Russel Metals Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

Key Takeaways

  • Russell Metals delivered a strong Q1 2023 with revenues rising to $1.2 billion (up from $1.1 billion in Q4), EBITDA of $160 million (versus $97 million), 100 bps margin expansion, EPS of $1.19 and an annualized return on capital of 27%.
  • The company is now in a net cash position of $105 million (versus net debt of nearly $500 million at end-2019), generated an additional $600 million in free cash flow and has total liquidity of about $800 million to fund growth.
  • Market conditions remain supportive, with steel plate and sheet prices elevated on higher scrap costs, modest supply-chain inventories in North America and broad-based industrial demand driven by onshoring, infrastructure and renewable energy projects.
  • Segment performance was robust: Metal Service Centers shipped record Q1 tonnage (+16% YoY) with margins of $4.64/tonne, Energy Field Stores sustained 25–30% gross margins, and Steel Distributors saw margin gains despite slight revenue dips.
  • Strategic capital allocation includes an average annual CapEx target of ~$75 million for value-added equipment and modernizing facilities, a dividend bump to $0.40 per share, an active NCIB and disciplined pursuit of U.S. service-center M&A opportunities.
AI Generated. May Contain Errors.
Earnings Conference Call
Russel Metals Q1 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to our First Quarter 2023 Earnings Call for Russell Metals. Today's call will be hosted by Martin Jurafsky, 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. I will now turn the meeting over to Mr.

Operator

Martin Jurafsky. Please go ahead, sir.

Speaker 1

Great. Thank you, operator. Good morning, everyone. I plan on providing an overview of the Q1 2023 results. And if you want to follow along, I'll be using the PowerPoint slides that are on our website And just go to the Investor Relations section.

Speaker 1

If you go to Page 3, you can read our cautionary statement on forward looking information. So let me begin with just a little bit of perspective on the quarter before I go into the detail. In Q1, we were very pleased with the financial results As we saw a pickup in performance across our business units. In addition, we advanced a number of internal initiatives related to our CapEx programs, System, safety and professional development of our staff. All these initiatives have set the stage for long term growth of our business.

Speaker 1

We also published our inaugural sustainability report, which you can find through the link on the main page of our website. We are very proud of our sustainability accomplishments, including a very low carbon footprint as measured on both an absolute basis as well as relative to our industry peers, Strong governance and attention to safety and engagement in our communities. So let's begin with going to Page 5 To have a little bit of a discussion around market conditions. Steel prices picked up late in Q4 and continued that trend into Q1. In particular, both plate and sheet head price increases on the heels of higher scrap prices and remain at levels that are above historical frames of reference.

Speaker 1

As you can see from the charts that are on the right hand side of the page, supply chain inventories are modest in both Canada and the U. S. And when combined with the recent pickup in demand, it allows the industry to be well positioned from a supply and demand perspective. Specifically on the demand side, we are seeing broad based support from our customer base as we are focused on the industrial side of the North American economy, Which from our lens is doing quite well. I think the industrial side of the economy is still playing catch up with pent up demand and we are seeing favorable demand dynamics Coming from onshoring in North American manufacturing, infrastructure products, projects, spending on renewable energy and as well as a variety of other areas of demand.

Speaker 1

If we go to Page 6, you can see a snapshot of our Q1 results. We saw a sequential pickup in revenues, EBITDA, margins and returns. If we look across the various charts going from top left, Revenues were $1,200,000,000 versus $1,100,000,000 in Q4. EBITDA was $160,000,000 Versus $97,000,000 in Q4 due to a pickup from each of our business segments, we saw an approximate 100 basis point pickup in EBITDA margins and solid results from each of our segments. From a bottom line perspective, EPS and return on capital also improved with EPS of $1.19 per share and Q1 2023 annualized return on capital of 27%.

Speaker 1

We continue to deliver exceptional results. In terms of capital structure, we have net cash of $105,000,000 Versus net debt of almost $500,000,000 at the end of 2019. The $600,000,000 increase in free cash Flow gives us a lot of financial flexibility going forward. In particular, we are pursuing a range of strategic initiatives that we think should grow the business, and I'll talk about those items in a few more minutes. If you go to Page 7, I'll go through a few items related to our detailed financials.

Speaker 1

From an income statement perspective at the top of the page, I covered a number of the high level items already, But a few other items of note. Revenues of $1,200,000,000 were about 8% higher than Q4. On margins, Service Centers and Steel Distributors improved, while Energy Field Stores were once again our highest margin segment. Interest expense came down to $4,000,000 as the increase in interest rates is allowing us to generate interest income on our growing cash reserves. Overall, we generated earnings of $74,000,000 and earnings per share of $1.19 per share.

Speaker 1

Our Q4 results were impacted by a few non operating items. Okay. To Trimark, we picked up $9,000,000 for our share of their earnings and $4,000,000 of cash flow came in from dividends through TriMark in Q1. Stock based compensation had a $4,000,000 negative impact in the quarter versus $2,000,000 in Q4. We had a small of $3,000,000 decrease in our inventory and our view reserves as the improvement in steel prices reduced inventory risk and the inventory provision.

Speaker 1

From a cash flow perspective, in Q1, we used $18,000,000 for working capital. There were a number of moving pieces with accounts receivable going up due to improved sales activity and AP coming up as well. All the while inventory was relatively unchanged. CapEx of $14,000,000 was similar to Q4, but higher than last year at this time as we are continuing to advance a series of value added equipment projects and facility modernizations. As we said in the past, our annual CapEx should pick up and be around $75,000,000 on average for the next couple of years.

Speaker 1

From a balance sheet perspective, we are in net cash position with net cash of a little over $100,000,000 Which is made up of our term notes of $300,000,000 that is more than offset by a cash position of a little over $400,000,000 Our liquidity is almost $800,000,000 Our book value is up again and is now approximately $26 per share. Lastly, we have increased our quarterly dividend from $0.38 per share per quarter to $0.40 per share per quarter, And I'll talk about that to give a little bit more context to it in a few more minutes. If we go to Page 8, you can see our EBITDA variance Between last quarter and this quarter and looking at service centers, the large pickup in volume was the biggest factor in Q1 As it added around $23,000,000 of EBITDA to the quarter. Margins picked up a bit as we moved through the quarter and that contributed about $7,000,000 of additional EBITDA via the Service Centers. The operating cost for Service Centers did pick up a little bit as we had higher volumes and higher incentive based compensation for that business unit.

Speaker 1

Energy field stores improved by approximately $6,000,000 in the quarter As the capital spending in the sector continues and steel distributors improved by about $7,000,000 due to pickup in steel prices. There was a $12,000,000 unfavorable variance in the other category, which included the slightly lower earnings in Q1 versus Q4 from TriMark, The seasonal impact of our Thunder Bay Terminal operation and that should shift back the other direction in Q2 and the mark to market on stock based compensation with the increase in our share price. If we go to Page 9, I have some of the segmented P and L information. The service centers continued to do well as the market improved. Revenues, margin, EBIT picked up and most of the impact was late in Q1, so we think there's a favorable dynamic heading into the early part of Q2.

Speaker 1

And then in the Chief Field Stores, we are continuing to see positive market sentiment. Overall, market conditions remain upbeat as we look into 2023, although there is typically some softening in Q2 Due to the Canadian spring breakup phenomenon, gross margins came in at 27% for energy field stores and have remained in that 25% to 30% range since the monetization of the OCTG Line Pipe business in mid-twenty 21. Distributors revenues was down slightly for the quarter, but margins and operating profit were up as they benefited from improving steel prices Any favorable product mix. If we go to Page 10, we're having a deeper dive on some of the metrics specifically related to our metal service center business. The top right graph is the last 5 years for tons shipped.

Speaker 1

And as you can see, the typical Q1 dynamic is a pickup from the seasonal impact of Q4, and we did see that in a very positive way This past quarter, in Q1 2023, we had a 16% increase in tonnage and experienced the highest volume quarter that we have seen for several years. Demand continues to look solid into the early part of Q2. On the bottom left graph, we have the revenues and cost of goods sold per ton. Our revenue per ton, even though there was a decline for the quarter versus Q4, We did start to see that trend shift late in Q1 with a 3% increase in March versus February. As I mentioned earlier, we are continuing to see pricing levels that are higher than the long term historical average.

Speaker 1

For cost of goods sold, it did come down The bottom right graph shows gross margins and EBITDA per tonne. Margins picked up by about $20 per tonne versus Q4 and remain well above historical levels. The current margin profile of $4.64 per ton remains healthy as we're seeing the continuing benefits from good demand and the increase in value added processing in the portfolio have an impact on our results. On Page 11, we have shown our inventory turns. This chart shows inventory turns by quarter for each segment with energy in red, service centers in green And steel distributors in yellow.

Speaker 1

In addition, the black line is the average for the entire company. A few high level takeaways. Overall, our inventory turns improved slightly in the quarter from 3.7 to 3.9. When we benchmark ourselves versus our publicly traded peers, We are generally the top performer on this metric by sector. Service Centers improved a bit from 4.2 to 4.5.

Speaker 1

Energy fuel stores was flat at around 3. And for steel distributors in yellow, the inventory turns increased from 2.7 to 3.2 As our inventory position declined in the quarter as we realized some backlog in that business. If we go to Page 12, You can see the impact of the inventory turns on inventory dollars. Total inventory came down by about $60,000,000 from December 31. This is mostly a reduction in steel distributors that was offset by an increase in energy field stores and increase in energy field stores is really to serve It's growing backlog of business.

Speaker 1

The service center saw a $12,000,000 reduction in inventory, which is mostly due to a reduction in average cost of inventory As opposed to tonnage, overall, our inventories are in pretty good shape as we have achieved a really nice balance between managing capital prudently And serving our customers in the marketplace. If you go to Page 13, you can see the overall impact on capital utilization and returns. Our capital deployment is up a little bit to around $1,500,000,000 More importantly, our returns continue to be industry leading with a strong start To 2023, our LTM returns stand at 31%. If we go to Page 14, I want to update our capital structure. The continuation of favorable market conditions and our disciplined approach to capital utilization has given us a lot of financial flexibility.

Speaker 1

On the left table, you can see that our cash position went up to $401,000,000 which was a $255,000,000 increase Over the past year, a $38,000,000 increase just in the past quarter. As I said earlier, we are realizing the return on our cash balance That substantially offsets the interest cost on our outstanding term notes. Our equity base continues to grow and is now over $1,600,000,000 If you look at the chart on the right, you can see the continuation of the last number of years. Our book value per share is now $25.90 which is an almost $11 increase over the past 2 years. If you go to Page 15, We have an update on our capital allocation priorities going forward.

Speaker 1

Given our strong balance sheet, we have a multi pronged approach to capital allocation. For investment opportunities, we continue to seek average returns over the cycle greater than 15%, and we have consistently delivered well above that target. The ongoing initiatives are threefold. We are continuing to identify and pursue new value added projects. We move forward on a number of series of projects in both Canada and the U.

Speaker 1

S. In the past quarter, and we're seeing more and more opportunities ahead of us That we continue to target. 2, building modernizations, we're moving forward with expansions and upgrading projects in Saskatoon, Joplin, Missouri and Little Rock, Arkansas. These projects will evolve Over 2023 and into 2024. In addition, we are looking at potential projects in several other locations where we have legacy setups that can be upgraded and consolidated into newer modern operations.

Speaker 1

These facilities will allow for volume growth, Increase operating efficiencies, improve health and safety conditions, and in some cases, they will also allow for the monetization of higher value legacy real estate. In terms of acquisitions, we remain committed to our financial and operational criteria. That being said, the deal pipeline remains active. In terms of returning capital to shareholders, we have adopted a flexible approach for dividends. As I said earlier, we have increased our dividends To $0.40 per share per quarter from $0.38 For the NCIB, we have acquired 1,000,000 shares under the current plan And of 2,200,000 shares of availability under that program.

Speaker 1

If you go to Page 16, I want to give a little bit more context to our dividend increase. Russell has had a history of dividend increases having rated dividend 4 times between 2,0092014. However, it has been a static dividend for the past 9 years. That being said, if we look back at the last 5 years, we generated Almost $18 per share in earnings and paid out cumulative dividends of $7.60 over those 5 years, which equates to about a 42% payout ratio. Our change in business mix over the past few years has resulted In lower free cash flow volatility, stronger earnings power and a very strong capital structure.

Speaker 1

Therefore, we feel very comfortable increase our dividend to $0.40 and also maintain our ability to pursue a range of other capital allocation scenarios. Going forward, we plan to periodically review our dividend level for potential future modifications by considering the prevailing market condition as well as our earnings, capital structure and alternative uses of capital. In closing, on behalf of John and other members of the management team, I'd like to express our appreciation to everyone within the Russell family. 2023 is off to a great start. We are very pleased with our financial results, but equally important, we were Very pleased with the series of initiatives that led to record low health and safety incidents.

Speaker 1

Thanks to everyone across the company for your contributions on all fronts. That concludes my introductory remarks. So operator, you can please now open the line up for questions.

Operator

Thank you, sir. And your first question will be from Michael Doumet at Scotiabank. Please go ahead.

Speaker 2

Hey, good morning guys. Nice quarter.

Speaker 1

Hey, Michael. So maybe first question, just

Speaker 2

on the Sequential margin improving in metal service centers. I think in your outlook, you highlight that demand trends, steel prices increase continue into Q2. I think you also, In a different section of

Speaker 1

your opening commentary, you talked about the reduced average cost of inventory.

Speaker 2

So wondering whether that implies so far high revenue per tonne and EBITDA per tonne so far into Q2 and just how Maybe we can give the balance of Q2 in that segment.

Speaker 1

Yes. It's a good question, Michael, because the dynamics that occurred within the quarter We're heading in the right direction. So we had positive trends when we look at Q1 versus Q4 as it relates to overall margins, But the margins got better through the back end of the quarter than the front end of the quarter. And we're seeing positive margin dynamics In the early stage of Q2 as well. So said another way, our margins that we were seeing in April We're slightly better than the margins that we saw for Q1 on average.

Speaker 3

Got it. That's helpful.

Speaker 2

And then just changing topics here. The fact that you guys have effectively no net leverage, just amazing because Presumably, while this business is working capital heavy, I'm assuming competitors are being more challenged with interest costs and Credit availability. Do you think that's translating or maybe they'll translate into market share gains and potentially eventually M and A?

Speaker 4

Hey, Michael, I think you're spot on there. I think it's going to give us some opportunities in both in market share gains. We're seeing that now. A lot of that's being led by our value added initiatives and so we're able to become more sticky with our customers. And again, putting our balance sheet in a position Relative to our competitors, I think it opens opportunities for M and A, but we'll remain very disciplined against our criteria.

Speaker 1

And John, it's fair to say too that when we actually look at the industry data, this is not just a new phenomenon. If we look back Where we are today versus the period pre COVID, we've seen market share.

Speaker 3

Very nice guys. Those are

Speaker 1

my 2 questions. Thank you. Great. Thanks, Michael.

Operator

Thank you. Next question will be from Ian Gillies at Stifel. Please go ahead.

Speaker 5

Good morning, everyone.

Operator

Hey, Ian.

Speaker 5

With respect to the strength in HRC prices Through Q1, is there any reason to think you won't

Speaker 3

be able to pass those

Speaker 5

on to your customers through Q2 as you're Actually selling that inventory, because there seems to be some commentary around demand being weak in certain instances. And Just trying to get your view on how that dynamic is playing out.

Speaker 4

If you look at the market right now, we're seeing a little bit of pressure on HRC due to scrap prices going down. We're not having any trouble passing it on. Keep in mind, I think Marty mentioned earlier, our So we're moving through our inventory much faster than the rest of the market. So we're not seeing any troubles since we're sustaining those high margins that we saw at the end of the quarter. So we're not very concerned about that and the ability to pass those on.

Speaker 4

We'll watch the market. But again, I think this is more of a dynamic than scrap. We're not seeing And I've seen a lot of import opportunities that are out there right now at attractive levels. Demand is very solid. So again, I think you'll see scrap bounce along here

Speaker 5

Okay. That's helpful. And switching gears to the energy products side, It's obviously early days and it's horrible related to the Alberto wildfires. But is there any update you can provide on what your intentions are for that business to During the near term here, I know it's typically a seasonally weak quarter, but nonetheless would be helpful.

Speaker 1

Yes. It's Thursday and you're right, the forest fire dynamic is just Difficult for people operating in those situations. It hasn't had that direct impact on what we've seen. What we've seen is the normal seasonal dynamic that happens in Canada this time of year It's a spring breakup. Hopefully, everybody is able to work through the 4 Squire situation out west.

Speaker 1

But in terms of that being the cause and effect of What we're seeing in our business, generally speaking, what we're seeing from our energy business in Canada, also in the U. S. It's just a generally positive trend. Yes, there's going to be Mother Nature that comes to play every now and again for parts of the year, but we're trying to see through that. And the trend for that segment is pretty positive.

Speaker 5

Okay. That's helpful. And then if I could maybe just sneak in one last one with respect to steel distributors. I mean, the margins there were great during the quarter. Yes.

Speaker 5

Has that continued on into the Q2? Or is that business normalized out? Just I'm trying to get a sense of what's happening there.

Speaker 4

It's normalizing now, Ian, and there were some timing things that we had some material held up at the port, came in late Q4 and so it flowed into Q1 and say we're able to monetize that in the market change, but they'll normalize out as we go through Q2.

Speaker 5

Okay. I appreciate that. I'll turn the call back over. Thank you very much.

Speaker 1

Thanks Ian.

Operator

Thank you. Next question will be for Frederic Bastien at Raymond James. Please go ahead.

Speaker 2

Good morning, guys.

Speaker 1

Good morning. Hey.

Speaker 3

There are concerns right now that the tightening credit environment will finally catch up to the segments of the construction Just wondering what your thoughts are on this and whether you're seeing I'm starting to see cracks at all in sort of the big steel heavy projects that you're helping support.

Speaker 1

The short answer is no right now. I mean, how things evolve over the medium to long term with the economy, and I think it goes to broader issues in terms of interest rates and inflation that are still out there. Those may or may not become relevant as things unfold, but the part of the economy of deal that we deal with is Still doing fine. At the margins, there may be some pauses in individual projects here and there and regions here and there. Looking at things in their totality across the segments that we deal with and we deal with a very broad range Of industrial type consumers, the broader dynamic is very good.

Speaker 1

Yes, there's little spots here and there Where there may be some softening, but that's always going to be the case when we look across the portfolio. But on average, Things are pretty good. How things evolve more over the medium to longer term? Our crystal ball doesn't go out that far, But the short term is generally pretty solid.

Speaker 3

Thanks for that. The other question I have is around Renewable power, there's a lot of investments being made in North America now to support the energy transition, etcetera. And I recall this was Sort of an end market that you were feeling pretty good about. Can you provide a bit of an update here and whether that comment you made in

Speaker 4

Thanks, Fred. It's we're very positive right now in the renewable, wind, solar. We're seeing that money start to flow down in the U. S. And the initial stages, we think it will have a big impact in Q4 of this year.

Speaker 4

And so it will affect the plate market pretty dramatically. So we're pretty bullish on what's going on there.

Speaker 3

Awesome. That's all I have. Thanks.

Speaker 1

Great. Thanks, Troy.

Operator

Thank you. And your next question will be from Michael Tupholme of TD Securities. Please go ahead.

Speaker 6

Thanks. Good morning.

Speaker 1

Good morning, Mike.

Speaker 6

Good question about the energy field stores Segment and also looking at the JV earnings. So Energy Field Stores, you saw an improvement sequentially in EBIT. The JV earnings though were down a little bit sequentially, so strong, but down a bit sequentially. So I'm just I realize they're different businesses, but At the same time, it seems like the driver here is really just the improvement in the energy sector and the level of activity, and I would have thought that both would generally move in the same direction. So

Speaker 4

Yes. So keep in mind, the OCPG Line Pipe or the JV, again, is driven by the downhole of the big project. When they have it, it's timing of the project. And really our field stores is driven by what's going on in the market, but they have a big large maintenance component. And so they maintain it for the life of the well as well as So they get some of these pickups intermittently in the period when you get well is going in, but the JV may have a well go in and then go into a low.

Speaker 4

They will go throughout and so they'll see that consistent maintenance and MRO type business that you won't see in the JV.

Speaker 1

Okay. In some ways, the contrast between those two businesses is part of the reason we did what we did back in 2021. They both touch on energy, but in different ways. And we feel pretty good about the field stores being a good part of our portfolio on the long term basis Because of the dynamics that John talked about and there are very different dynamics that impact the volatility and seasonality On OCTG line pipe. So in some ways, it's a little bit of a micro test that confirms the path that we started down a couple of years ago in Separating out those businesses and monetizing OCTG wine pipe.

Speaker 6

Okay. That makes sense. Second question, I don't think you were often asked about this, but corporate expenses This quarter looks somewhat higher than certainly than they were a year ago, but also just higher than they've been In general, over recent quarters. So wondering if there's anything to sort of explain that. And then secondly, how to think about corporate expenses Going forward.

Speaker 1

Yes. So there's a variety of moving pieces in there. But using Q1 as a baseline Of this year is a good place to start, Mike. When you look over year over year comparisons, there's a variety of things that are in play. One is you do have mark to market on stock based comp That has some variability into it.

Speaker 1

You've seen some inflation. And also the way The connectivity to variable comp also flows in there as well. So as market conditions improve or as market conditions And profitability goes up and profitability comes down, the variable comp moves with it. That's why you will see some variance in corporate expenses. And then the last piece is there is some inflation that is occurring this year versus last year across all parts of the economy, and that's one place that we're seeing it.

Speaker 6

Okay. So what we saw this quarter, you think that's a reasonable way to think about it over coming quarters for this year?

Speaker 1

Yes. That's a good starting point for your model, Mike.

Speaker 3

Okay. Perfect.

Speaker 6

And then the comment you had in In the release, just regarding the fact that you had evaluated a number of potential acquisitions in the quarter. I mean, I know this is part of the strategy and it gets talked about on quarterly calls quite regularly. I don't recall seeing a comment like that in the release. So just wondering if maybe just clarify for starters if that is in fact sort of new and the motivation for And maybe more importantly, like maybe just comment on the pipeline and what you are seeing in terms of the

Speaker 1

I actually don't remember offhand what we have said or haven't said in the past, To be perfectly honest, but in terms of capturing where things are right now, it is active. Now that being said, we've seen a lot of deal activity In terms of potential deal flow over the past period, but I think there were it was hard to find the right situations for us as we look back to 2022. I'm probably more optimistic today in terms of the situations that are in and around us. But there's still some wood to be chopped in order to move things forward. But I'm more optimistic about the pipeline that I'm seeing today In the pipeline that we are seeing, say, 6 months ago.

Speaker 6

Okay. And is it primarily the U. S. That we should be thinking about as really the focus area and more specifically service centers in the U.

Speaker 4

Yes. But keep in mind, we've said that for years and then we end up doing something in Canada along the way. So we will remain opportunistic. But Ideally, yes, it would be U. S.

Speaker 4

Service centers that we're focused on.

Speaker 6

Okay. That's all I had. Thank you.

Speaker 1

Great. Thanks, Mike.

Operator

Thank you. And at this time, gentlemen, we have no other questions registered. Please proceed with closing remarks.

Speaker 1

Great. Thank you, Operator, thank you everyone for joining our call. If you have any questions, please feel free to reach out at any time. Otherwise, we look forward to staying in touch during the balance of the quarter.

Operator

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

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