Russel Metals Inc.

Ladies and gentlemen, and welcome to our 2025 second quarter results for Russell Metals. Today's 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. 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. Now, let's turn the meeting over to Mr. Marty Dreyfus. Please go ahead.

Great. Thank you, operator, and good morning to everyone. I'll be providing an overview of the Q2 2025 results, and if you want to follow along, I'll be using the slides that are on our website. They can be found in 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. So let me start with page 5 to provide a little bit of a perspective on the quarter. In Q2, we generated a sequential improvement in most Q metrics, and we looked at the past two quarters, Q1 and Q2, both individually and together. We had a very solid improvement. We had an improvement between Q4 into Q1 and even more impactful improvement between Q1 and Q2, as we took advantage of some interesting market opportunities. It was nice to see the sequential pickup between Q1 and Q2 in absolute terms, but it also reflected a relative outperformance versus our publicly traded U.S. comparables. Specifically, we generated near-record shipments. Revenue was up 3% versus Q1. EBITDA was up 26% versus Q1. Earnings per share was up 43% versus Q1. And cash from operating activities was up 29% versus Q1. If you look at the middle row on that diagram on that page, discretionary cap at the left box, we are active on the investing front in early 2025. Our Q2 level of $60 million was down from the $29 million level in Q1, but we continue to explore and advance new projects. In particular, we're moving forward on a series of interesting initiatives in Western Canada related to business improvement opportunities across the formal Samuel and Russell operations that should result in some capital realignments. Capital deploy remained over $1.7 billion, and our capital grew from what was $1.3 billion at the end of 2023 to $1.6 billion at the end of 2024 to just over $1.7 billion on June 30th. And given the potential M&A landscape, I suspect we'll be able to further deploy additional capital at attractive returns. Generate strong return on invested capital. Our return on capital has averaged over 20% per year for the past several years, and in Q2, we generated an annualized level of 20%. which is an improvement from the Q1 level and continues to be above the performance of our publicly traded U.S. comparables. Growth in strategic ways. Our U.S. platform is 44% of year-to-date revenues compared to 30% in 2019, and if we roll the clock forward, I expect that our U.S. platform will be over 50% of total revenues over the near term. We also have 11% of our revenues as specially metal, such as stainless and aluminum. Is that the key focus item for us? going forward. On the last row of the diagram, returning capital to shareholders, we have a balanced approach, and I'll talk more about this later on. In Q2, we returned $23 million by share buybacks and $24 million by dividends for a total of $47 million of capital returned to shareholders. Last item, bottom right-hand box, maintaining a strong capital structure is critical as we operate in this cyclical industry. At the beginning of the quarter, we extended our bank facility, and as a result, our liquidity is strong. We have flexible bank covenants. We have no financial covenants in our term debt, and our maturities are 2029 for the bank debt and 2030 for our term debt. So let's go to market conditions, which is on page six. We saw in the top graph sheet and plate prices exhibit a strong upswing in the early part of the year because of the tariff dynamics. Prices have been stabilized, and the outlook will be driven in part by the evolving tariffs dynamic. That being said, metal prices remain at favorable levels compared to historical price points that we have seen in the past. Our shipment levels have remained solid in spite of volatile price environments, but we will experience a seasonal slowdown in Q3, as is normal due to holiday-related schedules in July and August. To talk about tariffs for a moment. Our adaptable business strategy has proven to be successful as the industry now navigates through this evolving tariff dynamic. And for us, we are a transactional business with a lot of flexibility to quickly change as the market changes. We focus on inventory management so we don't speculate on things like tariffs or other market dynamics that are beyond our scope. As the past few years have demonstrated, we've generated strong cash flow in both the up and down markets as their operating people have done a really nice job of navigating through the market volatility. On the bottom chart, we've shown aluminum stainless prices as though are now a more meaningful part of our products mix. And you can see from the chart, those products don't exhibit as much volatility as carbon-based products as they have different supply and demand dynamics. On the right chart, supply chain inventories in both Canada in the top right and U.S. in the bottom right have moved up a little bit over the past few months, but they remain within a normal range. On page 7, we have a snapshot of the trend of our historical results. And if we look across the various charts going from top left, revenues were up versus Q1 due to the favorable business conditions. Revenues of over $1.2 billion was the highest level in over two years on a quarterly basis. EBITDA of $108 million was the highest level achieved since early 2023. Margins increased about 180 basis points for growth margins and 160 basis points for EBITDA margins. This improvement in margins is a noticeable outperformance to some of our public competitors who had relatively flat margins on a quarter-for-quarter basis. EPS was $1.07, which is the highest quarterly level since early 2023. And as I said earlier, our key to annualized return on invested capital came in at 20%, which is a nice pickup from Q1. Also, as discussed earlier, and I'll go into a little bit more detail later on in relation to our capital structure, we're in really good shape. Our net debt to invested capital is only 6%, so we've lost the dry powder to do things opportunistically. Going into more detail on financial results, page 8, from an income statement perspective, I covered several of the high-level items on the previous page, but a few other items to note. Revenue is up 3% from Q1, and we'll talk more about volumes later, but it was a strong shipping quarter in spite of some weather-related issues that impacted a lot of the regions across North America. Gross margins and EBITDA margins, as I said already, were up on a quarter-by-quarter basis. And our Q2 results were pretty good in spite of two very specific items. The mark-to-market on our stock-based comp was $5 million of expense in Q2, versus a $3 million recovery in Q1. Also, as most people have experienced, the Canadian dollar strengthening did have a negative impact on our P&L from the translation of our U.S. operating income into Canadian dollars. The P&L impact was about $2 million negative of pre-tax income due to that strengthening Canadian dollar dynamic. From a cash flow perspective, in Q2, we used about $43 million from working capital due to the positive business activity. Share buybacks were $22 million before tax, and cumulative share buybacks since August of 22, a little over 12% of our shares outstanding for $288 million, or $37.61 per share has been the average buy-in price. Quarterly dividend was 43 cents per share paid in June, and we just declared a 43% share dividend that will be payable in September. As I mentioned earlier, our capex at 16 was down a bit from Q1, but we still have a nice pipeline of projects ahead of us. And we should average into $90 to $100 million per year zone for a few years, but it will ebb and flow on a quarterly basis. Balance sheet perspective, we remain in a strong position with only $104 million of net debt. And lastly, our book value per share remains near $29 per share in spite of the recent FX impact. that impacted our OCI account and the shareholders' equity balance. On page nine, we have a graph that shows EBITDA variance on a quarter-over-quarter basis. And going from left to right, if we start with the service centers, the volumes were down a small amount compared to Q1, but the pickup in margins had a large positive impact on our service center EBITDA. And in total, our service center EBITDA was up $19 million versus Q1. Energy field stores were up $4 million versus Q1 as the segment recovered from a relatively slow start to the year. Field distributors had a nice dollar quarter and was fairly comparable with Q1 as it benefited from the favorable environment that occurred in the early part of Q2. In the other bucket, there was a negative impact from the mark-to-market on our share-based compensation, which I mentioned earlier. and it was offset by the seasonal recovery of our Thunder Bay terminal operations. On page 10, a little bit more detail on our segmented P&L information service centers. Very positive results, as I said earlier, for Q2, and I'll go through some of the specifics in more detail on the next page. Energy field scores were continuing to see solid performance after this low start to the year with revenues, margins, EBITs all up versus Q1. and steel distributors' revenue that were comparable in Q2 versus Q1. Page 11, a bit of a deeper dive on the metrics related to this metal service center segment. Top right graph is timeshift. Q2 was a near record. We were really happy with our team's efforts to move volume in a volatile market, and it reflected a continuation of our market share gains at attractive margins. Going into Q3, as I said earlier, we expect to see our volumes come down from Q2 levels. As is typical seasonal activity, you can see that to some of the other Q3 versus Q2 trends on that same chart. On the bottom left graph, we have revenues and cost of goods sold per ton. Our price realizations per ton were up more than our increase in cost of goods sold per ton, which led to a very nice pickup in gross margins. Our gross margins were $487 per ton, which was up $57 per ton versus Q1, and EBITDA per ton came in at $200, which was a $52 per ton pickup versus Q1. These shifts are noticeable versus our competitors in a reflection of benefits from our value-added initiatives and our team's ability to quickly adapt to market conditions. That said, some of the improvements in the quarter was related to lag effect, benefit from lower cost inventory going into cost of goods sold, and this benefit is likely to reverse somewhat in Q3 as we expect Q3 average margins to be lower than the Q2 average. On page 12, we have illustrated our inventory terms. It is a focus item that we always do talk about and is a huge focus item internally to be efficient in adjusting to market conditions. This chart shows inventory terms by quarter for each segment, energy in red, service centers in green, steel distributors in yellow. The black line is the average for the entire company. And overall, our inventory terms remain relatively flat at 3.7, as the three business segments each had similar results in Q2 and Q1. Our team has done a phenomenal job in continuing to manage inventory through these volatile times. Hats off to them. On page 13, we have the impact of the inventory turns on inventory dollars. Total inventory dollars was up a small amount compared to March 31st, and this was mostly related to higher prices that were somewhat offset by lower tonnage, as the operating team, as I said earlier, has done a really nice job of keeping tonnage in check. Page 14, we have the overall impact on capitalization and returns. As I said earlier, our capital deployed is a little over $1.7 billion, which is up from where we were at the end of 2024 and earlier years. On a return basis, our three-year average of current uninvested capital for the last couple of years was 24%. Page 15, update on our capital structure. As I said earlier, liquidity is strong, which gives us a lot of flexibility. Maturities have been extended for our bank line to 2029, and we've got 2030 maturities on our term debt. and our equity base per share continues to grow despite the share buybacks and dividends over the past quarter, as well as the FX impact on our OCI accounts. We've grown our book value per share, and it's 47 cents per share higher than this time last year. Page 16, first standard chart on capital allocation priorities, and continues to remain the focus item for us. It's a multi-fond approach. On the left-hand part of the page are investment opportunities, staking returns Over the cycle, greater than 15%. This past quarter, the past few years, has been a good indicator that we've achieved more than that on a steady-state basis, and we continue to see some interesting opportunities going forward, and interesting opportunities are across the transom. It is on additional value-added equipment, additional facility modernization. In terms of acquisition, we're actively looking at M&A opportunities and the types of acquisitions that are being considered are similar in nature and scope to what we've done over the past few years. For returning capital shareholders, we've adopted a fairly flexible approach. And if we look back over the past 12 months, we have returned about $107 million to shareholders via the NCIB. And the current annual run rate for our dividends is around $96 million. On page 17, a little bit more context to our re-investment program. Over the last 12 months, we've invested $87 million in CapEx. And as I said earlier, it does ebb and flow a little bit by quarters as some projects come on and some projects come off. And in Q2, we're down a little bit as some projects were completed, and we're still scoping some potential new projects across our platform. Page 18, a little bit of a deeper dive on returning capital to shareholders. Top left graph is the longer-term dividend profile. And with dividend increase that we had last quarter, it's continuing to be $0.43 per share, which was a lift where it was at this time last year. And we'll continue to regularly revisit the appropriate dividend level to consider our capital structure, earnings profile, and other capital alternative deployment opportunities, as was done when we lifted the dividend in May 2023, May 2024, and most recently in May of 2025. Bottom left chart. We show our quarterly NCIB activity that was put in place originally in August of 2022. We don't have a fixed approach to the program, and we view it as an opportunistic way to buy back shares, and we've been more aggressive at certain price points than others. In the past quarter, we bought back about a half a million shares at an average price of a little over $42 a share. Bottom right chart is the impact of the NCIB. It has been a gradual reduction of our share count. And the net result is about a 12% reduction in our shares outstanding over the last couple of years. And the top right chart is the aggregation of dividends versus the NCI view over the past two years. And again, it ebbs and flows by quarter, but it's been fairly balanced in totality as we look over the last year or two. In closing, on behalf of John and other members of the management team, again, I'd like to really express our appreciation to everyone within the Russell family for their contributions. We're really pleased with the first half of 2025 and look forward to realizing a series of interesting opportunities that are on the near-term horizon. So, operator, that concludes my introductory remarks, and you can now open the line for any questions, please.

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. If you have a question, please press the star-followed 501 on your touchstone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press the star followed by the two. Again, if you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from James McGarry from RDC Topo Markets. Please go ahead.