Russel Metals Inc.

Good morning, ladies and gentlemen, and welcome to our 2024 third quarter results call for Russell Metals. This call will be hosted by Mr. Marty Jurowski, Executive Vice President and Chief Financial Officer, and Mr. John Reed, President and Chief Executive Officer of Russell Metals, Inc. Today's presentation will be followed by a question and answer period. At that time, if you have a question, please press star 1 on your telephone keypad. I will now turn the meeting over to Mr. Marty Jurowski. Please go ahead. Thank you.

Great. Thank you, operator, and good morning, everyone. I plan on providing an overview of the Q3 2024 results, and if you want to follow along, I'll be using the PowerPoint slides that are on our website, and you can find them in the investor relations section, and it's located in the conference call menu subtab. If you go to page three, you can read our cautionary statement on forward-looking information. So let me start with a little bit of a perspective on Q3. As we think about the quarter, there's a few summary observations. One, there was an awful lot on the go this quarter, and I'll talk about that in more detail in a minute, but a special thank you to so many members of the RUSLE team who worked tirelessly and with such a high-level commitment over the past period of time. The diversity of our business was very evident. There's a different cycle attached to our steel service centers versus our energy field stores. In this past quarter, the service centers encountered the challenges of lower steel prices, but the energy field stores did really well and provided stable margins and higher bottom line results. Three, the counter cyclicality of our cash flows is discussed often, and this quarter was a very good example. While earnings came down, cash flow went up. We generate $163 million of cash from operating activities, including $107 million from non-cash working capital. And if we exclude the $56 million impact of the working capital change that related to the Samuel transaction, our same store reduction in working capital and cash generation was $51 million. And the fourth item, speaking of the Samuel acquisition. The Samuel integration is going well. The transaction closed earlier in the quarter. There's a lot of moving pieces related to our ongoing initiatives to integrate systems, blend our operations together, and generate efficiencies that should lead to further capital reduction and margin improvement. And I'll talk about those more in a second. So now let's go to page five and give a context around market conditions. We've seen underlying steel prices exhibit a fair amount of volatility over the past while, as both sheet and plate prices came down over the past few quarters. Supply chain inventories in both Canada and the US remain modest, and suppliers have recently been fairly proactive on the supply side with curtailments, both maintenance as well as market-related curtailments. From our customer base, our shipments have been fairly steady, other than the seasonal dynamics that did occur in Q3, and will occur and are typical in Q4 as we get into the holiday periods. Given all those moving pieces on supply and demand, there appears to be a basis for more favorable pricing environment as we're heading into 2025. On page six, we have a snapshot of our historical results. If we look across the various charts going from top left, revenues were up a bit versus Q2 and comparable with the past number of quarters. EBITDA was $67 million. EBITDA margin was 6%. Earnings per share was 59 cents per share. All these were down versus Q2 given the lower margins in our steel service centers. Our annualized return on invested capital came in at 13%. And that's a fairly decent result taking into account the down quarter for service centers and the deployment of the extra capital for the Samuel acquisition that didn't yet benefit from a full quarter of contribution. Even though our return on invested capital was down for the quarter, it remained above the levels reported by our U.S.-based comparables. Lastly, in terms of capital structure, we have net cash of $73 million at the end of the quarter, and this is after the closing of the Samuel transaction, so we continue to retain a high level of dry powder to deploy opportunistically. If we go to page 7, we have a more detailed financial snapshot. And starting at the top of the page from an income statement perspective, a number of the items I've already covered off, but just to go into a few more items of detail. Revenue of $1.1 billion was up 2% from Q2, and this was primarily driven by a $69 million contribution from the former Samuel branches. Gross margins increased. EBITDA margins were down, but some of this was due to the margin drag from the Samuel acquisition. As we talked about before, the lower Samuel margins were expected to negatively impact the overall average service center margins, and they did so by about 1%, and caused about a 40 basis point negative impact on our overall EBITDA margins in the quarter. This is as expected, with our focus being to enhance the margins of the acquired business. Our Q3 results were impacted by a few other items of note. Samuel acquisition, as I've talked about a couple times already, it did have a contribution in about half of a quarter where we owned the businesses. It contributed a little over $2 million to our EBITDA, but we did encounter a similar amount of non-recurring costs related to the closing. The mark-to-market on our stock-based comp was a $5 million expense versus an $8 million recovery in Q2, so that was a $13 million negative, but a non-cash swing. From a cash flow perspective, in Q3 we generated $107 million from working capital. Some of that was a $57 million increase in accounts payable, of which most related to the rebuild of the accounts payable that was left behind as part of the Samuel transaction structure. We also had a decrease in inventory on a same store basis on service centers and steel distributors. As said earlier, we closed the Samuel transaction. which on the cash flow statement is reflected at $223 million, but this excludes the impact of the accounts payable that we left behind. When we take into account that rebuild of the accounts payable to September 30th, the invested capital related to the Samuel deal comes down to $167 million. Share buybacks were active with 1.2 million shares or 2% of our shares outstanding for a total of $46 million before tax. The cumulative share buyback since August of 2022 is around 10% of our then shares outstanding for $226 million with an average price of $36.62. Our dividend was increased in May of this year to $0.42 per share, and we are retaining that level for the current quarter. This $0.42 per share dividend will be payable in mid-December. CapEx of $21 million in the quarter was in line with our tracking, and our last 12-month run rate is right around that $100 million mark that we have been talking about before. From a balance sheet perspective, as I mentioned earlier, we are in a net cash position even after funding the Samuel transaction and have a net cash balance of $73 million at the end of the quarter. Also in Q3, we closed our new bank facility for $600 million, which is undrawn at the end of the quarter. The facility is unsecured with no borrowing based restrictions and investment grade financial covenants. The remaining $150 million of five and three quarter percent notes that we had outstanding at the end of September were redeemed on October 27th. So as of today, we no longer have any term debt outstanding. If we go to page eight, our EBITDA variance analysis last quarter, this quarter is reflected. In looking at service centers on the left part of this chart, the volumes were down from Q2 due to seasonality, as were our margins. But there was also a $6 million reduction in our operating costs, which is a function of our variable compensation model that toggles up and down with financial results. So in a quarter with down financial results, our operating costs and the incentive comp was also down. For the Samuel branches, they contributed $2 million of EBITDA, which I mentioned before, but there was also non-recurring costs of $2 million. Energy Field Stores had a really nice quarter. It was up $3 million, and Steel Distributors was flat quarter over quarter. In the other bucket, as I mentioned earlier, there was an unfavorable impact from the higher mark-to-mark on stock-based compensation versus the recovery that we showed in Q2. On page nine, we have our segmented P&L information. And for service centers, our revenues were flat versus Q2, and I'll go into more detailed metrics on the service centers on the next page. Energy field stores, we're continuing to see really good performance. Q3 revenues were up and margins were steady, leading to higher overall bottom line results. Distributors' revenues were up due to continued improvement in overseas logistics. but margins were down, which netted to a flat quarter-over-quarter operating profit compared to Q2. If we go to page 10, we have a deeper dive on the metrics for our metal service center business. Top right graph is the past five years for ton shipped. The Q3 volumes were up 4% versus Q2, reflecting the Samuel contribution. But if you look at on the same store basis, which is that dotted green line, On the same store basis, volumes were down versus Q2, and that's primarily driven by seasonality, but it was flat compared to Q3 of last year. On the bottom left graph, we have the revenues and cost of goods sold per ton. Revenue per ton, our price realization decreased by $95 per ton, while our cost of goods sold came down by $41 per ton. And the reflection of that is in our margins that you see on the bottom right. margins came down by $53 per ton, but some of that was diluted by the Samuel transaction, and that $53 per ton reduction would have only been $35 a ton if we look at it on a same store basis. On page 11, we have illustrated our inventory turns. Overall, our inventory turns remain consistent at right around 3.8 turns. By segment, our service centers remain strong at 4.0. which was somewhat impacted by the Samuel transaction. Our energy field stores were consistent at 3.4, or our steel distributors improved from 2.3 to 3.6 due to the improved logistics and a reduction of our in-transit inventory. Page 12, we have the impact of inventory turns on dollars. Total inventory was up compared to June 30th, and that's due to the addition of the Samuels acquisition. On a same store basis, however, our service center inventories declined by $23 million. On page 13, we have our overall impact in capital utilization and returns. Capital deployment moved up to over $1.5 billion with the closing of the acquisition. And even though our last 12-month returns were down to 17%, it remains above our cycle average threshold of 15% and remains well above our industry peers' who have already reported their Q3 results. We go to page 14, a quick update of our capital structure, and there have been a number of changes during Q3 and into the early part of Q4. As I mentioned earlier, in July we closed a revamped bank deal. Our bank group has recognized the significant evolution of our credit profile, and we now have a more traditional investment-grade type bank structure that has no borrowing-based formulas, unsecured, and has pretty flexible financial covenants. The new bank deal was upsized by $150 million from the previous deal, and this gives us ample liquidity. On October 27th, we redeemed the $150 million of 5.75% notes. So as you look at the pro forma column on this page, we have no term debt outstanding. And so with the redemption of those notes, the previously completed redemption of the $150 million of 6% notes that we did in Q2, and the change in our bank structure, we have removed all the legacy elements of our former debt structure and now have a very, very clean balance sheet and clean slate going forward with significant flexibility. Lastly, our equity base per share continues to remain strong. In spite of $134 million of share buybacks over the past year, we have grown our book value per share by 62 cents versus this time last year. Page 15, an update of our capital allocation priorities, and they remain pretty much the same as we've talked about for the last period of time. Given our strong balance sheet, we continue to have this multi-pronged approach. Investment opportunities, we're looking for average returns over the cycle, 15% or greater, and we've delivered well above that target, even in a quarter like this where there have been some challenges. The ongoing opportunities are threefold with the value-added projects that we talk a lot about, The facility modernizations and those five that we have are at a near final stage, and I'll go through those in a little bit more detail in a minute. In terms of acquisitions, we closed the Samuel deal on August 12th, and we are continuing to explore other opportunities. On page 16, I want to provide a broader context to our reinvestment program. Over the past 12 months, we've invested $97 million in CapEx, which is a higher level than in the past. And you can see that progression over the last number of years as we continue to find more and interesting opportunities for discretionary capital. I expect that we'll remain in that $25 million plus or minus per quarter over the next while as additional discretionary projects come to the table and get completed. On page 17, we have some updated pictures of our five modernizations that are underway in both the U.S. and Canada. The bottom left is Saskatoon and is a new greenfield location that is replacing older facilities in Saskatoon and the older locations real estate is going to be monetized. The new greenfield is now up and running. The other four pictures are of our other projects in Texarkana, Joplin, Little Rock and Green Bay and they're all sizable additions to our existing locations. These projects in total represent about a 5% increase in the score footage on our service center operations, and will support organic growth, better workflow, and allow for the accommodation of future equipment upgrades in certain locations. On page 8, you see our acquisitions over the past 20 years. The history is a combination of both small and medium-sized transaction, with three of the transactions in the past five years being medium-sized and two being smaller tuck-ins. Going forward, I expect to see opportunities that are both small tuck-ins like Alliance in 2023 and Sanborn in 2020, but also standalone medium-sized transactions like Boyd in 2021. I've also noted the deal size for Samuel is $167 million. As I mentioned earlier, it represents the impact of the closing price, less our rebuild of the accounts payable that was excluded from the deal structure. On page 19, I have a bit more information on the Samuel deal. At the time that we announced the deal back in December of 2023, we stated a total purchase price of $225 million based upon what was then $186 million of working capital, which you see broken out in the left column. As of September 30, 2024, this quarter end, the working capital is in the right column and is down by $58 million, a combination of receivables, inventory, and accounts payable shift. Most of that shift is the reduction of inventory. As a result of that decrease of $58 million, we've pretty much achieved our initial goal of reducing invested capital by $50 million, with ongoing initiatives to further reduce capital and also enhance margins over the cycle. On page 20, there's a bit of a deeper dive in returning capital to shareholders, top left graph. We have our longer term dividend profiled with the just announced 42 cents per share per quarter. And we'll continue to regularly revisit the appropriate dividend level to take into account our capital structure and earnings profile as was done when we listed the dividend both May of 2023 and then again in May of 2024. On the bottom left, we show our quarterly NCIB activity since we put it in place in August of 2020. This illustrates that we don't have a fixed approach to the program, but view it as an opportunistic way to buy shares. One item to note is that we renewed our NCIB, and it took effect in mid of August this past quarter, and we're limited by a daily maximum based upon the TSX to 44,000 shares a day, and that is down from the daily maximum that we had under our previous NCIB which used to be 73,000 shares per day. On the bottom right chart, the impact of the NCIB has been a gradual reduction of our share count over the past couple of years and has resulted in a 10% reduction to our shares outstanding. On the top right chart, the aggregation of our dividends versus the NCIB over the past two years shows a more balanced approach that has recently been more weighted to share buybacks over dividends. Over the past 12 months, we have acquired $134 million worth of our shares and the current run rate for dividends is lower than that, around $97 million. On page 21, I have a summary of our capital relocation over the past few years that reflects the fairly substantial changes in our approach. On the left chart, we generated a total of about $1.9 billion through $1.5 billion of cash from operations, $400 million through asset sales, and a little bit through the exercise of options. On the right, we have a pretty balanced approach to the capital deployment with three roughly comparable sized buckets. In orange, we've invested about $643 million through both acquisitions as well as internal CapEx programs. In blue is $685 million being returned to shareholders through a combination of both share buybacks and dividends. And in green, we show the $584 million of debt reduction flex cash rebuilt. So again, those blue buckets, orange bucket, green buckets, roughly equal size as it relates to how we've deployed capital over the last number of years. So it both gives us an opportunity to both maintain a very flexible balance sheet, reinvest in the growth initiatives of our business, as well as rewarding our shareholders through returns of capital. In closing, on behalf of John and other members of the management team, I'd really like to express a strong appreciation to everyone within the Russell family for their contributions. In particular, many people have provided significant leadership and demonstrated commitment and teamwork as we continue to make inroads in advancing our business initiatives. Operator, that concludes my introductory remarks. And so you can now open the lineup for questions.

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Our first question will be coming from Frederick Bastian from Raymond James.