Russel Metals Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to our 2023 Year End and 4th Quarter Results Conference Call for Russell Metals. Today's call is being hosted by Marty Jurosky, Executive Vice President and Chief Financial Officer and John Reed, President and Chief Executive Officer of Russell Metals. Today's presentation will be followed by a question and answer period. I will now turn the call over to Marty Droshky, CFO and John Reed, CEO. Please go ahead, gentlemen.

Speaker 1

Great. Thank you, operator, and good morning to everyone. I plan on providing an overview of the Q4 twenty twenty three results. And if you want to follow along, I'll be using the slides that are located on our website. All you Need to do is go into the Investor Relations section.

Speaker 1

It's located in the area called Conference Call

Speaker 2

and you'll find a slide there.

Speaker 1

If you go to Page 3, you can read our cautionary statement on forward looking information. Let me start with a little bit of a Perspective and context around 2023. First of all, I want to thank the 3,500 people that are part of the Russell family. The team effort has been truly exceptional and

Speaker 3

we are very proud of how the

Speaker 1

group came together and delivered not just in 2023, but over the last number of years. 2nd, I want to thank our shareholders for granting us the patience as we implemented a series of initiatives over the past few years. It probably sounds like a cliche to say that we are focused on advancing the business for the long term, but we try to be very targeted And how, when and where we deploy capital. If we look at 2023, our safety record is the best in our history And we were recently recognized with an award by our industry peers. There's a robust pipeline of internal investments With some projects being completed in 2023 and many more in progress for 2024 and beyond, this pipeline of projects is Targeted value added equipment and facility modernizations and that pipeline is now the largest backlog in our history.

Speaker 1

We I announced the Samuel acquisition, which is expected to close in Q2. This acquisition was a long time in the making and would position our business well in Western Canada and the U. S. Northeast. We also completed a small tuck in acquisition within our energy field store business in Q4.

Speaker 1

So let me start with Page 5 and begin with a little bit of a discussion around market conditions. So So after some volatility with sheet prices in Q2 and Q3, both sheet and plate, were relatively steady In December January, that being said, sheet prices have declined somewhat over the past couple of weeks. When we look at both benchmarks today, there are a few interesting observations. The absolute prices are at levels that are higher than in previous cycles because of good demand, a higher cost curve for producers as well as better discipline by producers. The current spread between sheet and plate is making more sense than it had over the past few years.

Speaker 1

We saw periods in 2021 where sheet was in fact higher than plate, which is a bit of an anomaly. We also saw periods where plate was $700,000 $800 Per tonne higher than sheet, which is also an anomaly. The current spread is more reasonable compared to historical spread levels. You can see from the right charts in terms of inventories within the service center supply chain that the industry remains at reasonable levels for inventory At the same time, the demand is solid. On Page 6, we have a snapshot of our results.

Speaker 1

2023 was the 3rd best year in our history from a top line, bottom line and return perspective. We generated significant free cash flow and have the strongest capital structure that we've ever experienced, and that gives us a lot of flexibility To pursue a range of opportunities. If we look across the various charts going from top left, Revenues were $1,000,000,000 in the quarter versus $1,100,000,000 in Q3. EBITDA was $82,000,000 and EBITDA margin was 8%. Both of those were down from Q3, but without the Q3 contribution that came from TriMark, The Q3 and Q4 results would have been very similar from an EBITDA, EBITDA margin, EPS and return perspective.

Speaker 1

We think there's a very good outcome as Q4 is typically impacted by seasonality. Our annualized return on investment capital Came in at 19% for the quarter and our total for 2023 was 25%. When I mentioned the financial discipline and focus on returns, I think the bottom middle chart illustrates how we have delivered over an extended period of time. Our target is over 15% through the cycle and to be 1st quartile in the industry. The portfolio changes that have experienced over the last number of years have led us to achieving these goals.

Speaker 1

Lastly, in terms of capital structure, you see that on the bottom right hand chart. We have net cash of $332,000,000 versus net debt of almost $500,000,000 at the end of 2019. This capital structure shifts, As I said earlier, it gives us a lot of financial flexibility going forward.

Operator

If we

Speaker 1

go to Page 7, there's some more detailed information on our financial results. Just starting at the top of the page from an income statement perspective. I covered several of the high level items already, but a few other items to note. As I said earlier, revenues of $1,000,000,000 for the quarter, it was down 8% from Q3, price realizations were down a little bit And we had a small decline in service center volumes. On margins, all segments were up by about 100 basis points, And I can discuss these in more detail in a few minutes.

Speaker 1

Interest came down to $1,000,000 for the quarter as we are generating interest income on our growing cash Our Q3 results were impacted by a few non operating items. TriMark, we picked up $12,000,000 in Q3, but had nothing in Q4 as our interest in TriMark was sold in early September. Stock based compensation was $7,000,000 for the quarter due to the increase in our share price In the quarter, and we had a $3,000,000 increase in our inventory and RV reserves. Going down to the middle of the page from a cash flow perspective. In Q4, we generated $82,000,000 from working capital, primarily driven by a reduction in inventory and AR, which was somewhat offset by a reduction in accounts payable.

Speaker 1

CapEx. CapEx of $28,000,000 was higher than in the past couple of quarters As the pace of our various projects is picking up some steam. The 2023 CapEx of $73,000,000 is in line with the $75,000,000 that we had Going forward, we expect our 2024 CapEx to be over $100,000,000 as there are additional value added and modernization projects that are coming through during the next 12 From a balance sheet perspective, we are in net cash position of $332,000,000 This is a $60,000,000 improvement in the past quarter. Our liquidity is over $1,000,000,000 and we have the strongest balance sheet that we've experienced, as I've mentioned earlier. We manage the company with a conservative bias and We've demonstrated this approach through market volatility.

Speaker 1

One item of note is the Canadian dollar did strengthen in the quarter, which did have a negative impact on our OCI account In translating our U. S.-based financial results from U. S. Dollars to Canadian dollars. In the quarter, we picked up 390,000 shares under our NCIB, which brings the total to 3,200,000 shares since we put it in place in August of 2022.

Speaker 1

Our average purchase price to date is $34.65 Our book value per share remains north of $27 Per share, notwithstanding our share buybacks in the quarter. Lastly, we declared a quarterly dividend of $0.40 a share. If we go to Page 8, We have our EBITDA variance comparing last quarter to this quarter. Starting to the left, if we look at the service centers, the volumes were down a little bit Compared to Q3, but our margins were up a little bit and we also benefited from a $4,000,000 variance related to a reduction in our operating costs, which is mostly variable compensation. Towards the middle of the page, energy field stores were down on an EBITDA basis As Q4 was impacted by some seasonal slowdown in our U.

Speaker 1

S. Business and because Q3 included some lumpy projects at one of our Canadian divisions. Steel Distributors was up $3,000,000 due to good business activity and lower costs. There was a $13,000,000 unfavorable variance in other. As I said earlier in Q3, we had a $12,000,000 pickup from the TriMark Components and obviously there was nothing in Q4 because it was divested.

Speaker 1

We had a slight decline in our Thunder Bay Terminals operation and there was also an additional expense related to the mark to market on our stock based comp. As a favorable variance, other expenses came down by $4,000,000 in the quarter. If we go to Page 9, there's our segmented P and L information. For service centers, revenues were down, but both margins and EBIT were up. I'll go through more detailed metrics on the service centers on the next page, but our overall results were very good in what is typically a weak quarter.

Speaker 1

In Energy Field Stores, we are continuing to see solid performance. In Q4, revenues were down versus Q3 was some seasonal dynamics that I talked about before, particular for our U. S. Operation. Margins did come up a bit.

Speaker 1

As a reminder, and as I said earlier, one of our divisions moved some volume in Q3 for project work. That was a below normal margin, which is why our Q4 revenues were down a bit, but our margins were up. Steel Distributors segment revenues were down slightly, but margins Profitability were better than Q3. On Page 10, there's a deeper dive on some of the metrics for our service center operations. Top right graph is volumes for last number of years.

Speaker 1

Q4 2023 volumes were good. They were down 1% versus Q3. But given the seasonal comparison, if you look compared to Q4 of last year, they were up 5% versus this time last year. Bottom left graph, we have the revenue and cost of goods sold per tonne. Revenue per tonne of price realizations decreased by 114 Per tonne versus $115 decrease in cost of goods sold, which resulted in a slight pickup in margin per tonne That is shown on the bottom right graph.

Speaker 1

When we look at operating results over the past number of months, 5, 6 months, the margins were declining on a month over month basis as Prices were coming down and we were working through the lag effect of some higher cost inventory. This downward margin trend reversed towards the So our margin profile was better at the end of Q4 than at the beginning of Q4. For Q4, our gross margin was $4.43 per tonne, which remains at a pretty good level compared to the historical levels, which were closer to $300 a ton. As we've said many times in the past, our initiatives that are related to the value added Processing equipment and the other investment profiles that we have should lead to higher average margins and lower volatility over the cycle as compared to our legacy margins. On Page 11, we have illustrated inventory turns.

Speaker 1

The chart shows Turns by quarter for each segment, 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 declined from 4.0 at September to 3.8 at December 31. This is typical at this time of year as our Q4 turns do come down a bit with the pullback in shipments in the last few weeks of December. That being said, the 3.8 for Q4 of this year is better than we normally see in a typical Q4. By sector, our service centers were 4.4 turns, which is again industry leading.

Speaker 1

Our energy field stores Came down to 2.8, but that should improve in Q1, while our steel distributors improved from 3.2 to 3.5. On Page 12, I have the impact of the inventory turns on inventory dollars. Total inventory declined by $43,000,000 with a small decline across all three segments. In service centers, we had a decline in prices that more than offset A small increase in tonnage. This is consistent with our expectation that I mentioned a number of months ago on our Q3 call.

Speaker 1

On Page 13, we have the overall impact on capital utilization and returns. Our capital deployed came down to 1.3 $1,000,000,000 because of our working capital reduction in the quarter. More importantly, our returns continue to be industry leading. As mentioned earlier, our 2023 returns on invested It was 25% for the year. If we go to Page 14, I can provide an update on our capital structure.

Speaker 1

The continuation of the strong free cash flow gives us a lot of flexibility. On the left table, our cash position went up to $629,000,000 which It's a $660,000,000 increase versus September and it's also a $266,000,000 increase since this time last year. Our equity base remains over $1,600,000,000 and the chart on the right shows that our book value per share remains over $27 per share, which is over $2 increase since this time last year. On Page 15, we have an update on our capital allocation priorities going forward. Given our strong balance sheet, we continue to have a multi pronged approach across all of these bubbles that are on the page.

Speaker 1

For investment opportunities towards the top left of the chart, we seek returns over the cycle greater than 15%, as I've already discussed, and we've delivered well above that target. The ongoing opportunities are threefold. We are continuing to identify and pursue additional value added projects. In total, we have over 40 equipment projects on the go right now. Facility modernizations, we have 5 projects underway.

Speaker 1

They are tracking for completion at various times in 2024 and it's early 2025. In total, our CapEx was $73,000,000 for last year. As I said earlier, we expect that number to go up to over $100,000,000 for 20 24 As our project pipeline is currently over $200,000,000 that's a multiyear number as we continue to identify more and more opportunities. In terms of acquisition, we looked at a lot of deals over the last couple of years. In Q4, we closed the acquisition of Alliance Supply, which is a small tuck in for our Canadian Energy Fuel Store business.

Speaker 1

In addition, the Samuel deal is expected to close in Q2. In terms of returning capital to shareholders, the bottom part of the page, we've adopted a flexible and somewhat more balanced approach. For dividends in May, we increased our dividend to $0.40 per share per quarter and we'll continue to reevaluate the appropriate level on a regular basis. For the NCIB, we acquired 390,000 shares in the quarter. And since August of 2022, we acquired 3,200,000 shares at an average price of We expect to continue to utilize the NCIB on an opportunistic basis.

Speaker 1

If we compare the 2023 activity of our NCIB versus dividends, the dividend run rate was around 90 $6,000,000 versus $82,000,000 in share buybacks for last year. So we are close to a balance between the two forms of capital repatriation. That fifty-fifty frame of reference is not a hardwired target, but it's a good litmus test to see if we're being somewhat balanced. On Page 16, I want to provide a context around the cumulative impact of the actions over the past few years. In total, we generated 1.7 $1,000,000,000 worth of cash with $1,200,000,000 coming from operations $400,000,000 coming from asset sales, which If we compare that $1,700,000,000 on the left to the capital redeployment on the right graph, it is split into roughly three Equal buckets in orange are our reinvestments, which in total is just under $600,000,000 and it includes $81,000,000 of completed acquisitions, dollars 225,000,000 for the pro form a impact Of the Samuel transaction and $170,000,000 for internal CapEx.

Speaker 1

The blue part, excuse me, totals around $500,000,000 Which was the capital return to shareholders through both dividends as well as the more recent initiative under our share buyback program. And the last bucket is in green, which is around $600,000,000 in debt reduction cash buildup, which provides us the financial flexibility that I've mentioned earlier. Again, when we look back at this, it just provides an interesting frame of reference of the amount of cash that's been generated, the cash that's been redeployed In very similar buckets, about a third, a third, a third. Also, it's interesting to note that when we look at the asset sales of around $400,000,000 That is roughly the equivalent of the amount that has been invested through acquisitions and in the announced acquisition. So it comes down to a situation of trying to do more with effectively the same amount of capital, just better capital redeployment And you see that on Page 17.

Speaker 1

The top left is invested capital and it has averaged around 1 point $3,000,000,000 $1,400,000,000 over the last decade, but the biggest difference is that we reallocated our capital away from some underperforming businesses And reinvested in our core business. The result is we are doing more with the same amount of capital. Bottom left chart shows returns, which are At the higher tier over the last couple of years than they have been in the past. On the top right is EBITDA margins. We've consistently said that one of the outcomes of our actions should be to raise the floor, raise the ceiling and reduce the volatility through the cycle.

Speaker 1

And you can see some of that result being demonstrated over the last Couple of years. By comparison, there were some tough times in the past, 2015, even the front end of COVID of 2020. The sustainability of the business and financial performance is different than it has been in the past because of some of those initiatives.

Speaker 3

The net

Speaker 1

result is somewhat illustrated also on the bottom right graph, which is our book value per share. We've been in an elevated baseline And we're in pretty good position to continue to grow through the cycle. In closing, on behalf of John and other members of the management team, I'd like to express Our appreciation to everyone within Russell. Thank you to everyone across the company for your contributions. That concludes my introductory remarks.

Speaker 1

So operator, if you'd now like

Speaker 2

To open the line for questions, that would be great.

Operator

Thank You will then hear a 3 tone prompt acknowledging your request. And your first question will be from James MacGregor at RBC Capital Markets. Please go ahead.

Speaker 4

Hey, guys. Congrats on the strong results.

Speaker 1

Great. Thanks, James.

Speaker 4

Hey, just looking at the results sequentially at your service centers, we've seen steel prices up significantly versus The lows from last year, you pointed to higher volumes quarter over quarter. So how should we be thinking about sequential trends, In particular, on the gross margin side, given the higher pricing and the focus on value added services, Kind of within the context of your historical seasonality?

Speaker 1

Yes. Well, I think without being too short term focused, This is more a function of what does the trend line look like. I think we've tried to be consistent in saying that these initiatives should add a couple of 100 basis on average over the cycle. Now the cycle does move around a little bit and sometimes it gets more pronounced than others. But overall, It should be a couple of 100 basis points of impact through the cycle.

Speaker 1

Now that being said, we just happen to have had a couple Pretty good years from a cycle perspective. But even when cycles turn south and even with the volatility and they have turned a little bit south from time to time in 2023, We still demonstrated some pretty good results as evidenced by the margins that we had in Q3 and Q2 where there was some softening In pricing, so overall, James, to get to your question, the initiatives over the course of time should add on average a

Speaker 4

And then another one on some of the recent CapEx spend. Hi. This is a 2 part question. So you alluded to potential share gain from some of those initiatives. And what's the opportunity set kind of if we look longer term with regards to share gain?

Speaker 4

And then On the uptick in CapEx from prior guidance, is this a pull forward of spend or additional spend? And can you comment a little more specifically on what you saw in the market that kind of prompted that increase in CapEx spend?

Speaker 1

So when I answer the last question first, then John can deal with the first question in terms of the market. In terms of CapEx, it's not so much a pull forward. What we have is sort of an evergreen list. And It's the backlog of projects in the go and it's constantly getting updated every day, every week, every month. And the timing is a little But it effectively is a multi year plan.

Speaker 1

And then in terms of the specifics of when certain things come to fruition, It's a function of lead time in certain equipment. In some cases, it's readiness of certain facilities. In some cases, it's both equipment as well as buildings and buildings could sometimes be driven by permit requirements. So it's not so much we pull stuff forward. It was really a function There was an evergreen list that we always have, and this is just what that 12 month window between January 1 December 31 looks like.

Speaker 1

But we tend to get more focused on the evergreen list that is a multiyear evergreen list. What we've said The over is that we expect it to be north of $75,000,000 per year on average and 2024 is going to be one of the years that's a little bit above average.

Speaker 3

Yes, James, to your first part of the question on share gains, a lot of the share gains are actually coming directly from the end user customers. And so where they bought the steel in the past from us or someone like us and then that steel would be processed in their plant And it may have 2, 3, 4 processes done. With this value added equipment we've now installed, we're able to bring that in house And do that for the manufacturers or end users to where they can free up that space, free up the time and the working capital And we're able to do that with a typically at a more competitive price because it's not a multi Step process where we just have some more sophisticated equipment that can do all those in one step. So that's where the majority of the gain is coming from. And so that we feel like we'll continue down that road as we're seeing this just kind of evolve into the next step of

Operator

Did you have any further questions, James?

Speaker 4

No. Thank you very much. I'll turn the line over.

Speaker 1

Thank you.

Operator

Next question will be from Michael Doumet at Scotiabank. Please go ahead.

Speaker 1

Hey, good morning guys. Hey, Michael.

Speaker 5

So on the topic of capital deployment, you've invested a lot of growth capital, Marty. Good presentation there just

Speaker 1

To connect the dots on

Speaker 5

what you've done in the last 3 years, I guess the issue is that in the last 3 years you've managed to out earn what you've spent. So I'm thinking maybe longer term here, What your thought is on the optimal balance sheet for Russell Metals leverage targets? What you strive to get to longer term as you continue to invest?

Speaker 1

Yes. It's a good question, Michael, because at the end of the day, you're right, we've Built a really strong position. Some of it was by design because of the initiatives that we did and some of it was being In the right place at the right time as the cycle turned very favorably. And building dry powder is a good thing because we don't have The crystal ball on how cycles evolve, but having that flexibility is extremely important. So obviously, we've got tremendous flexibility right now.

Speaker 1

This is probably more of a philosophy than a hardwired numbers attached to targets. But the philosophy is we want to maintain good flexibility at all points in the cycle So that we can always be in a position to take advantage of opportunities that are presented to us because we don't know what's presented to us. And so what that means is, yes, we're sitting on I'll tell you that's net cash. That's not the long term plan. But at the end of the day, we do want to have a philosophy That gives a tremendous amount of flexibility to seize on opportunities.

Speaker 1

When we look at historical metrics, there's Frames of reference of there's been times you can do 30% net debt to invested capital. We can do something like that within the But it's not so much a hardwired target as it is more of an overall frame of reference of maintaining Strong liquidity at all parts of the cycle, so that if the cycle turns up, we do certain things. If the cycle turns down, we do different things. And so that liquidity flexibility is more of a qualitative underpinning than a hardwired number. It should be this or it should be that.

Speaker 5

That's perfect. I really like the answer. And then maybe just switching over to the numbers here. So Steel Distributors 2023, pretty outstanding year. Maybe if you can break down, John, the reasons behind the outperformance, especially into Q4.

Speaker 5

And then just wondering, as we think about 2024, the overall sustainability of the margin profile?

Speaker 3

Yes. So very astute acknowledgment there on steel distributors and primarily driven in Q4 And really throughout the year by our Canadian steel distributors. And again, we've typically done back to back contracts as the market Moves up and down in price, they'll lock in sell back to back. They had an opportunity in some windows this year to do some more transactional Things that were in favor just due to the market and available tonnage that was brought to us from suppliers. So they were able To take advantage of that opportunity.

Speaker 3

But overall, again, I think that gave them some margin windows that are typical. So I think we'll go back to a more normalized margin that we've seen historically in 2024 for our steel distributors. Our U. S. Again is highly transactional.

Speaker 3

It had an average year for them. They'll be probably stronger in 'twenty four, so there'll Some balance in there, but as far as their gross margin profiles, I think it will be more historical.

Operator

Next question will be from Davis Bacon at BMO Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. This is Davis on for Devin Dodge.

Speaker 7

Hey, Davis.

Speaker 6

Thanks for taking my question. Regarding the Samuel acquisition and expanding into the Northeast, How quickly can Russell add scale to that region?

Speaker 1

Some of it's out of our control because it's a function of opportunity. And we don't want to hardwire targets or hardwire timing Because it would kind of force the wrong situation perhaps at the wrong time. Just to kind of, Davis, to peel back, John, I've lost track of how many acquisitions we've looked at in the last number of years, Probably close to 100. And so building scale is not hard. Building quality Businesses that fit financially, fit culturally, fit operationally, that is hard.

Speaker 1

And so we don't have hardwired timelines or Targets to say we need to be of a certain size in certain regions at various points in time. We're just going to continue to be opportunistic. And we think that is a region where we actually have some operations already in Wisconsin. The two locations in Pittsburgh and Buffalo for Samuels are a nice extension of that. So we actually do have a good platform and we'll be opportunistic as new situations present themselves.

Speaker 1

And if they don't present themselves, we're not compelled to grow in that region. We've got good scale for what we have. If there is better opportunities, terrific. And if there aren't the right opportunities, we've got a good platform as it currently stands.

Speaker 6

Okay, great. I appreciate the context. Then switching gears maybe a little bit here. Are your 5 facility modernization processes still expected

Speaker 1

Yes, mostly in 2024. A couple might spill into early 2025.

Operator

Next question

Speaker 8

Yes. Thanks for the commentary on the share gains in Q4. So I mean just to circle up on that, The volume growth was pretty good in Q4, just over 4%. So am I understanding correctly that that was mainly in Canada with the transactional items in the market And also some share gains on the value add initiatives that John discussed.

Speaker 3

Yes. And I think Michael was asking Specifically about steel distributors only. So if you're looking more broadly across the service centers, I think What you're touching on, on the share gains based on the percentages you gave there. So again, those were again different. That was driven by the value added initiatives that we've done primarily that are out there.

Speaker 3

So again, 2 different segments to our business. I think you may have blended the 2 together.

Speaker 8

Right. Okay. Thanks. I was

Speaker 4

just wondering if you could

Speaker 8

give us an example of One of the value add initiatives where you've seen success that's allowed you to Gain share with your customers and or turn inventory faster. I think it's kind of underappreciated that you're leading the sector in terms of inventory turns for I would just like to understand that a little better.

Speaker 3

Yes, so just Just a couple without getting too granular on specific is we were a big beam inventory player. We put in a beam line It allowed us to go in and now we're actually taking those beams where our customers that were in fabrication were doing value added downstream that may Include in a project of scale, maybe $1,000,000 project, $1,500,000 We're now adding a component of a couple of $100,000 of labor margin to that By being able to do that on that line within a monthly period, that would be one project. So with, Again, as Marty said, over 40 underway, probably well over 100 completed. We're seeing that in each individual location Happened over and over again. So we become now not just a commodity supplier to that to our customer, But we're a value add extension of them where they can go out and take on more additional work if they don't have that capacity in their shop Or if they do not have that process, it gives them an avenue into that.

Speaker 3

So it allows us to go out and do that without in a lot of cases without adding to our inventory profile We're just adding the labor component.

Speaker 8

Thank you. And Marty, on the acquisitions, you mentioned you looked at close to 100 last year. For the ones that you're saying no to, Are there any common reasons why you'd be saying no? Is it valuation primarily or And how much higher do you find that the margins for your service centers are versus the targets that you see?

Speaker 1

So the 100 was not Last year, it was over a couple of years. But regardless, it was a big number that we looked at. In terms of reasons, it's all over the map Some of it is valuation and within that 100, there were some deals that came back to market multiple times And we had issues not just the first time we had issues, the second time or in some cases the third time when they would come to market. Sometimes it is valuation, sometimes it is Cultural fit, there's some things that are non negotiable in terms of things like safety. And obviously there are situations where you can bridge from legacy safety cultures to what our standards are and sometimes you can't.

Speaker 1

Sometimes there's entrepreneurs who have run really successful businesses who want to leave. And is there a backup plan in place behind them? So there's a whole variety of reasons, and I wouldn't pinpoint to saying it's only one item. It is really A whole series of things that are important criteria to us, which is why we tend to be fairly selective.

Speaker 8

And apologies if I missed this. On your CapEx plans for 2024, Which include over $100,000,000 Do you have a breakdown for how much of that would be for the Samuels integration? How much would be for value add and how much is maintenance CapEx?

Speaker 1

Yes. So the maintenance CapEx component of that is probably $30,000,000 $35,000,000 plus or minus. So the balance of it is discretionary. And so that goes kind of go back to the core pieces of the value added projects, The things that John was just talking about as examples, as well as those facility modernization. So about 2 thirds of that is discretionary.

Speaker 8

And how are you thinking about the dividend and the NCIB Here, given the share price has recovered somewhat, but the stock still looks compelling on valuation now that you're Flush with cash and we'll be busy with integration on Samuels as far as large acquisitions go.

Speaker 1

Yes. So In terms of dividends, we made the dividend increase from $0.38 per share per quarter In May, to $0.40 per share per quarter and we'll continue to revisit on a periodic basis. I can't tell you exactly what the period is going to be. But it's something that we'll probably revisit more actively on a go forward basis than had been done over the last Number of years. It's hard to completely forecast what that would look like, but it'll probably be a periodic reassessment.

Speaker 1

On the NCIB, it's opportunistic. And in some ways, it's the sort of same circumstances as M and A. M and A is opportunistic. We're not interested in doing everything that is available out there from M and A landscape. By the same token, there's times we'll be more active or less active on the NCIB.

Speaker 1

There are certain price points we'll be more aggressive than others. And so we've I tried to articulate it as an opportunistic approach to the NCIB, and I think that's going to just continue to be the frame of

Speaker 8

Thanks for your comments.

Speaker 1

Great. Thanks, Jonathan.

Operator

Next question will be from Michael Tupholme at TD Securities. Please go ahead.

Speaker 7

Maybe just to pick up on one of those last questions. Just regarding the dividend, Marty, you mentioned you'll You expect to continue to reassess periodically. Is there a payout ratio you have in mind that we should be thinking about As we try to think about how the dividend may evolve over time?

Speaker 1

The short answer is no. It's not viewed that way that we've got a hardwired dividend ratio that we're going to do a recalibration on every quarter, every year. It's looking at things more holistic than that for a whole variety of criteria. So I wouldn't want to sit here and say we've got a hardwired formula That you can plug into a model. It's not the way we've looked at it recently and it's probably not the way we're going to look at it on a go forward basis.

Speaker 7

Okay. That makes sense. As far as the quarterly performance for Service Centers, we did see gross margins I know you commented earlier about how we should think about sort of gross margin Improvement potential over time given the value added initiatives. But in the short term here, just given the way steel prices have moved, We saw them move up through the early part of this year and then I guess recently there's been a little bit of a check back. Can you just help us think about Q1 Service Center gross margins versus Q4 just given kind of the movements we saw in in steel prices and kind of what we've seen so far this year, just because again, it's sort of rising and then now falling a little bit.

Speaker 7

So just trying to understand where that leaves us Q1 versus Q4 Service Centers gross margins.

Speaker 1

Sure. Well, your last observation is spot on. They do move around, that is for sure. And I think overall, it kind of under it underpins another point, which is there is still a cyclicality attached to this business, And we pay attention to that a lot. We don't predict it.

Speaker 1

We don't control it, but we recognize that it's there and we try and adapt to it. So part of the dynamic attached to margins is also just the lag effect between prices changing on product And incoming inventory that may be committed to a couple of months in advance of actually product going out the door, that whole lag effect of How it flows through, which is why on a very short term basis, usually measured by a couple of months, you often do see times where Top line might be going up, bottom line cost of goods sold might be coming down or vice versa and that translates into Dynamics with margins, Q4 was a little bit of that because there's a point where we actually saw pricing coming down, Actually, Q3 and Q4 pricing coming down, but cost of goods sold was coming down more on a lag effect basis. So they weren't working in symmetry. What that ultimately meant for us is that when you break down Q4 into its components, margin picked up In December versus what they were in October or November, and that kind of the level that's maintained itself into January. So the January level It's kind of similar to December, and December was a little bit higher than it was in November.

Speaker 1

So where we are right now, all of the things being equal, the January level is probably sustainable, which is a little bit higher than the than it was Coming into Q4, but there's obviously, as you point out, some moving pieces in terms of steel prices. So it's hard to be too predictive. But at the end of the day, it was a better story coming out of Q4 than going into Q4 from a margin perspective.

Speaker 7

Okay. Well, thank you. Can you provide an update on where things stand in terms of the approvals for the Samuel Service There's acquisition and what key items are still required to achieve before closing?

Speaker 1

Yes. So there's a whole variety of things that are taking place in terms of planning and readiness and all that. And we're spending an awful lot of time. There's a lot of IT elements attached to coordination. There's a lot of people elements attached to readiness, a lot of back office elements attached to that.

Speaker 1

There's ongoing dialogue with the regulators. So it's really a multipronged approach. And there's a lot of resources that are going into it. It's a carve out from an existing company. So there's complexity attached to that by definition.

Speaker 1

There's locations in various locales. So there's a lot of components attached to kind of going from concept, going from an agreement to closing, which is why it takes a little bit of time. So there's a whole variety of those things taking place in parallel right now.

Speaker 7

Okay. But Q2 is the expectation for Correct. And you were asked about CapEx earlier, the $100,000,000 and gave the breakdown between Maintenance versus discretionary. Does the $100,000,000 include what you intend to spend, If anything, in the context of the Samuel acquisition and whatever you plan to do Once you do close in terms of any value added related initiatives?

Speaker 1

Yes. Well, let's put it this way. The $100,000,000 What I said is greater than $100,000,000 So whatever needs to be done in terms of Samuels, That by definition would be inclusive in it, but we don't know enough right now to know exactly what we would want to do. And To be more specific too, from a timing perspective, there's a lead time associated with doing any kind of investment. So We wanted to do something within our existing operations today.

Speaker 1

There's a lead time to the planning. There's a lead time associated with An approval process, there's a lead time associated with the equipment. So for all intents and purposes, it wouldn't be a big dial mover Element in 2024 anyways.

Speaker 7

Okay. Makes sense. And then just regarding the Energy field stores, I don't think there's been a lot of discussion on this call about that segment, but the outlook commentary you provided In the release sounds fairly constructive as it relates to that segment. Through the 1st part of this year at least, we have seen Looks like North American rig counts are down versus last year. I'm not sure they've changed much sort of sequentially, but just on a year over year basis, They're down a fair bit, maybe more so in the U.

Speaker 7

S. Than in Canada. You've obviously seen some natural gas price weakness of late. I'm just wondering how you're thinking about that business For sort of full year 2024 versus last year, is this a business you think you will see growth in, in 2024? And if so, where is that coming from?

Speaker 7

Or how you're thinking about it would be helpful to better understand?

Speaker 3

So for the broader industry, I think it's fairly flat. We'll see a little maybe a little bit of a bump in Canada with some of the large projects that are starting to come to fruition, but we're pretty bullish on that we're taking share on both sides of the border right now, and that's where we saw our growth Last year, and so we'll continue to see that and we think we'll continue to grow share both in Canada and the U. S.

Speaker 7

Okay, got it. I will leave it there. Thank you.

Speaker 9

Thanks, Mike.

Operator

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

Speaker 10

Is relative to 3 months ago when you do the bottom up analysis through your various operating jurisdictions, Is sentiment better or worse from your customers and I guess your operators?

Speaker 3

When we're looking at specifically at 1 division, are you talking about each one?

Speaker 10

Yes, sorry. Sorry, I apologize. And that's specifically for metal service centers.

Speaker 3

Okay. Yes, metal service centers, it's interesting demand is pretty flat overall. What you've seen is the interest rate Sensitive projects that are out there or maybe industries that are out there, they've obviously pulled back a little bit based on What's going on with the increased interest rates? There is some anticipation they'll take back off as interest rates start to roll over and come down. But overall, we've seen a very Steady demand, our tonnage is very steady.

Speaker 3

We're seeing price fluctuations up and down, so there's some sensitivity there. But we're in a very, very healthy pace right now for our industry When you look back historically, again, 3rd best year ever and we're holding that type of rate right now, so we're pretty bullish on our service centers.

Speaker 10

And John, I suppose to follow on from that, and I know it's incredibly hard to tell, but do you get the sense yet of whether you're seeing Any demand pickup from whether it be IHAA, the IRA or any of these various government bills? Or do you think that ends up being a net tailwind as we move through the middle and Maybe back half of this year and into 2025?

Speaker 3

Yes, I think we've seen a little bit and it's but it's not the huge tailwind that The media portrayed it as early on, but I do think we'll see that mid year and late year with it being an election year, it will get pretty Interesting, especially with the U. S. Election, so that could get delayed a little bit, but we are starting to see things move forward. It's out of the ground now, and so we're starting to see things Leave the planning process and go to the procurement process for some of those projects.

Speaker 10

Okay. And on the Pricing side, I mean, we tend to spend a lot of time focusing on HFC and Play, but there's a pretty large chunk of your book that isn't really either of those two products. What's are those are the prices in those other products that are harder to find, are they a bit stickier? Are they holding in a bit better? Like how should we be thinking about those?

Speaker 3

Yes. And so and we do spend a lot of time focusing on HRC and plants, you're exactly right. Some products, again, That's the base substrate metal for them. So if it's tubing pipe, those things are coming from a substrate, so they're driven by it. The others are more sticky So if you look at your traditional bar stocks, your beams, angles, channels, valves are highly engineered product if Shift over to energy, so in our energy fill stores, flanges fittings, so those are highly engineered, so they just don't move as much.

Speaker 3

There's not as Much raw material to move there or commodity item to move. No, you're exactly right. The others are more sticky. The non ferrous, we will see movement in Based on the indexes that are out there and the input coming in, so it has more volatility as well. And as we continue to grow that initiative

Speaker 10

And As you think about the facility modernization projects that are ongoing, I presume you've embedded those in growth capital. And so Can you maybe talk a little bit how you're going to generate returns just from upgrading facilities and the like?

Speaker 3

So there's 2 real avenues that are there when we're upgrading facilities. 1 is just modernization efficiencies. And so we've got some of our facilities are older, a little bit antiquated, but as we come in, we'll come in with better equipment as well as expanded facilities It will allow us to again improve efficiencies through our warehouses and handling. And then the additional space also allows us To grow in the value add space to add equipment, plus now we can take on additional share of sales that are out there. So if we're growing, We may be running that capacity at a facility now by doing this it will allow us to expand further.

Speaker 3

Thanks Ian.

Operator

Next question will be from Maxim Sytchev at National Bank Financial. Please go

Speaker 9

ahead. Hi, good morning gentlemen.

Speaker 3

Good morning. Hey Matt.

Speaker 9

Most questions had been asked already, but I just wanted to try Maybe to ask sort of a different tack in terms of visibility, because one of the things we've heard is that as steel pricing was kind of rising throughout Q1, There was a bit of a slowdown in terms of the pace of whether inquiries or maybe less kind of inventory restocking. I'm just curious to see what you guys are seeing on the ground and whether that's a bit different in your universe. Yes, any comments would be greatly appreciated. Thanks.

Speaker 3

Yes, so we did see steel pricing going up, you're right into Q1 and we've seen it roll over now and you can see some of the indexes are starting to roll over. Inventories For our industry as far as the service center, we're at a very good level. And what I mean by that is that we weren't too high, weren't too low, so they're turning at a very normalized level. So You're not going to see pricing pressure from one side or the other from it being either too low or too high. The mills are running at a capacity level around that 75%, 74%, which is very healthy for the mills.

Speaker 3

So again, on all those levels, I think we're in pretty good shape going forward. We are seeing that steady demand out there. So again, if this is a steady state that we're in right now, we'll just see pricing fluctuations based Raw material inputs from scrap and any up or down will have an effect, but right now it looks to be a very steady state for us in the first

Speaker 9

Okay. That's super helpful. Thank you. And Marty, just because you made a comment around sometimes cost of goods sold Moving in the opposite direction to in the short term in terms of the revenue, but in terms of what you have In the inventory and what's going to be flowing through the COGS, do you mind maybe commenting a little bit on directionality? How should we think about this?

Speaker 9

Yes, most of that

Speaker 1

if steel prices didn't move, And they will, but if they didn't move for the next couple of months, we've probably seen that lag effect already factored in To our cost of goods sold. So some of that dynamic that I was talking about before where prices were moving around, prices were coming down, but our cost of So we're still going up a little bit and the reverse has happened. It's kind of all other things being equal, that lag effect Has worked itself through our inventories and into our cost of goods sold now. Does that get to

Speaker 9

your question, Max? Yes, Absolutely. Yes. So I guess like a bit of stability, assuming things are going to stay as they are, which maybe they won't. Okay.

Speaker 9

Okay. I understood. And maybe just last one. I mean, like obviously, it's an election year in the U. S.

Speaker 9

I guess any chance of Section 232 being potentially removed, I guess, high to high non liquid from your perspective?

Speaker 3

Yes, I think both sides need 232 right now. Again, with Pittsburgh being a sorry, Pennsylvania, I'm sorry, being a swing state. I think they're both Very keen to stay with 232 and to keep it as is and not make any changes there because that state may swing the election. And so it's both for pandering to the unions that are out there in those states, both sides of the party. So I just don't see any changes at all $232,000,000 going into an election.

Speaker 9

Okay. Okay, excellent. That's it for me. Thank you so much. Thanks,

Operator

And your next question will be from Frederic Bastien at Raymond James. Please go ahead.

Speaker 2

Hey, good morning, guys.

Speaker 3

Good morning,

Speaker 2

Lots of interest in Russell Metals. That's awesome. John, I recall you flagging the Inflation Reduction Act and some investments in renewable power as really a positive source of growth like 12, 15 months ago. Is this sort of a market you're really excited about? Obviously demand seems to be broad, Strong and broad across geographies and things like that, but any specific markets that you're really excited about?

Speaker 3

So solar is something we're really excited about. Believe it or not, a lot of solar goes on in Alberta. So again, we're very excited about solar. We're participating on both sides of the border there and also wind. And so as we continue to see the wind projects go forward, That money is now available.

Speaker 3

That was kind of they were kind of running out well late last year. Those funds are now available to be reused again from the Government acts that you mentioned, so that will start to ramp back up as well and again good users of our product in that and so we Again, on both sides of the border there. So we think both of those are good. Obviously, the EV plants are continuing to grow And we're seeing that transition start to happen. We don't typically participate in automotive, but on the EV side, we do have some participation

Speaker 2

You've been at this for a while. Is this the best markets and best opportunities you've ever seen in your time in the steel sector? It seems We're going to be in for a couple of good years of strong demand, strong prices.

Speaker 3

I guess it's a nice way of telling me I'm old Fred since I've been at it for a while,

Speaker 2

but Well, we've known each other in a while.

Speaker 3

It's definitely been a very robust market compared to anything I've seen And really the sustainability of that over 3 years, there's been some peaks and valleys in that, but everything at a very high. So the demand has been very good and also the price of Steel has been very good. So it appears that the pricing has reset that the new floor on steel when you look at where we where steel will come to I think slowdown will be interesting to see, but it looks like the cost, those things that went in have reset the bar for our industry. And so, it's been a really nice ride for the last 3 years and we don't see anything really pulling back on that for the next I guess the next 2 or 3 years as far as we can see out, we just don't see anything to change that right now.

Speaker 2

So my next question is going to be what's keeping you up at night? It doesn't seem like you're it seems like you're sleeping well, but What are the concerns that you're having right now and to make that potentially with your people and The strategy going forward?

Speaker 3

Yes. And again, Marty touched on it in his opening Vincent just so proud and excited for our team that they won the MSCI Safety Culture Award. They continue to set records every year with our safety performance All time low again this past year on our LTIs, but that's really what keeps me up at night is we've got 3,500 Russell family members That are out there every day. This is a dangerous product. Again, we think we've put things in place to Stop the risk, keep them from happening, but accidents do happen.

Speaker 3

And so the really things keep me up and I are worrying about our teammates, their safety, Making sure they go home safely to their families every night and that we're doing everything we can do as a company and This is a Russell family to take care of them, so that would be the number one. When we look at it from a business operating side, It's really we've got great people. We've done a good job with succession building depth in the organization. So that's what I think separates us and makes us really strong. So that definitely does not keep me up.

Speaker 3

It's what do we see in the economy and then what's going to come in as a Black Swan event. We've got a balance sheet that's very flexible that allows us to really take advantage of opportunities or manage markets as they turn down. Is there another COVID around the corner or a financial crisis? Those things are out of our control, but they do concern you at

Speaker 2

All right. Thanks. That's all I have. Thank you very much. Thanks, Greg.

Speaker 3

And At

Operator

this time, Mr. Jurasky, we have no further questions. Please proceed.

Speaker 1

Great. Thank you, operator. I appreciate everybody for joining our call today. If you have any follow-up questions, please feel free to reach out at any time. Otherwise, we look forward to staying in touch during the balance of the quarter.

Speaker 1

Take care, everyone.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending.

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Key Takeaways

  • Russell delivered its third-best year ever in 2023 with Q4 revenues of ~$1 billion, EBITDA of $82 million, a 25 percent ROIC for the year and strong free cash flow.
  • The company ended Q4 with net cash of $332 million and over $1 billion of liquidity, positioning it to close the Samuel acquisition in Q2 and pursue opportunistic share buybacks.
  • Capital expenditures will rise to over $100 million in 2024, funding more than 40 value-added equipment upgrades and facility modernizations within a >$200 million multi-year project pipeline.
  • Service centres achieved industry-leading margins and inventory turns, supported by value-add processing initiatives and the best safety record in company history.
  • Capital allocation remains balanced, with the quarterly dividend raised to $0.40 per share and ~$82 million repurchased in 2023, all while targeting >15 percent returns through the cycle.
AI Generated. May Contain Errors.
Earnings Conference Call
Russel Metals Q4 2023
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