Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the 2019 third quarter results conference call for Russel metals today's call will be hosted by this Merian Britain Executive Vice President and Chief Financial Officer, Mr., John Reid, President and Chief Executive Officer for Russel metals.
Today's presentation will be followed by a question and answer period at that time. If you have a question. Please press star one on your telephone keypad.
Now, let's turn the conference over to Ms. Mary in Britain. Please go ahead.
Good morning, everyone I'll start on page three reading the cautionary statement certain statements made on this conference call constitute forward looking statements confirmation within the meaning of applicable securities laws, including statements as to our teacher capital expenditures.
Our future financing and our ability to pay dividends forward looking statements relate to future events.
Or our future performance all statements other than statements me I'll circle Socs are forward looking statements forward looking statements are necessarily based on estimates assumptions that well considered reasonable.
Inherently involve known and unknown risks uncertainties and other factors that may cause actual results or events to differ materially from those anticipate in such forward looking statement.
Our actual results could differ materially from those anticipated in our forward looking statements, including had there we saw the Miss factors described below interim DNA and in our annual information form well, we believe that expectations reflected in our forward looking statements are reasonable no assurance can be given that these expectations will prove to be correct.
And our forward looking statements included in this call should not be unduly rely upon these statements speak only as of the data this call and except as required by law, we did not assume any obligation to update forward looking statements.
Turning over to page five.
Two words third quarter result.
Q3 earnings 18 million or 29 cents of <unk> compare to last year, which was a record quarter up.
All are 10, P., Oh, I'm, Mark and then we have earnings of 83 million or adult and 34.
During the quarter, we generated significant cash I mean for the nine months anything cash up 59 million and our accounts receivable and 80 million from inventory.
Free cash flow for the nine month to September 134 million or $2 and 16.
Compared to three to six last year return on equity a 13% and we are yesterday declared our dividend for the fourth.
[laughter].
Turning to page six speak a little bit to the market conditions, Oh, we experienced slower demand in all.
Business segments steel prices were down also in the quarter and we believe steel prices are at or near the bottom.
Metal service centers are selling price decline was the biggest driver of the metal service decline in earnings.
On price was down 11% compared to Q3, eight she and was down 7% compared to Q2 19.
The tons were down in the quarter on a same store basis compared to.
Q3, 18 by 5%.
College in both Q Western Canada are significantly down euro per year, which has impacted our demand in our energy segment.
Revenues for energy were down 17% compared to Q3.
2018.
[laughter].
Looking forward to the next page seven.
This is our charge that gets you the thought for your look back and our comparison to the.
Nine months last year, you'll note that our accounts receivable I mentioned has generated significant cash the nine month, but it is also down very significantly from where we were at this point in Q3 2018 or due to the revenue decline.
Oh further down this page I'll point out the capital expenditures.
So far this year, we spent 24 million on capex compared to 31 million last year.
We do continue to add value added equipment and the number of our service centers, which we do believe is helping keep our demand and.
A little <unk> better than the industry.
We don't anticipate it spending more than ours, we anticipate spending this year less than the 2018 number of 40 million, we'll expect to be in the low 30 millions for Capex This year.
Turning forward to page 10.
Just point out the cash flow up from accounts receivable and inventory in on that other highlights page. We had the nine month numbers, but you'll note that there was a significant drop in inventory in the quarter. A we continue to work on reducing inventories to go.
Get rid of higher priced inventories in the segment and to position ourselves, particularly energy, where we have lower demand.
Turning forward to page 13, Oh I'll mention here that we completed the.
Acquisition of Citi tight October 1st see the more specific detail on the acquisition are in no 22.
Our complete.
Statements that were filed.
Yesterday on SEDAR the.
Acquisition price in US dollars ended up to be 106 million they had brought down there.
Assets to keep keeping in line with their revenues the.
Acquisition price consisted of 56 million you asked of net assets plus 50 million of goodwill we have not completed the actual allocation of the two fair market value to the assets, but that will be done by yearend.
Turning forward to page 14.
This is our normal chart, which has our comparison to prior year plus shelter gross margin in our EBIT margins.
Looking at this.
I'll speak to the metal service, even our gross margin of 18.5 that compared to the year to date of 18.8.
Margins held quite well and in the quarter, considering the fact that prices.
Came down in the quarter and came down more after the end of the quarter.
We're expecting that it'll be in this range or slightly less in the Q4 period energy products was impacted slightly by.
And our views that we had to take with in that segment I'll speak to that a little bit later.
And.
A mix, but mainly the energy decline in margins has to do with the impact of lower rig counts on or CTG product.
Still distributors similarly had pressure on their margins due to the reduction in.
Our pricing steel.
Moving forward to page 17.
Just to speak to how the year is nine months compared to the quarterly numbers the.
Tons for the quarter were down 5% year to date were down 6%.
Which we're anticipating similar numbers for Q4 on the demand side on the selling price, we actually year to date were up 3% because last year for remember we.
Kind of went up during the year, where this year, we have been coming off but in the quarter. We did have a significant decline at 11% and we anticipate average selling price over last year's Q4 to be down similar double digit number.
Turning forward to page 18.
We did take some and rvs and continue to take some obsolescence reserve in our energy group.
NRP related to items that we have received with tariffs on them and really looking at price of steel. So the and RV was around 5 million and we had 2 million of obsolescence taken in our energy.
Segment, there was approximately 1 million each in so distributors and service centers also.
And arby's just to make sure we were in line with current pricing of products.
Turning forward to page 22.
We have our normal charts here on our inventory values and turns can see the significant drop in inventory in service centers from December .
427 down to 334, both tons and price our has come down our service centers have been managing down their inventories very well.
Trying to get.
And to a level, where they can start purchasing at lower prices.
Energy products have not been able to bring their their inventories down as much as we would like Mitt basically due to demand.
We continue to work on trying to get our energy products inventory in line with where we see that demand for the next six months.
Still distributors continue to bring those down as they can take it.
Them up during the time when the tariffs are on but Theyre now rightsizing them to that.
To which would be normal based on revenues we anticipate.
Those are my comments for the quarter, we'll open it up for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone you will hear three children prompt acknowledging your request and your question will be pulled any order they are received.
Should you wish to decline from the pulling process. Please press star followed by Q, if you're using a speakerphone. Please lift your handset before pressing any keys.
In moments, where your first question.
Your first question comes from Michael You, Matt Scotiabank. Please go ahead.
Hey, good morning, guys.
Right.
Marinate caught you.
Providing some margin guidance for Q4 for MSC I'm, just wondering for the energy products segment, I mean, given the declines.
Demand and pricing wise, what should we expect for Q4 and should not that hopefully be the bottom.
Oh, I would say between 16 and 17 would be my expectation could be down slightly from where we were this quarter.
It really will depend on price.
And if all the CTG if we have very little volume, we may have been of a mix tick up but I would say.
Possibly down a bit.
Okay. That's helpful.
And then aside from O. CTG what categories are products are you seeing the most margin pressure and.
Any potential risk or write down in Q4 or potential magnitude there as well.
John ill speak to the up.
Price of steels issues.
On on the service Center said, Michael up and where it really good shape returns are continuing to move right direction, we've done a really good job.
Some exposure on the distributions.
But the write downs will be small so theres anything material there this lip.
Bigger concern would obviously be energy typically lags.
60 days, so for those products, so as coal pricing looks to can hit the bottom.
We've seen a slight increase now will increase in scrap pricing.
The same is true frozen.
Based on the demand pressure that's out there I would imagine that were pretty aggressive so.
If there is anything remaining we think it would be in that Kevin.
Okay and could you maybe size that out for us just in terms arranger magnitude.
I would say much bigger than what we've had I guess that would be my expectation, but.
Hi, Semiprecious stones to another.
Thanks.
So somewhat we stay flat in that holds the nothing.
Significantly less.
Okay. Thanks.
Your next question comes from.
Michael Toppled TD Securities. Please go ahead.
Thanks, Good morning.
You provided a little bit of commentary around your thoughts on steel prices, suggesting you think were were at or near a bottom and as you mentioned we've seen.
Scrap in November tick up and HRC as has come up in the last few weeks.
I'm wondering if you can talk a little bit about.
Please prices and what you see happening there.
So I think.
Prices, if you look at them in relation to historical spreads with.
Pricing.
I think coil might have overcorrect little bit.
Thats due to mills pressing forward with utilization they may run a little heavier rate in demand.
And so I think we may have overcorrected something plate is getting close to above.
Recent downturn on plate.
Recent price decrease I think we're getting close to about there's will spread pushes forward and thats going to raise the input costs.
Additionally, I'm not a big fan of price increases sustaining based on input cost increases conscript return again.
Demand get pretty bullish when demand is driving that so that's.
I think we're getting to a bottom again threat RUPS 30 books and will also begin.
And is there any chatter about price increases on the played side or is it does it.
You are early for that.
Thanks.
I have not heard any on the place. Furthermore, coils.
And then getting some of that is going to stick on the coil set but I've not heard any on the please.
Well.
Sure.
Okay.
Married with respect to service centers, the same store tons shipped down 5% year over year.
I apologize if I missed this but did you provide some sense for how we should be thinking about that in the fourth quarter.
Yes, I think we were you year to date were down 6%. So I would think we're going to be in the five 6% range fourth quarter on.
Year over year.
And how do you think.
Demand and shipments look in that segment as we as we look a little further out to 2020.
I mean, I suspect you know you're going to pay some easier comps I don't I don't imagine you're going to expect to see.
Those kinds of declines throughout next year, but.
How do we think about that you say you see an opportunity for some gross or what are you what are you thinking about.
It is weve historically, when we really did down Mark as Michael our people are very adept at managing inventory managing working capital in taking cost out model Thats when we've typically grown our business.
Adding new equipment for value added processing lasers growth levers.
It was by acquisition or just taking organic market share within markets. So as we look at again, we're such a transactional business, we look at down markets as a real opportunity for us to for us.
We're going to go out and we feel like grow our share regardless of where the market direction is.
Because again, we think were built.
We have really professional operators out there in the field no better run their business in a down market, we know a cyclical they're prepared for our compensation models premier as well for the company. So.
So.
John regarding share gains and then the value added do you think though the overall market how should we think what the overall market. So we can sort of overlay your own.
Your own share gains and through value added on top of that.
Yes, we'll be as good as Matt we're not built to predict the market were built to react to better than anyone out there. So.
Okay fair enough.
I don't know if it's if you would say the same thing, but with respect to energy products any thoughts on how we can think about look for next year.
I mean, maybe have a better sense given.
Some of the commentary from from some of the industry players on the rig count side, but.
Right off the visibility there as tough as well.
Yes, I mean, the rig count Visibilities, obviously tough we think we're getting near bottom on rig count it looks like we're seeing some stability in oil pricing.
The changed in the model dynamic is obviously, the NP companies, having to learn live within their cash flow budgets and run.
Real business for the first time, so that came out run their cash flows and so they're having to live within budget constraints. So I think we've seen that reset this year.
Through our city pipe acquisition or apex apex Remington stores, we will see growth out there theres continues to stay at this level, we have to maintain the rigs, but any uptick at all we'll see the growth in the through LNG project in Canada, we're starting to see some growth there and also we had one project going in the seems to come code is doing very well.
Okay, and actually I was going to be my last.
It was going ask you about LNG.
Is there is there an actual opportunity.
That you've been presented with so far or is this more sort of perspective as we get further into the year 2020.
More perspective, we're putting this together, we're looking at opportunities and how we can do.
Projects, where we do the engineering.
Work with of course teams so it looks like those real projects.
Feel better about that than I do infrastructure.
Okay.
Okay. Thank you very much.
Your next question comes from Rial Stroud RBC. Please go ahead.
Hi, Good morning, everyone. This is route strata, calling on behalf of their struck at RBC. Thanks for taking my questions today.
Thank you.
Great I get to start off.
With the city pipe acquisition now fully accounted for what is what did the currency Levered de leveraging could look like and is there is there a number or target leverage range that we should expect for year end 2020.
No. We don't have a target leverage I mean, we will bring threw off cash in their demands not there otherwise we will.
We'll move with where it ever as our leverage we look at is our debt to equity which we.
Two.
Prove as we throw off cash from working capital.
We'll see what happens.
We basically use cash it was on our balance sheet to do the acquisition because we had cash in the U.S.
Okay, great. Thanks, Thats helpful and any any color around what with the merger profile looks like for city pipe and maybe any commentary around the potential synergies might look like as well on a run rate basis.
The margin profile that is similar to our apex operations that we already own.
We did get their nine months EBIT and.
Revenue number in the.
Commentary and you can see than it was up.
10 for above 10% for the nine month period.
So similarly, they run at strong EBIT margins.
If you look at them in a general sense the.
Energy Service Center business as we call it for city in apex looks a lot more like our service center models on inventory turns margin profiles don't have as big of value added components. So it does move around a little later.
They are much more service business.
For distribution.
There's a growing model against the smaller order sizes. So it looks a whole lot more like our service center profile.
Okay, great create and and just one last one for me I'll pass the line.
With inventories look into have been reduced for the third straight quarter is there a target inventory level, you're currently coupled with given the current steel pricing and demand environment.
Service centers are getting close to the targets are not already there.
Turning to bring down inventory in this quarter.
We look at it as a target turn level, we need to improve on energy.
The targets are in level is approved by at least one full turns where we would try to get too.
But it Didnt start numbers is declining price were chosen to fall and so we tried to settlements.
Great. Thanks, guys.
Your next question comes from Frederic Bastien Raymond James Please go ahead.
Hi, Good morning, guys can conditions are challenging obviously it for you in the sector, but probably even more so for smaller mom and pop operators.
I was wondering if you're finding that.
Potential acquisition targets are more receptive to entering into discussion with you or are you actually seeing the opposite.
But we really it's been more of a flat market right now we've had some opportunities we've looked at I.
I think as we go into next year, we will that recalibrated the expectations coming up 18, again, everybody with a record year, though.
Thanks.
People were Recalibrated looking at 19, and then there should be some opportunities for acquisitions.
We will come at reasonable levels.
That's good to hear are you.
As you look forward are you still contemplating.
Increasing your exposure to U.S. service centers, just wondering is here.
Your view has changed there with respect to M&A opportunities.
We obviously from a footprint perspective, and geography, that's where we make the most sense to growth.
Canada. It gets a little tricky color was a nice acquisition because again it.
The product mix that we didnt have been our footprint in Canada.
We're number one or two in every region, we serve their so obviously the us as a much larger.
Broad footprint forced to growing we will enforce it either.
So it so it has to be good fit for us and don't like to put people on island two months, where we have a service and other just bought so we can't offer under synergies are hill.
So.
Looking to build on our existing footprint or find something that is a larger standalone operation five or six locations.
Okay. That's helpful. Thank you.
Your next question comes from a new pre her GMP Securities. Please go ahead.
Hi, Good morning, Marianne just one quick question you took a $5 million write down on energy, but then in note for you're showing an $11 million impairment charge I'm. Just wondering can you just connect the dots from me on those two numbers. Please yes. So the 5 million wasn't NRP related to pricing Terra steps that we had we felt we needed to right size on energy.
We did have an another 2 million of.
So lessons in the energy area.
And then we had <unk> million.
I bet in service center on end RMBS and a million in.
Distributors.
Quite at up to 10.9, I know, but.
It's kind of where it felt like.
Alright, and then John I'm, just curious if I want to service center side are you seeing any material differences in the demand Canada versus the US I mean, the numbers were down obviously across the board, but I'm, just curious to see where roski, rather where they're not you're seeing any material difference in demand coming on the Canada versus the U.S.
Right and I'd say the material difference in demand we are seeing them.
Material differences and competitive pressure that you asked is a lot more aggressive right now.
We are under pressure.
Yeah.
For election with us.
Competitors, maybe overstock significantly so we've seen them go a little bit more aggressive on price.
Okay. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Your next question comes from Michael Telecom TD Securities. Please go ahead.
Thanks, just a follow up Aireon earlier in the call you you had talked about expectations for gross margins in the service Center segment I believe for the fourth quarter.
I just wanted to clarify what what you had said about that.
Yes, I, we came in at 18 than half and I think it'll be in the that level are slightly down to possibly 18. It just depends on how.
Pricing whole thin plate and everything so.
I think will stay in the 18 range, but we could be down slightly from Q3.
Okay and then.
Similarly, if I look at the gross margin and Geo distributors, 10.9%.
I don't if I can find the comment.
As I am speaking here, but I think I recall reading that you suggested sort of that was you saw normalization in the margins within steel distributors I think we were in that 13% range. We go back to Q2. So is this are you now at a level there at at around 11% in steel distributors that you think of sort of the to sustainable level or.
Or could that still move around.
That margin pressure to bit by the pricing moving down and I anticipate that will be continued in Q4 also but we should come back to more of.
12% level, which is more normal and starting next year.
Okay, and then would it be fair to say.
Yes, all else being equal at this point, but.
If we do look out to 2020 for your other segments.
It would be reasonable to think about 2020 as sort of going back to the more typical normal type levels, assuming again, no further deterioration price.
I would agree we can make that assumption.
Okay, Yes, I mean I know its.
Perhaps a bit of a big assumption, but.
We'll see what happens.
Thank you.
Okay.
You have no other questions at this time. Please proceed.
Okay. Thanks, everyone for attending the call a little tough to next quarter.
Ladies and gentlemen, this does conclude your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.