Russel Metals Inc.

Good morning, ladies and gentlemen, and welcome to our 2023 year-end and fourth quarter results conference call for Russell Meadows. Today's call is being hosted by Marty Jurowski, Executive Vice President and Chief Financial Officer, and John Reed, President and Chief Executive Officer of Russell Meadows. Today's presentation will be followed by a question and answer period. At any time, if you have a question, you will need to press star 1 on your telephone keypad. I will now turn the call over to Marty Drowski, CFO, and John Reed, CEO. Please go ahead, gentlemen.

Great. Thank you, operator, and good morning to everyone. I plan on providing an overview of the Q4 2023 results, and if you want to follow along, I'll be using the slides that are located on our website. All you need to do is go into the investor relations section. It's located in the area called conference call, and you'll find a slide there. If you go to page three, you can read our cautionary statement on forward-looking information. Let me start with a little bit of a perspective and context around 2023. First of all, I want to thank the 3,500 people that are part of the Russell family. The team effort has been truly exceptional and we were very proud of how the group came together and delivered not just in 2023, but over the last number of years. Second, I want to thank our shareholders for granting us the patience as we implemented a series of initiatives over the past few years. It probably sounds like a cliche to say that we are focused on advancing the business for the long term, but we try to be very targeted in how, when, and where we deploy capital. If we look at 2023, our safety record is the best in our history, and we were recently recognized with an award by our industry peers. There's a robust pipeline of internal investments with some projects being completed in 2023 and many more in progress for 2024 and beyond. This pipeline of projects has targeted value-added equipment and facility modernizations, and that pipeline is now the largest backlog in our history. We announced the Samuel acquisition, which is expected to close in Q2. This acquisition was a long time in the making and would position our business well in Western Canada and the U.S. Northeast. We also completed a small tuck-in acquisition within our energy field store business in Q4. So let me start with page five and begin with a little bit of a discussion around market conditions. So after some volatility with sheet prices in Q2 and Q3, both sheet and plate were relatively steady in December and January. That being said, sheet prices have declined somewhat over the past couple of weeks. When we look at both benchmarks today, there are a few interesting observations. The absolute prices are at levels that are higher than in previous cycles because of good demand, a higher cost curve for producers, as well as better discipline by producers. The current spread between sheet and plate is making more sense than it had over the past few years. We saw periods in 2021 where sheet was, in fact, higher than plate, which is a bit of an anomaly. We also saw periods where plate was $700, $800 per ton higher than sheet, which is also an anomaly. The current spread is more reasonable compared to historical spread levels. You can see from the right charts in terms of inventories within the service center supply chain that the industry remains at reasonable levels for inventory at the same time that demand is solid. On page six, we have a snapshot of our results. 2023 was the third best year in our history from a top line, bottom line, and return perspective. We generated significant free cash flow and have the strongest capital structure that we've ever experienced, and that gives us a lot of flexibility to pursue a range of opportunities. If we look across the various charts going from top left, revenues were $1 billion in the quarter versus $1.1 billion in Q3. EBITDA was $82 million and EBITDA margin was 8%. Both of those were down from Q3, but without the Q3 contribution that came from Trimark, the Q3 and Q4 results would have been very similar from an EBITDA margin, EPS and return perspective. We think there's a very good outcome as Q4 is typically impacted by seasonality. Our annualized return on investment capital came in at 19% for the quarter. and our total for 2023 was 25%. When I mention a financial discipline focused on returns, I think the bottom middle chart illustrates how we have delivered over an extended period of time. Our target is over 15% through the cycle, and to be first quartile in the industry, the portfolio changes that we've experienced over the last number of years have led us to achieving these goals. Lastly, in terms of capital structure, see that on the bottom right-hand chart, we have net cash at $332 million, versus net debt of almost $500 million at the end of 2019, this capital structure shifts. As I said earlier, it gives us a lot of financial flexibility going forward. If we go to page seven, there's some more detailed information on our financial results, just starting at the top of the page from an income statement perspective. I covered several of the high-level items already, but a few other items to note. As I said earlier, revenues of $1 billion for the quarter. It was down 8% from Q3, price relief, Realizations were down a little bit, and we had a small decline in service center volumes. On margins, all segments were up by about 100 basis points, and I can discuss these in more detail in a few minutes. Interest came down to $1 million for the quarter as we are generating interest income on our growing cash reserve. Our Q3 results were impacted by a few non-operating items. Trimark, we picked up $12 million in Q3, but had nothing in Q4 as our interest in Trimark was sold in early September. Stock-based compensation was $7 million for the quarter due to the increase in our share price in the quarter, and we had a $3 million increase in our inventory and our via reserves. Going down to the middle of the page from a cash flow perspective, in Q4 we generated $82 million from working capital, primarily driven by a reduction in inventory and AR, which was somewhat offset by a reduction in accounts payable. CapEx. CapEx of $28 million was higher than in the past couple quarters as the pace of our various projects is picking up some steam. The 2023 CapEx of $73 million is in line with the $75 million that we had expected for the year. Going forward, we expect our 2024 CapEx to be over $100 million as there are additional value-added and modernization projects that are coming through during the next 12 months. From a balance sheet perspective, we are in a net cash position of $332 million. This is a $60 million improvement in the past quarter. Our liquidity is over $1 billion, and we have the strongest balance sheet that we've experienced, as I've mentioned earlier. We manage the company with a conservative bias, and we've demonstrated this approach through market volatility. One item of note is the Canadian dollar did strengthen in the quarter, which did have a negative impact on our OCI account in translating our US-based financial results from US dollars to Canadian dollars. In the quarter, we picked up 390,000 shares under our NCIB, which brings the total to 3.2 million shares since we put it in place in August of 2022. Our average purchase price to date is $34.65. Our book value per share remains north of $27 per share, notwithstanding our share buybacks in the quarter. Lastly, we declared a quarterly dividend of 40 cents a share. If we go to page eight, we have our EBITDA variance comparing last quarter to this quarter. Starting to the left, if we look at the service centers, the volumes were down a little bit compared to Q3, but our margins were up a little bit, and we also benefited from a $4 million variance related to a reduction in our operating costs, which is mostly variable compensation. Towards the middle of the page, energy field stores were down on an EBITDA basis as Q4 was impacted by some seasonal slowdown in our U.S. business and because Q3 included some lumpy projects at one of our Canadian divisions. Steel distributors was up $3 million due to good business activity and lower costs. There was a $13 million unfavorable variance in other. As I said earlier, in Q3, we had a $12 million pickup from the Trimark component, and obviously there was nothing in Q4 because it was divested. We had a slight decline in our Thunder Bay terminals operation, and there was also an additional expense related to the mark-to-market on our stock-based comp. As a favorable variance, other expenses came down by $4 million in the quarter. If we go to page 9, there's our segmented P&L information. For service centers, revenues were down, but both margins and EBIT were up. I'll go through more detailed metrics on the service centers on the next page, but our overall results were very good in what is typically a week quarter. In energy field stores, we are continuing to see solid performance. In Q4, revenues were down versus Q3 with some seasonal dynamics that I talked about before, particularly for our U.S. operation. Margins did come up a bit as a reminder, and as I said earlier, one of our divisions moved some volume in Q3 for project work. That was a below normal margin, which is why our Q4 revenues were down a bit, but our margins were up. Steel distributors segment revenues were down slightly, but margins and profitability were better than Q3. On page 10, there's a deeper dive on some of the metrics for our service center operations. Top right graph is volumes for last number of years. Q4 2023 volumes were good. They were down 1% versus Q3, but given the seasonal comparison, if you look compared to Q4 of last year, they were up 5% versus this time last year. Bottom left graph, we have the revenue and cost of goods sold per ton. Revenue per ton, our price realizations decreased by 114 per ton. versus $115 decrease in cost of goods sold, which resulted in a slight pickup in margin per ton that is shown on the bottom right graph. When we look at operating results over the past number of months, five, six months, the margins were declining on a month-over-month basis as prices were coming down and we were working through the lag effect of some higher cost inventory. This downward margin trend reversed towards the latter part of Q4. So our margin profile was better at the end of Q4 than at the beginning of Q4. For Q4, our gross margin was $443 per ton, which remains at a pretty good level compared to the historical levels, which were closer to $300 a ton. As we've said many times in the past, our initiatives that are related to the value-added processing equipment and the other investment profiles that we have should lead to higher average margins and lower volatility over the cycle as compared to our legacy margins. On page 11, we have illustrated inventory turns. The chart shows turns by quarter for each segment, energy in red, service centers in green, steel distributors in yellow. In addition, the black line is the average for the entire company. Overall, our inventory turns declined from 4.0 at September to 3.8 at December 31st. This is typical at this time of year, as our Q4 terms do come down a bit with the pullback in shipments in the last few weeks of December. That being said, the 3.8 for Q4 of this year is better than we normally see in a typical Q4. By sector, our service centers were 4.4 terms, which is, again, industry-leading. Our energy fuel stores came down to 2.8, but that should improve in Q1, while our steel distributors were improved from 3.2 to 3.5. On page 12, I have the impact of the inventory turns on inventory dollars. Total inventory declined by $43 million, with a small decline across all three segments. In service centers, we had a decline in prices that more than offset a small increase in tonnage. This is consistent with our expectation that I mentioned a number of months ago on our Q3 call. On page 13, we have the overall impact on capital utilization and returns. Our capital deployed came down to $1.3 billion because of our working capital reduction in the quarter. More importantly, our returns continue to be industry leading. As mentioned earlier, our 2023 returns on invested capital was 25% for the year. If we go to page 14, I can provide an update on our capital structure. The continuation of the strong free cash flow gives us a lot of flexibility On the left table, our cash position went up to $629 million, which is a $60 million increase versus September, and it's also a $266 million increase since this time last year. Our equity base remains over $1.6 billion, and the chart on the right shows that our book value per share remains over $27 per share, which is over $2 increase since this time last year. On page 15, we have an update on our capital allocation priorities going forward. Given our strong balance sheet, we continue to have a multi-pronged approach across all of these bubbles that are on the page. For investment opportunities towards the top left of the chart, we seek returns over the cycle greater than 15%, as I've already discussed, and we've delivered well above that target. The ongoing opportunities are threefold. We are continuing to identify and pursue additional value-added projects, In total, we have over 40 equipment projects on the go right now. Facility modernizations, we have five projects underway. They are tracking for completion at various times in 2024 and into early 2025. In total, our capex was $73 million for last year. As I said earlier, we expect that number to go up to over $100 million for 2024, as our project pipeline is currently over $200 million. That's a multi-year number. as we continue to identify more and more opportunities. In terms of acquisition, we looked at a lot of deals over the last couple of years. In Q4, we closed the acquisition of Alliance Supply, which is a small tuck-in for our Canadian energy field store business. In addition, the Samuel deal is expected to close in Q2. In terms of returning capital to shareholders, the bottom part of the page, we've adopted a flexible and somewhat more balanced approach. For dividends in May, we increased our dividend to 40 cents per share per quarter, and we'll continue to reevaluate the appropriate level on a regular basis. For the NCIB, we acquired 390,000 shares in the quarter, and since August of 2022, we acquired 3.2 million shares, an average price of $34.65. We expect to continue to utilize the NCIB on an opportunistic basis. If we compare the 2023 activity of our NCIB versus dividends, the dividend run rate was around $96 million versus 82 million in share buybacks for last year. So we are close to a balance between the two forms of capital repatriation. That 50-50 frame of reference is not a hardwired target, but it's a good litmus test to see if we're being somewhat balanced. On page 16, I want to provide a context around the cumulative impact of the actions over the past few years. In total, we generated $1.7 billion worth of cash, with $1.2 billion coming from operations, $400 million coming from asset sales, which is mostly the monetization of the OCTG line pipe businesses, and $35 million from option exercises. If we compare that $1.7 billion on the left to the capital redeployment on the right graph, it is split into roughly three equal buckets. In orange are our reinvestments, which in total is just under $600 million, and it includes $181 million of completed acquisitions, $225 million for the pro forma impact of the Samuel transaction, and $170 million for internal CapEx. The blue part totals around $500 million, which was the capital return to shareholders through both dividends as well as the more recent initiative, under our share buyback program. And the last bucket is in green, which is around $600 million in debt reduction, cash buildup, which provides us the financial flexibility that I've mentioned earlier. Again, when we look back at this, it just provides an interesting frame of reference of the amount of cash that's been generated, the cash that's been redeployed in very similar buckets, about a third, a third, a third. Also, it's interesting to note that when we look at the asset sales of around $400 million... That is roughly the equivalent of the amount that has been invested through acquisitions and in the announced acquisition. So it comes down to a situation of trying to do more with effectively the same amount of capital, which is better capital redeployment, and you see that on page 17. The top left is invested capital, and it has averaged around $1.3, $1.4 billion over the last decade. But the biggest difference is that we reallocated capital away from some underperforming businesses and reinvested in our core business. The result is we are doing more with the same amount of capital. Bottom left chart shows returns, which are at the higher tier over the last couple of years than they have been in the past. On the top right is EBITDA margins. We've consistently said that one of the outcomes of our action should be to raise the floor, raise the ceiling, and reduce the volatility through the cycle. And you can see some of that result being demonstrated over the last couple of years. By comparison, there were some tough times in the past, 2015, even the front end of COVID of 2020. The sustainability of the business and financial performance is different than it has been in the past because of some of those initiatives. The net result is somewhat illustrated also on the bottom right graph, which is our book value per share. We've been elevated baseline and are in a pretty good position to continue to grow through the cycle. In closing, on behalf of John and other members of the management team, I'd like to express our appreciation to everyone within Russell. Thank you to everyone across the company for your contributions. That concludes my introductory remarks, so operator, if you'd now like to open the line for questions, that would be great.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to remove yourself from the question queue, you will need to press star 2. And if you're using your speakerphone, please lift the handset before pressing any keys. Please go ahead and press star 1 now if you do have any questions. And your first question will be from James McGregor at RBC Capital Markets. Please go ahead.