Russel Metals Inc.

Good morning, ladies and gentlemen, and welcome to the 2025 third quarter results for Russell Metals. Today's call will be hosted by Mr. Martin Juravsky, 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. Martin Juravsky. Please go ahead, Mr. Juravsky. Thank you.

Great. Thank you, operator. Good morning, everyone. I'll be providing an overview of the Q3 2025 results, and if you want to follow along, I'll be using the slides that are on our website. just go to 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 a little perspective on the quarter that's outlined on page five. If we look at the first nine months of this year or trailing 12-month periods, we have delivered an improvement in trendline results. I'll talk more about this on another slide, but in summary, for the first nine months of 2025, as compared to the first nine months of 2024, we generated 10% increase in revenues, 100 basis point pickup in gross margins, and a 13% pickup in EBITDA. This is a reflection of the impacts of our recent capital deployment initiatives, including two acquisitions last year, as well as our ongoing capital investment initiatives. On the middle row of that diagram, Q3 CapEx was $15 million. This number is a bit below our expected multi-year run rate, as some projects have been recently completed, and we are still scoping out some potential new opportunities. In particular, we expect to be moving forward on a series of interesting initiatives in Western Canada related to business improvement opportunities across the former Samuel and Russell operations, as well as investment opportunities will emerge from the Klockner transaction that we recently announced. Capital deployment. remained a little over $1.7 billion. Our capital grew from $1.3 billion at the end of 2023 to $1.6 billion at the end of 2024 to just over $1.7 billion on September 30th. When the Klockner deal closes, it will be around $1.9 billion on a pro-form basis. At the same time that we are deploying incremental capital for the Klockner acquisition, we are also repatriating some capital in Western Canada, In September, we announced the closure of a branch in Delta BC and the sale of the related real estate. This will release over $40 million of capital that was not generating an adequate return and was part of the broader initiatives in Western Canada that emerged as part of the Samuels acquisition. When that real estate sale closes in the new year, we'll have released over $100 million of capital in Western Canada and thereby substantially reduce the cost of the Samuel acquisition from the original $225 million purchase price to something closer to $100 to $125 million. Generate strong return on invested capital. Our annualized return on invested capital was 16% for 2025 year to date. This level is greater than our stated target of over 15% over the cycle, notwithstanding some challenging market conditions, and was greater than our three U.S. peers who have already reported their Q3 results. The annualized 2025 year-to-date return on invested capital for the three U.S. peers averaged less than half of the 16% that we generated. We grew in strategic ways. Our U.S. platform is 44% of year-to-date revenues compared to 30% in 2019. Once we take into account the Klockner acquisition, our U.S. platform will be over 50% of total revenues. We also have 11% of our revenues as specialty metals, such as stainless and aluminum. On the last row of the diagram, returning capital to shareholders, we have a balanced approach. In Q3, we returned $14 million via share buybacks and $24 million via dividend for a total of $38 million of capital returned to shareholders. Maintaining a strong and flexible capital structure is critical as we operate in a cyclical industry. As a result, our liquidity is strong. We have flexible bank covenants, no financial covenants in our term debt, and our maturities are 2029 for the bank debt and 2030 for our term debt. We are also pleased that S&P has recently upgraded our credit rating to BBB-, so we are now rated as investment grade by both S&P and DBRS, and this gives us financial flexibility as well as continued access to low-cost term debt if and when required. Let's turn to market conditions on page six. We saw sheet and plate prices exhibit a strong upward swing in the early part of 2025 because of the tariff dynamic. Prices have since come down and have stabilized over the past couple of months. The ongoing price dynamic will be driven in part by the evolving tariff situation. As a reminder, we are primarily a cost pass-through business with a lot of operational adaptivity to how and where we procure materials. So the key thing from a Russell perspective is to have tariff clarity and consistency for our suppliers and the markets. Our shipment levels have remained solid in spite of volatile price environment. We've experienced a slight seasonal slowdown in Q3, as is normal due to holiday-related schedules in July and August. Going forward, we expect a typical seasonal volume decline will come into play for Q4. On the bottom chart, we've shown aluminum and stainless prices, as those are now a more meaningful part of our product mix. As shown on the chart, those products don't exhibit as much volatility as carbon, as they have different supply and demand dynamics. On the right side chart, supply chain inventories in both Canada and the U.S. is measured by months on hand that you can see in the yellow line, remains within the normal range. On page seven, there's a snapshot of our historical results. And if we look across the various charts, starting with the top left, Revenues were consistent around $1.2 billion for each of the past three quarters. EBITDA on the middle chart of $75 million was down from Q2 2025, but higher than Q3 of 2024. EBITDA margins at 6.4% for the quarter and 7.6% year-to-date were up over the comparable periods in 2024. Earnings per share was $0.63 per share and $2.45 for year-to-date 2025, which, again, were both up versus the comparable periods in 2024. I mentioned return on invested capital earlier. Our Q3 return on invested capital was down from Q2, but year-to-date 2025 came in at 16%. And as mentioned earlier, the bottom right chart capital structure, we're in pretty good shape with net debt to invested capital at only 5%. On page eight, going into our financial details a little bit more, top part of the chart 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 were down 3% from Q2, and I'll talk more about volumes later, but it was generally a pretty good shipping quarter in spite of the seasonal dynamic. Our Q3 results were, however, impacted by a few items. There was a $4 million one-time charge for the closure of our Delta BC facility. On the plus side, we'll have a gain on that sale plus a gain on the sale of our Saskatoon property when they close in 2026. Second, there was a $2 million tariff cost that was applied to materials in transit when the Canadian government changed the tariffs, and it was applied to in-transit goods from an overseas supplier. The Canadian government's rules have since changed, and we have filed an appeal for a refund on that tariff. The mark-to-market on stock-based comp was a $2 million recovery in Q3 versus a $3 million expense in Q2. From a cash flow perspective, in Q3, we generated $5 million of cash in working capital. There was a $46 million reduction in inventory, so the cash generated from working capital would have been higher if not for the timing of AR and AP right around quarter end. Share buybacks, as I mentioned earlier, $14 million for the quarter, and the cumulative share buybacks since August 2022 are greater than 13% of our shares outstanding at the time for a little over $300 million, or an average of $37.77 per share. Excuse me. Our quarterly dividend of 43 cents per share was paid in September. and we've just declared a $0.43 per share dividend that will be payable in December. Our capex of $15 million was down a bit from Q2, but we still have a pipeline of projects, and we should average that $90 to $100 million per year for the next few years. From a balance sheet perspective, we remain in a strong position with net debt coming down, and it was only $87 million at the end of September. And lastly, our book value per share remains above $29 per share, and it grew by 127 over the past year in spite of the share buybacks. Page 9, we show our EBITDA variance analysis between Q2 and Q3. First, looking at the service centers on the left part of the page, the volumes were down a small amount compared to Q2, and this was the typical season factor that I already mentioned. The margin impact of $22 million was due to the market in general, and the lag effect of steel price changes to inventories and cost of goods sold that I mentioned earlier. The $7 million variance in operating costs is driven by the $4 million delta charge that I spoke of and some other costs related to our Western Canada business as there are near-term operational impacts from removing and relocating a fairly significant amount of equipment across our network. Some of the equipment relocations are continuing, but it sets the stage really well once these moving pieces settle down in early 2026. Energy field stores down $2 million from Q2. Steel distributors had a solid quarter, and it was only down $1 million from Q2 in spite of the market dynamics and the $2 million tariff charge that I mentioned earlier. In the other bucket, there was a positive impact from the mark-to-market on stock-based comps. that was offset by a decline at our Thunder Bay terminal operation from what was a pretty strong Q2 for the Thunder Bay terminal. On page 10, this is a new chart. And I want to show the trend of our results from a slightly different angle. So let me start with a little bit of a description of what this chart is showing. One, it is a continuity that takes out the quarter-to-quarter noise as it's sometimes hard to see trends when looking at an individual quarter in isolation. So all the data on this chart shows trailing 12-month periods at the various points in time. Two, want to show two time periods being pre-COVID and post-COVID. Pre-COVID is obviously the period, the three years between 2017 and 2019, then excluded the COVID period of 2020 to 2022. And those years were quite unusual, as we all know. A really down year in 2020 and phenomenally strong 2021 and 2022. So those COVID years, not that meaningful in looking at medium-term trends. The right chart reflects the most recent almost three-year period of 2023 to 2025. So the takeaways. The pre-COVID period shows an average EBITDA of $270 million. excuse me, versus the post-COVID chart where the average EBITDA was $361 million, which is a 35% increase. Also, the chart on the right doesn't fully reflect the impact of the acquisitions that were completed in 2024 or the Klockner deal that is not yet closed. The point being that our average cycle EBITDA is now substantially higher than in the past. Also, if we look at the circled areas on these charts, It shows that the peak to trough range in the last cycle had a variance of $167 million in the 2017 to 2019 period versus a much lower variance of $127 million on the right chart for the most recent three-year periods. The point being that we have raised the cycle average EBITDA and also reduced the cycle volatility. Lastly, if we look at the chart on the right, it shows a sequentially improving trend in in trailing 12-month results. On page 11, we have our segmented P&L information for service centers. I'll go through this in more detail on the next page, but it was a down quarter versus Q2 due to the seasonal impacts of volume and the margin compression that I mentioned earlier. Energy field stores, we were continuing to see solid performance after a slow start to the year with EBITDA down slightly from Q2. Distributors' revenue and EBITDA were comparable in Q3 versus Q2. So on page 12, there's a deeper dive on the metrics for the service center business. The top right graph is ton shipped. Q3 was down a little bit from Q2 due to seasonality, but up over Q3 2024 on not just an absolute basis, but also on a same store basis. I expect Q4 to exhibit similar seasonal patterns to typical Q4s with volumes being down in the quarter versus Q3. On the bottom left graph, we have revenue and cost of goods sold per ton. Realizations on price per ton were flat, while we had an increase in cost of goods sold per ton, which led to a decline in gross margins to 430 per ton in Q3 versus $487 per ton in Q2. Looking into Q4 a little bit, we saw that in August and September, the margins had stabilized, but were below the Q3 average. And I expect that we'll see margins in and around that August-September level for Q4. Page 13, we've illustrated our inventory turns. This chart shows the inventory turns by quarter for each segment, energy in red, service centers in green, steel distributors in yellow, and the black line is the average for the entire company. Overall, our inventory turns improved slightly to 3.8, and again, our guys do a really fantastic job in managing inventory through the cycle. Page 14, we have the impact of inventory turns on dollars. Total inventory was down about $40 million compared to June due to both lower tonnage and lower prices per ton. On page 15, a quick update on our capital structure. Our liquidity is strong, which gives us significant flexibility, and as said earlier, we recently obtained a credit rating upgrade from S&P, so we are now investment grade by both S&P and DBRS. Since last quarter, our net debt was reduced from $104 million to to $87 million, and our liquidity increased from 566 to $600 million. The far right column of the table shows the impact of the Klockner acquisition, and we'll continue to have significant liquidity on a pro forma basis. Lastly, our equity base per share continues to grow in spite of the share buybacks and dividends, and we've grown our book value per share, and it's up $1.27 from this time last year. Page 16, just a summary of our capital allocation priorities. And again, very similar priorities of how we've talked about it in the past. And I'm going to go into a little bit more detail in a second. But overall, when we look at the capital allocation priorities on the left-hand side of the page, it is really focusing on all those initiatives. And the most recent example being the acquisition of Klockner that is not yet closed, but we expect to close at either the end of this year or the early part of next year. and then the returning capital to shareholders. Again, fairly balanced approach. Over the last couple of years, the average NCIB activity was $106 million, and the current run rate on our dividends is $96 million per year. Page 17, a little bit of context for our reinvestment program. Over the past 12 months, we've invested $81 million in CapEx. Q1 and Q2, we were down a little bit as some projects were completed and we were still scoping out some potential new projects. across the platform. Page 18, bit of a deeper dive on the returning capital to shareholders. Left chart, longer-term growth profile on dividends, with the most recent dividend of 43 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, and it was done when we lifted the dividend in May of 2023, May of 2024, and most recently in May of 2025. On the bottom left chart, we show our quarterly NCIB activity since it was put in place in August of 2022. I've said it before, I'll say it again. We don't have a fixed approach to the program as we view it as an opportunistic way to buy back shares, and we have been more aggressive at certain price points than others. In addition, you'll see that our activity in Q3 of this year was lower than the past few quarters as we were in a longer than normal blackout period when we were getting to the finish line. on the Klockner agreement. On the bottom right chart, the impact of the NCIB has been a gradual reduction of our share count and resulted in a greater than 13% reduction in our shares outstanding. On the top right chart, the aggregation of dividends versus NCIB over the past two years shows a fairly balanced approach between the two tools. In closing, on behalf of John and other members of the management team, I'd just like to express our thanks to everyone on the Russell team for their contributions. In particular, I'd like to especially acknowledge those within RUSLE who are actively involved in the due diligence, structuring, and transition planning for the Klockner acquisition. It's an exciting new project, but it was and continues to be a lot of work, and our team's efforts are very much appreciated. Operator, that concludes my intro remarks. Could you now open the line for questions?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Davis Bainton of BMO. Your line is already open.