supply chain where it's coming from. But overall, again, demand is very, very stable for them.

[Operator]

Next is a follow-up from Michael Tupholme at TDBank -- I'm sorry, TD Securities.

[Michael Tupholme, Research Analyst]

Just 2 follow-ups. First off, in the outlook in the release, when talking about improved availability of steel continuing into 2022, you do note though there are still some constraints, specifically COVID related staffing constraints but also transportation issues. The comment about transportation issues, is that reflective of what we're seeing just sort of recently now in the last few weeks here or there is just something broader that you're referring to?

[John Gregory Reid, CEO, President & Director]

You've got the transitory issue that's in the recent weeks and I think we'll obviously abate sometime in the future. But you've also got the freight issues with the cost of freight coming in from overseas or shipping. And so those costs have inflated, and so we can pass those through typically. But that does occasionally have noted some strain on the lead times at the box for an issue unloading. So it's taking a little longer to get material than it has in the past. So that was our primary pointing.

[Michael Tupholme, Research Analyst]

And then secondly, I wanted to go back to something I think you mentioned earlier on the call, Marty, if I got this correctly, I thought I heard you say that you may not be done with portfolio changes. And I just want to clarify, I think you were 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 and line pipe and reassessing the overall business and the portfolio in that sense? Or 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 Leb Juravsky, Executive VP, CFO & Secretary]

It's the latter. It's -- we're not looking at hiding 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.

[Operator]

And at this time, Mr. Juravsky, we have no further questions. Please proceed.

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Great. Thank you, operator, and thank you, everybody, for joining our call today. We very much appreciate it. 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]

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 Leb Juravsky, Executive VP, CFO & Secretary]

Thanks, operator.

[Operator]

You're welcome.

[John Gregory Reid, CEO, President & Director]

Bye-bye.