Russel Metals Inc.

Good morning, ladies and gentlemen, and welcome to our 2024 year-end and fourth quarter results for Russell Metals. Today's call will be hosted by Mr. Martin Trusky, 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. If at any time you have a question, you will need to press star one on your telephone keypad. I will now turn the meeting over to Mr. Martin Jorofsky. Please go ahead, sir.

Great. Thank you, operator. And good morning to everybody on this lovely snowy day here in Toronto. I plan on providing an overview of the Q4 2024 in the full year, 2024 results. And if you want to follow along, I'll be using the PowerPoint slides as a reference that are on our website and just go into the investor relations section. And it's located in the conference call submenu. If you go to page three, you can read our cautionary statement on forward-looking information. Let me start with a little perspective on 2024, which is outlined on page five. If we look back on the year as a whole, characterize it a year of growth with purpose, focus, and discipline. And I think both John and I are very proud to say that the Russell team really delivered on that front. And more importantly, we're just getting started as there is a lot more work to be done. We look very different today than a number of years ago, and we'll continue to evolve in the years ahead. So if we look at a few items on this page, item one, the starting point is strong cash flow generation. And in spite of the steel price volatility and general economic uncertainty that occurred during much of 2024, we generated $344 million of cash flow from operations in including $103 million from working capital. The counter-sickle nature of our business allows us to capture cash flow when markets turn down. The second row of the diagram summarizes our growth initiatives. Firstly, on the left, increased capital investments. We were very active on the investing front in 2024. Internally, we invested CapEx of $90 million, and externally, we completed two very important acquisitions for a little over $300 million. When we combined the M&A initiatives and CapEx, this was by far and away the largest year in Russell's history for investing activities. The investing opportunities continue to grow, and our multi-year CapEx pipeline of potential projects is over $200 million. We're also remaining active in looking at M&A opportunities. Capital deployed growth. As a result of the investments that I just mentioned over the past year, our capital grew from $1.3 billion to at the end of 2023 to 1.6 billion at the end of 2024. It is with a purpose. We generated a solid return on invested capital. Our return on invested capital was 15% in 2024, despite the market challenges, and it averaged 24% over the past three years. Return on invested capital is the most important metric in our pay for performance culture and has resulted in a history of industry leading returns. And the last box in that row is the growth was very focused. It was a growth in strategic ways. Our service center segment now represents 67% of our revenues for 2024 versus only 53% in 2019. We grew our U.S. platform, which is now 39% of revenues and will be higher in 2025 and beyond. We grew our value-added processing and grew into specialty metals such as stainless and aluminum, which was 9% in 2024 and should be greater than 10% in 2025. The last row of the diagram illustrates the results of our capital investments, returning capital to shareholders. A frame of reference is that if we're able to successfully grow our business, it presents opportunities to grow the return of capital to our shareholders. In 2024, we returned $131 million by share buybacks and $98 million through dividends for a total of $229 million of capital returned to shareholders. Just like 2024 investments were the largest in Russell's history, so too was the amount of capital that was returned to shareholders. We had a record year in which $650 million was deployed for investments in returning capital to shareholders, and we are still able to retain a very strong balance sheet. We also cleaned out all of our legacy debt structure, and now have no long-term debt, have an investment-grade bank deal, and ended the year with a net cash position of $32 million and $580 million of liquidity. Let's turn to market conditions on page six, starting with prices of sheet and plate in the top graph. We saw carbon sheet and plate prices exhibit downward pressure during 2024 but they did stabilize in the latter part of the year and have recently exhibited some increases. The recent price increases are a function of an improving outlook, and some is likely related to the impact of the potential US tariffs and the potential retaliatory tariffs. Let me talk about tariffs for a moment. And obviously, it's a bit of a moving target. But we do not have any material direct impact from tariffs as we're generally a cost through business, and the impacts are more on steel producers, in particular those who export cross-border. By contrast, we generally sell our products to local customers. The indirect impacts relate to steel prices, supply chain disruptions, currency movements, and the business activity for some of our customers who may export finished equipment. There are some industries like automotive that are integrated in their cross-border supply chains, and I expect that industry to face some challenges, but we do not serve that industry. The key thing from a Russell perspective is that we have a very flexible business model with an ability to flex to whatever circumstances may unfold. And if we look back to the introduction of the Section 232 tariffs in 2018, that was actually a positive for North American steel prices, and that was good for Russell. On the bottom chart, we've added a new piece, and this is the first time we've shown aluminum and stainless prices, as those are now a more meaningful part of our product mix. As I mentioned earlier, they're around 10% of our 2024 revenues. And as you can see from the chart, these products don't exhibit as much volatility as carbon plate and sheet, as aluminum and stainless have very different supply and demand dynamics. The two charts on the right, supply chain inventories in both Canada and the U.S., remain modest. On page 7, there's a snapshot of our historical results. If we look across the various charts going from the top left, revenues were down in Q4 5% versus Q3 due to some seasonal dynamic. EBITDA was $61 million, which was down from Q3. EBITDA margin was flat at 6%, and earnings per share was $0.47 per share. Our Q4 annualized return on invested capital came in at 10%. which is pretty good considering the significant increase in capital for acquisitions during the latter part of 2024 at a time where there's generally a seasonally down Q4. As mentioned earlier, our capital structure is in really good shape, and we have a net cash position of $32 million. Going to page eight, we have a more detailed snapshot of our financial results. Starting at the top from an income statement perspective, I covered several of the high-level items on the previous page, but a few other items to note. Revenues of $1 billion was down to seasonality compared to Q3. We did have an offset from the full quarter impact of the Samuels acquisition. It closed in August, and so we only had a partial quarter in Q3 and a full quarter in Q4. And then in Q4, we had a pickup from the Tampa Bay acquisition that closed in early December. And so when we look into 2025, we will benefit from a full quarter of the Tampa Bay acquisition as well as a more normal run rate from the Samuels acquisition as we get out of the seasonal Q4 period. Gross margins and EBITDA margins were generally flat on a quarter-over-quarter basis. And looking at the line items below EBITDA, there was an increase in D&A. as well as interest expense, both a result of the two acquisitions that were done in the latter part of 2024. And our Q4 results were impacted by a few items of note. Samuel integration continues with some non-recurring costs of $1 million in a quarter. The integration process is continuing to unfold with efficiency gains expected to materialize in the latter part of 2025 once we're onto the same systems. In addition, we are continuing to actively explore location rationalization opportunities. Mark-to-mark on stock-based comp was $2 million expense versus $5 million in Q3. There are also a couple of small non-cash-related write-offs of $1 million related to deferred financing costs, and that increased our interest expense by a little bit, and $1 million related to the write-down of some legacy equipment, which impacted our operating costs by a little bit. From a cash flow perspective, as we always talk about the counter-cyclical nature of the business, Q4, we generated $54 million from working capital. There was $113 million decrease in accounts receivable, a $42 million decrease in inventory, of which some was offset by a $96 million increase in accounts payable. We closed the Tampa Bay acquisition in December for $75 million, which is lower than the announced value of $79.5 due to a favorable adjustment related to working capital at closing. Share buybacks were $14 million before tax, and the cumulative share buybacks since August of 22 have been a little over 10% of our shares outstanding for $240 million before or an average of $36.97 per share. Our quarterly dividend was increased in May of this year to 42 cents per share, and we remain at that level for the current quarter. This 42 cents per share level will be payable in mid-March. Our CapEx of $21 million brings the 2024 total to $90 million, and I expect our 2025 CapEx to be comparable level to the 2024 level as our multi-year pipeline is greater than $200 million, and we're continuing to greenlight a series of projects that keep coming to the table, particularly related to value added and additional modernization opportunities. From a balance sheet perspective, we remain in a net cash position, even after funding the Tampa Bay acquisition with a net cash balance at the end of the year of $32 million. As I mentioned earlier, we have In 2024, we cleaned out all of our legacy term debt, and in the quarter, we redeemed our last series of high-yield notes, and we no longer have any term debt outstanding. The FX movements towards the end of the quarter were meaningful, and it did have a positive impact of $69 million in the OCI shareholders' equity amount. And lastly, our book value per share grew again, and it was over $29 per share at the end of the year. If we go to page 9, there's a reconciliation of our EBITDA variance between Q3 and Q4. In looking at service centers, the volumes were up a bit compared with Q3. While there was an increase in margin dollars, but a comparable increase in operating costs, which translated into a $1 million increase in EBITDA for service centers for Q4 versus Q3. Energy field stores were down $4 million due to some seasonality, while steel distributors were down $4 million due to market conditions. In the other bucket, there was a favorable impact from lower mark-to-market on stock-based compensation. On page 10, we have our segmented P&L results. Service centers, revenue is up versus Q3 due to the Samuel and Tampa Bay acquisitions that I mentioned earlier, and I'll go through more detailed metrics on the service centers on the next page. Energy field stores were continuing to see solid performance Q3 revenues were down, as I mentioned, some seasonality, but margins were up. As a result, overall EBITDA was down a little bit. Distributors' revenues were down due to market conditions and some cautious buying activity by our groups amidst the market volatility, but margins did improve. Overall, EBITDA was down for that segment versus Q3. On page 11, we have a deeper dive on the metrics for our service center business. The top right graph is time-shipped. If you look at Q4 2024, the top right-hand data point, volumes were up 6% versus Q3, reflecting the Samuel and Tampa Bay acquisition contributions. They were down 1% on the same store basis volumes were due to the seasonality, but this 1% decline in Q4 is less than we typically see in Q4s, which reflects some solid ongoing market activity. On the bottom left graph, we have the revenue and cost of goods sold per ton graph. Revenue per ton are price realizations and cost of goods sold decreased by similar amounts in the quarter, leading to flat profit per ton on the bottom right-hand graph. On a same-store basis, however, and there is noise continuing because of the acquisitions that occurred in both Q3 and Q4, but on a same-store basis, gross margin per ton was up slightly. On page 12, we've illustrated our inventory turns. This chart shows the turns by quarter-free segments 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 came down in Q4 to 3.6, which is consistent with what typically happens towards the end of the year. By sector, our service centers remain strong at 4.0, which was similar to Q3. Energy field stores was 2.8, which was down from Q3, but consistent with Q4s of the past few years. And lastly, steel distributors decreased to 3.1 from 3.6. On page 13, we have the impact of inventory turns on dollars. Total inventory was down slightly compared to the end of September. And if we exclude the increase from Tampa Bay, which was about $14 million Canadian, our same store inventories would be down 2% compared to the end of Q3. On page 14, we have the overall impact of capital utilization and returns. As I said earlier, 2024 acquisitions in CapEx resulted in growing our capital deployed to over $1.6 billion. And this is in spite of pulling out $400 million from the OCTG line pipe business over the 21 to 2023 period. So $1.6 billion of capital deployed it's up from where it has been for the last couple of years as we continue with our growth focus. On a return basis, our three-year average return on invested capital was 24%. And if we look back over the last few years, we continue to achieve industry-leading returns and at levels that are greater than our cycle average target of 15%. On page 15, I have an update of our capital structure. And as I said earlier, there are a number of changes during 2024 In May and then in October, we redeemed the legacy high-yield notes. In July, we closed the revamped bank deal. Our bank group has recognized the significant evolution in our credit profile, and we now have a more traditional investment-grade type bank structure that has no borrowing-based formulas, unsecured, and has flexible financial covenants. And with these changes, we now have a very clean slate going forward with significant flexibility. In terms of the year-over-year change in cash, we deployed $90 million for acquisitions, $329 million for acquisitions, $230 million was returned to shareholders via dividends and share buybacks for a total capital outlay of about $650 million. Given our strong operating cash flow in 2024 and the strong starting balance sheet at the beginning of 2024, our net cash position only came down by about $300 million, and we remain in a slight net cash position. Lastly, as I mentioned earlier, our equity base per share continues to grow in spite of share buybacks and dividends over the past year, and we've grown our book value per share that is now $1.87 per share higher than at this time last year. Page 16, just a quick summary of our capital allocation priorities on a go-forward basis. Given our strong balance sheet, we continued this multi-pronged approach Investment opportunities, I mentioned earlier, our average target return is greater than 15% over the cycle, and as already discussed, we've delivered well above that target. The outgoing opportunities are continuing to identify the value-added projects, and there are a lot on the go. Facility modernizations, we've mostly completed the five projects that have begun over the last couple years, other than a few refinements of some equipment coming into certain of those locations, and we have more projects on the drawing board. In terms of acquisitions, as I said a couple times, we closed the Tampa Bay acquisition. It was closed on December 4th, and we're continuing to explore other potential opportunities. Returning capital to shareholders, as said earlier, we've adopted a fairly flexible approach, and it included both dividends, including the dividend increase in May, as well as fluidity on the NCIB approach. If we go to page 17, I want to provide a context for our reinvestment program. In 2024, we invested $90 million in CapEx, which is a level higher than in the past. And as we're continuing to identify more opportunities, I expect that we will remain in the plus or minus $25 million per quarter zone over the next while as additional discretionary projects come to fruition. On page 18, you see our acquisition history over the past few years. And the history is a combination of both small and medium-sized transaction with a fair number over the last few years being in the more medium-sized category. in particular three of them in the past five years. Going forward, I expect to see opportunities that are both the small tuck-ins like Alliance was in 2023, Sanborn in 2020, but I also expect to see some medium-sized transactions like Boeing in 2021, Samuel and Tampa Bay in 2024. On page 19, there's a deeper dive on the returning capital to shareholders, top left graph. We have our longer term dividend profile with the just announced 42 cents per share for this past quarter. And we'll continue to regularly revisit the appropriate dividend level to take into account our capital structure and our earnings profile as was done when we lifted the dividend in both May 2023 and May of 2024. On the bottom left chart, we show our NCIB activity by quarter. since it was put in place in August of 2022. As I said a couple times, and I've said many times in the past, we don't have a fixed hardwired approach to the program. We view it as an opportunistic way to buy back shares, and we've been more aggressive at certain price points than others. That being said, we did buy 330,000 shares in the quarter for around $14 million. On the bottom right chart, you see the impact of the NCIB. It has been a gradual reduction of our share count over the past two years and has resulted in a greater than 10% reduction in our shares outstanding. On the top right chart, the aggregation of dividends and NCIB over the past couple years illustrates a more balanced approach that has recently been more weighted to share buybacks over dividends. And over the past 12 months, we have acquired $131 million of our shares. And the current run rate for dividends is around $96 million. The other item to note is that with the reduction in our share account, it has allowed us to maintain a similar quarterly outflow for total dividends, even as we increase the per share dividend in both 2023 and 2024. On page 20 of a summary of our capital reallocation aggregated over the past five years, on the left chart, you see that we've generated a total of about $2 billion through $1.6 billion of cash from operations and $400 million through asset sales. And on the right chart, we have a pretty balanced approach when we look at the three primary buckets to capital allocations. In blue is $724 million being returned to shareholders through a combination of both share buybacks and dividends. In orange, we've invested $770 million in both acquisitions and internal capex. And in green, we have the $528 million of debt reduction cap build. So again, from our perspective, when it comes to capital allocation, we've tried to take a fairly balanced approach to the various opportunities. Lastly, and in closing, If we look beyond 2024 and into 2025, there are a few key observations. One, steel prices have very recently moved higher. As said earlier, some of this relates to tariffs and some relates to demand dynamics. That being said, we are well equipped to adapt regardless of market conditions. Two, we completed a lot of initiatives in 2024, which positions us really well for 2025, but also the multiple years ahead. and these initiatives should lead to further growth in a number of ways. Firstly, as I mentioned earlier, our U.S. expansion is continuing relative to our Canadian platform. I would expect that our U.S. business should exceed 50% of our revenue base within a few years. Two, the types of growth are on value-added and specialty products as part of our overall portfolio. Some of this growth will be through market share gains, and some is through the impact of acquisitions that we've seen this year, as an example, with Tampa Bay and Samuels. These initiatives will provide for margin expansion and a continuing migration to more stable baseline of cash flows, and I expect that we'll get to 50% of our revenue base having a value-added element within a few years, and I expect over 10% of our revenues will be specialty products like stainless steel and aluminum in 2025 alone. So, in closing, on behalf of John and other members of the management team, I would just like to express our appreciation to everyone within the Russell family for their contributions. In particular, 2024 had a lot on the go, and we saw a lot of people step up and provide significant leadership, work effort, commitment, and teamwork as we made a series of inroads. So, operator, that concludes my introductory remarks. If you'd now like to open the lineup for any questions, please.

Thank you, sir. Ladies and gentlemen, if you do have any questions, please press star followed by 1 on your touch-tone phone. You should then hear a prompt acknowledging that your hand has been raised. Should you wish to decline from the polling process, please press star followed by 2. And if you're using a speakerphone, you will please need to lift the handset first before pressing any keys. Please go ahead and press star 1 now if you do have any questions. First, we will hear from James McGarrigle at RBC Capital Markets. Please go ahead.

Hey, thanks for having me on, and congrats on a good quarter there and a pretty tough backdrop. But, Marty, you kind of gave us some color on tariffs in your prepared remarks, and it seems like the U.S. business should benefit from higher prices, but the impact to the Canadian business is likely going to be a bit more nuanced. That said, would you expect pricing to hold up in Canada today? in the event of tariffs, given that we're a net exporter of steel to the U.S.? And, you know, any early indications that we're seeing any impact on volumes, maybe some project deferrals, just given some of the uncertainty caused by recent announcements? Any call you can provide there?

Yeah. So, James, let me just give a context to this. And first off, I appreciate your introductory comments. Thank you. The tariff question is, it's a real moving target. And as we kind of look back over the last two weeks, one week has looked very different than the next week in terms of what is being announced and what is being contemplated. Nothing has actually happened yet. So the best data point that we can point to now is what happened back in 2018. And I think it's fair to say that there's a lot of noise in the period leading up to tariffs with lots of stuff happening in terms of supply chains moving around and activity. I think it's premature to for people to be talking about projects that are canceled, projects that are being accelerated, projects that are being moved, because this is really evolving in real time. But if we look back to 2018, probably the single biggest takeaway is it did lift steel prices and to a certain degree aluminum prices as well in the near term. How that then shakes out is a function of all the other iterations that will happen in trade issues. And back in 2018, It wasn't a single data point. It evolved over 2018 from announcements to retaliatory tariffs to them coming off to coming on, different rules for different countries. So just the qualifier in all this is a bit of a moving target. That being said, John, what are you seeing in terms of the near term?

James, thank you for the question. There's a couple of things to look at on this. The markets are moving. And when I talk about the markets, it's still price markets on plate. We're moving up. Prior to tariff announcements, hot roll coil was moving up. Scrap on a localized domestic North American market and on the world market are all moving up. Demand is very solid. So those things were very good. So we're seeing the increases. In addition, if you add tariffs on top of that, you'll see further increases. We assume there'll be retaliatory tariffs from both Canada and Mexico. So that will further increase the prices. We think that will continue in the near term. I think the bigger challenge that we have to look at from a Canadian perspective is how Canada reacts to the rest of the world. And does Canada become a dumping ground for things that would have traditionally went to the U.S. because of the 25% tariff? Are they going to put tariffs on the rest of the world? I think they'll have to. But initially, we see this as just a pass-through for us on both sides of the border, keeping in mind that our average order size is very small. in-country on each side.

Nathan, thanks for that color there. Looking at the commentary on the outlook, you flagged some near-term opportunity in the U.S. That seems a lot more positive compared to your outlook commentary last quarter. Given the recent ramp we've seen in pricing, the Tampa Bay acquisition is now closed, some opportunity potentially left in Samuel. Can you give us some color on how we should be thinking about sequential earnings trends into Q1? And after that, I can turn the line over. Thank you.

So let me deal with the very end of what you asked, James, and then John can put some color on it. I expect Q1 to be better than Q4. It's a bit of a moving target right now in terms of the tariff impact and what that does to steel prices and all that. So I kind of park that aside. But generally, our Q1s are better than Q4s. in particular, and that's from a volume perspective, and also we did see stabilization of pricing and having a little bit of inching up. So there should be some positive migration in Q1 versus Q4, but it's probably not a step function change. It's continuing migration. And so if you look at Q3 for us and Q4, I would suspect right now that Q1 is probably looking somewhere in between Q3 and Q4.

Yeah. James, from the Again, from the outlook side, we've been pleasantly surprised in Canada and in the U.S. that demand has come out early on in the quarter better than we anticipated. And so we see that continuing going forward. Again, it's capacity utilization in mills is continuing to inch up. Lead times are inching out, which again adds further price stability or potential for price increases that are out there. There have been some large pipe jobs that have went into the hot roll coil mills. that have actually extended those mills well into third quarter for any spot tons. So that's firm enough pricing as well. Rig counts, if you look at Canada specifically, they're up 7% as of this morning compared to this time last year. So we're seeing very positive opportunities on our energy fill store businesses. We're continuing to gain share in our U.S. and its growth. The U.S. market is down in energy. But again, oil is above $70 a barrel right now. Natural gas is over $3.50. Those are two very strong numbers for continuation in that market. So as Marty mentioned in his comments, we feel very good. Demand is very solid. We think it's going forward. And then we'll have to sift through the noise and the continuous changes of the tariff announcements here to see what this really means in the coming days. Thanks, James.

Thank you.

Thank you. And at this time, Mr. Jorofsky, we have no other questions registered, sir. Please proceed.

Great. Thank you, operator. Thank you, everyone, for joining our call. And if you have any additional questions, please feel free to reach out. Otherwise, we look forward to staying in touch during the balance of the quarter. Have a good day, everyone.

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.