Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the 2019 your AD and fourth quarter results Conference call. Today's conference call will be hosted by Mr., Merian Britain Executive Vice President and Chief Financial Officer, Mr., John Reid, President and Chief Executive Officer of Russel metals Inc. today's presentation will be followed by.
Question and answer period.
At that time, if you have a question. Please press star one on your telephone keypad I'd now like to turn the conference over to Miss Mary In Britain. Please go ahead.
Good morning, everybody.
I'm on the <unk>.
<unk> three of our duck, which is the cautionary statement.
Statements made on this conference call constitute forward looking statements or information within the meaning of applicable securities laws, including statements as to our future capital expenditures our outlook the availability of our future financing and our ability to pay dividends.
Forward looking statements relate to future events for our future performance all statements. Other statements of historical are forward looking statement.
Forward looking statements are no certainly based on estimates and assumptions that well considered reasonable bio inherently involve known and unknown risks uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in our forward looking statements.
Our actual results could differ materially from those anticipated in our forward looking statements, including as a result of risk factors described will enter mdna and our annual information form well, we believed that the expectations reflected in our forward looking statements are reasonable no insurance can be given that expectations of proved to be correct.
I've heard looking statements included in this call should not be unduly rely upon these statements speak only as the date of this call and except as required by law, we will not assume any obligation to update or forward looking statements.
But before I turn into the Doug I just wanted to.
Make your comments to think or operations employees, who navigated through the <unk> steel price reductions and the rough environment that we had during the second half of 2000 and not like team our metal service center operations, and our valves and fittings operations had a solid year and continue to perform as we expect from.
No.
Coming off of your like 2018, we're managing decline. However, Q4 ended with a few more challenges that we then I will try will speak to shortly.
Turning to page.
Five of the dock or give a few market conditions.
During the quarter, we had a selling price decline of 15% can paired to Q4, 2018, and 6% compared to Q3 2019 or biggest dropped during the year metal service center ton down, 7%, which was slightly.
Higher than our year compared to the Q4 18, we still works stronger than the M.S.C. I reported numbers.
Rig count continues down in the U.S. year over year and in Canada, a is up slightly.
Energy products segment was down 21% compared to Q4, mainly related to lower demand for line pipe and that was because we had a project in Q4 18.
And rig activity.
Turning over to slide six fourth quarter results as people wouldn't know did already we did report a loss of 7 million or 11 cents per share in the corridor.
Compared to our 2018 Q4, when we reported 74 cents a year to for the year. We report earnings of 77 million or $1.23 and that compares to the 353 or stellar year in 18.
We will go into a little more detail as we go through but there was a inventory we serve a 14 million recorded in Q4 nine team related to use U.S. line pipe operations and we did have our charges related to the acquisition that was in the quarter.
Free cash flow was one of the a strong areas for the year or free cash flow was to 20 compared to 484 for 2018.
Particularly strong reduction in working capital during the fourth quarter up 2019, where we had 133 million reduction in working capital for the year. It was 144 million.
Return on equity for the year was 8% and we declared 38 cents dividend.
Yesterday.
The comparative information is on slide seven I'm going to skip by that and speak a little more to other pages in the deck. The one thing I'll mention is that we did fall all our documents yesterday. So complete set of statements with notes detailed on the ACA.
Position and other things that people may have interest or have been filed on SEDAR.
[noise] [noise] turning over to page 13 in the deck.
Weve <unk>.
You did hear a chart, which is a chart, which includes non-GAAP measures. So I will caution you know the fact that the adjusted net earnings is a non-GAAP measure, but I think it does help you understand the abnormal entries that we had to record into Q4.
And related to the year, if the Q4 chart, we'll get to shortly so during the year or net earnings of 77 million. If you consider everything Tory provisions, which we consider onetime mainly the oh.
14 million related to line pipe and 5 million related to Oh, CTG that was actually recorded in Q3.
Represent that represented 18 cents or 18 million sorry, our after tax error 29 cents area and Citi pipe acquisition costs of 4 million and I'll speak to that a little bit later, but that's a fair value accounting of inventory and then the asphalt costs related to trend.
Section, which represented seven cents.
On an adjusted basis brings our efforts to $1.59.
[noise] turning over to page 16, I'll just highlight some of the annual numbers and then we'll go into the quarter numbers.
Revenues were down 12% revenues and service centers, obviously off less than our other operations.
The.
Gross margins are I mean, the operating profits were down more driven by the gross margin you'll see that our gross margin for service center ended up at 18.8%.
Pretty good considering the conditions, we were going through the energy service products segment was lower due to the reserves that we took and similarly instill distributor slower due to reserve stuff that we took.
Going forward to page 18, the lower selling price was one per cent compared to 2018. This is for the annual numbers and tons shipped were what the down 6%. You'll note that I had said 15% for the key.
Corridor, so it dropped significantly a lot, but in the year and the tons held up during the year slightly better than the Q4. We also indicate here that the Canadian U.S. service centers them Sci numbers were 7% on an annual basis [noise].
Moving onto page 19.
One I'll highlight the fact that our oilfield stores and calm called pipe operations had a strong results and actually come called pipe ended up with a lower or higher revenue and EBITDA than they had for 2018 or valves fittings site continues to operate strong.
Really.
The note under sees there there is the Q1 acquisition or I mean, sorry October one acquisition of Citi pipe. It resulted in revenues in the quarter of 34 million and 2 million of operating earnings.
We did have a charge of 6 million of which 4 million of that relates to the fair value of inventory adjustment on a as part of the accounting and 2 million related to the actual cost of the transaction.
Turning over to page 20, I'm still distributors revenues were down 13% you'll know when we go to the Q4 numbers down more due to a less demand in that area and we did take a box charge against or at immature.
The provision of 5 million in our U.S. operations, our Canadian operations tend to pre sell their material and continuing to operate at.
Drawing in 2019 as they were in 18.
I'd like now to flip to page 28, which ties our quarterly numbers.
[noise] you will see on page 27, I'll just mention this I'm not going to go through it in detail the non-GAAP charge against for that brings us from the 11 fat loss to the 19 cents.
EPS adjusted earnings for the quarter.
So if you look at the page 28, you'll note see revenue decline is down significantly, particularly still to do distributors. They had significantly less revenue in in the quarter and you'll notice we look out inventories out their revenues are going to be down because or they've stopped.
Acquiring as much inventory due to price differential.
The.
Good news on this page was the 18.8% metal service center its gross margin that they delivered a little stronger than I had indicated win in our last call.
So they did perform well and they continue to reduce their inventory to take advantage of the lower cost inventory when they do purchase that.
The.
Selling price of 15% lower which was highlighted on the front slide I'm looking at the numbers. It looks like we're going to have a similar or 15% decline Q1 20 versus.
Q1, 19, because if I look at Q4 versus Q1. So there was a significant grew up in selling price during the year. So were there year over year comp will be hit by that would get to Q1 20.
The only other comment here is the the drop in revenue and some of the earnings.
Energy products is related to a larger line pipe project that we had going on in Q3 Q4 last year and has not been repeated actually line pipe husband, an area, where demand has been significantly down during 2019.
You would flip back now to page 21.
Make a couple of comments, Tom we did end up spending 35 million on capital spend deters that during the year a significant portion was related to value added processing. This compares to the 41 million. We spent in 2018, we have indicated that we expect to set.
Spend.
Above depreciation depreciation being 32 million for the next few years as we continue to value add value added processing at her metal service center as it has helped to keep us our demand better than the average and we believe it has helped to stabilize our gross margin.
Turning over to page 22.
Speak to the inventory level charts on this page you'll note the a significant reduction in the inventory up metal service centers, it's both related to tons and to price that that strong reduction resulted in a.
Turn a 4.5 for the year, which is in line or sorry for the quarter, which is in line, where weve been for the last few quarters and significantly better than where we were at the end of 2018 or the fourth quarter. The other comment would be the energy products number although it looks like.
Maybe hasn't come down as much as you would think 47 million of that number relates to city acquisition in the quarters. So without city. It would've been for 47 once again the lowest number on this chart that we have and as I mentioned earlier are still distributors continues to reduce it.
Inventory, which will result in lower revenues on the go forward basis, because the pricing environment doesn't pricing environment and demand has not driving activity in our still distributors.
Yes.
Those are my comments I'm going to turn it over to the operator.
Thank you ladies and gentlemen, we will now begin a question and answer session should you have a question. Please press the star followed by one on your Touchtone phone, you'll hear a three Trump tolling prompt acknowledging a request and your questions really pulled any order they are received.
Did you wish to decline from the pulling process. Please press star followed by too. If you are using a speakerphone. Please lift your handset before pricing any Keith one moment for your first question.
Your first question comes from Devon Dodge with BMO. Please go ahead.
Hey, good morning.
Good morning, I, just wanted to start with maybe the service center business it looks like it tends to perform.
Pretty well in a tough environment, just can you give us a sense for how demand has trended so far in 2020, just across regions and end markets.
Yes, we do a 2020 started up Oh Cabo Sean the arm picked up from a what was a slow Q4 as we had a down Q4 as we came up through leveled off now, but with eastern Canada has been pretty strong construction.
Seems to be doing very well their manufacturing is doing well there.
You moved Western Canada, again, specifically in British Columbia has been very slow with the issues going on with the lumber in the timber industry. That's out there all and gas is obviously slow and informing which again is going to affect our AG equipment. So that's kind of a tale of two has for Canada U.S. has been very steady and so.
For our business in the service centers.
Interesting thing Devin I think if you look at.
I think we start January of 2018 prior to the 232 Merian loot alluded to it in her opening we started 640 atone on plate.
Shoot jumped almost $1000 a ton 980, but the late Q3 early Q4.
18, and then early to mid Q4 my team we're back down below six board.
So the volatility that we saw in the pricing was not really demand driven more to 32 political arena that was driving all of it.
Well take our operators in or service centers, an exceptional job managing the navigating that.
So you can have a gross margin of 18.8% at Mary as mentioned earlier I think represents how much of that's been propped up our value added process and as we continue to grow that when you're looking at $350 a ton dropping about seven eight months.
They did not the absorbed all of that through the remote write offs and service centers to the absorbed all that through margin. So I think they did a tremendous job there so demand overall.
Okay. It's.
I assume anything that's a catalyst to drive it through the roof work in infrastructure project.
Take off or anything like that but again, it's it's in solid place for services right now.
That's good color that's helpful. Thank you.
Maybe switching gears.
It feels like industry conditions in the.
Oil country tubular good.
Distribution is likely to.
Day challenging and there's some mills that are going direct increased competitive pressures just so just a couple of questions really did it.
Does this division earn a return on capital that is consistent with Russell's overall whack.
And have you given much thought or any thought to selling are winding down this business.
So well when you look at that it also includes the.
We feel stores energy feel stores apex tomko now at least supply partners as we merge those two so when you look at your own CTG in line pipes, where I think you're referring to in the energy segment definitely challenges you now have mills going direct more mills. We started to took two around that phrase that we're seeing as much inventory on the ground mills as we are in the.
Distribution, so the businesses supply chain has definitely been.
Disrupted we think there may or may be a structural change. So we're looking at several avenues right now.
Reduction of capital reduction of inventory how do we.
Try to get a return, but right now that would be one of our lower performing.
Are the lowest performing group, we have would be the CTG and alone pipe for Russell.
Okay that makes sense, maybe just one last one can you give us an update on the CFO search.
We think we're coming to an end sometime maybe.
Early March.
Merian was very gracious and gave us a long runway. So it's really let us take or time, but the process very carefully.
Through the December January of kind of put the brakes on everything with the timing for the year end schedules for both the candidates and for ourselves.
I think we're coming where we wanted to an inference.
Exciting candidate for sometime in early March.
Okay. Thank you I'll turn it over.
Your next question comes from Michael Topple TD. Please go ahead.
Thanks, and just just building on one of the last question. So John a question about the demand outlook for 2020 appreciate the comments you provided.
In the Mdna you did talk about demand remaining consistent with early 2019. So I guess just to maybe try to take what you've said, so far and maybe put some numbers around it's possible, but when we look at 2020 full year versus 29 chain.
Is this a is this a year in which you think you could see sort of modest volume growth or where should we be thinking more about a kind of a flatter.
<unk>.
Profile for 2020 versus 2019 full year.
Are we talking service centers or overall.
Oh, sorry. This is on the service center side and particularly.
Yeah, typically it's going to follow GDP to some extent so that would that would lend itself to relatively flat year I think when you're modeling keep in mind the numbers that we mentioned there you're going into.
19, with the just just under 1000 dollar atone play you can look at flat rolled them and I'm sure you see the graph as well and look at where we're going in now so you're going to see some swings there and top line just if we if we hold flat on tonnage.
Right Okay.
Okay and.
And then just in terms of the or can you elaborate a little bit more on on your commentary in the mdna, but the oversupply in energy products.
Operations for the market as a whole I guess any sense on from your perspective on timing for how long it'll it'll be before we see the market's pipe inventories come back to appropriate levels.
And I guess, what is what does that mean for pricing.
Yes.
Yes, so you get.
I guess two real dynamics that are driving that obviously demand the U.S. down 24% year over year on the rig count. So there there's a lack of demand is down in the U.S. with the rig count hovering around 800.
50, you've obviously got pricing that's clear when you're looking at $50 role or or just slightly below you're looking at $1.80 on natural gas. So those things are in fact impacting demand.
But also what we're saying is as I mentioned earlier the mills are now carrying more inventory than they've carries for their competing with distribution. When there's a downturn that compounded end users had been taking longer positions because of the mill programs. So we're competing with end users are now selling into the market so that compounds the issue.
Q4 was very challenging we're starting to see.
Certain products now that have bounced back into Q1 that or selling it but I would call normalized pricing or other products that are still overstock. So you feel your way through your product mix, but we're starting to see the again I would say, 50% to 60% of the product mix now selling today.
Normalized margin for us and again, there is still a handful of items that are out there that you are highly competitive on because they're just overstocked in the marketplace.
Okay.
And I know you took a inventory charges most of the charges in the fourth quarter worry and your energy products segment.
So presumably you took what you felt was necessary in the fourth quarter, but given the market dynamics, how do we think about risk a further inventory charges a specific clean energy products going forward.
Yes. So our approach has always been again when we see that we identified quickly we try to put plow through it.
In the quarter and get it behind us. So we can move forward. If there is a downturn and pricing there could be a further risk pricing holds where it is or starts to move back up I think we're fine.
If oil prices, obviously fall than we could have an issue there if demand.
Changes, but if things stay status quo and coupon.
And we drifted very aggressively we want to plow through this stuff and get it behind us and move on.
Also the charge was more heavily weighted to the U.S. line pipe area, which.
Not sure that this year is going to see a lot of projects going on with the election and not in so weird and are we.
We will be managing that area to make sure that we don't have the same exposure.
Okay.
And then just maybe lastly, Marion historically youve been helpful in providing some gross margin.
I would look commentary by segment will be sort of over there.
The near term is there anything you can say on that front as we look into Q1 or the first half of the year how to think about gross margins for your various segments and in terms of any kind of a bounce back to just kind of more normal levels or.
Just anything you can provide on that front be helpful. For I would think that service centers is heading back to a number with the two in front of it so 2021.
I'm, hoping we get there in Q1, well little bit wait and see I'm on lot, but I would expect at about the 18.8 that was the Q4 and annual number.
And you know thus.
Borrowing all other changes in pricing was never seems to happen in one year, we should be in that 21 to 22 range and before we get to the end of 2020.
Energy products.
It's going to be a little bit harder to sort out we're going to go there, but I was saying the Q4 17.8 I know last year, we had where in the nineteens for the year, which I think it's too strong for energy I think it'll depend a bit awaiting on our oilfield.
Okay and valves setting numbers versus.
Our.
Our numbers that we do get from both CTG and that's really be driven a bit more by which area has the larger demand. This year as still distributor as we're going to get back to a number that is in the range of the 12% to 13%, but once again the revenues are going to come off in that area. So it'll be even a less of a factor.
Sure in our total gross margin.
Okay. That's helpful. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Yeah.
There's no further questions we can.
In the call no further questions at this time.
Okay. Thanks, I, thank everybody for participating and we will talk to you in the spring. Thanks, Mike.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and asset you. Please disconnect your lines have a great day.
[noise].