Q3 2020 Russel Metals Inc Earnings Call

<unk> and 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.

I will now turn the meeting over to Marty Jurafsky. Please go ahead.

Effective that is really bit of of lag elements and those prices that were flowing through.

To our part of the supply chain, we should start to see that effect kicking in in queue for.

Second topic is business optimization.

We continue to refine our portfolio in a number of ways.

We sold some real estate in BC that was part of the rationalization program for that region, and we realize $10 million of proceeds.

<unk> CTG in line pipe, we talked in the past about a focus to reduce that footprint over a 12 to 18 month period, we have an inventory reduction target of about $100 million. In Q3. We are pleased that we achieved $31 million towards that goal and we remain committed to the target. We obviously have a little.

More work to be done on that front.

We have also further rationalize some small unprofitable locations this will reduce costs and further streamline the management of our inventories in other parts of the business.

Graham was very helpful in creating a bit of a buffer time period to adjust to the evolving conditions and allow for markets to recover and internal cost structure to adjust to the circumstances.

Property sales of $10 million, which I mentioned, a little bit earlier resulted in a gain of $6 million. We had some pre existing capital loss carryforwards. So most of that $6 million was shielded from tax.

Terms of some incremental costs for the quarter.

The $4 million at the end of Q3 $44 million reduction as a result, we're sitting on a net cash position of $122 million at the end of Q3 and as I discussed earlier, just provided a really nice opportunity an opportunity for us to redeem our 6% notes that were due in 2022 in the process.

This reduced our interest expense.

For shareholders equity there is an accounting adjustment because of the FX shift at the end of Q3 versus the FX at the end of Q2 five.

Final item, we have declared our quarterly dividend of 38 cents per share.

Bottom line is that we have made really nice progress in this quarter in the last quarter as well in undertaking a number of initiatives.

Those initiatives are focused around driving free cash flow.

Notwithstanding the fact that I believe that Weve made really nice progress I think theres still more on the comm.

We flip to the next page to page seven we include some of our segmented PML information.

At the end of the year to 700 million $790 million at the end of September or $94 million reduction. The biggest portion of this decline as in the energy generally in Octu G line pipe in particular as we continue to adjust our portfolio composition going forward I expect to continue the shift in the <unk>.

Coming quarters.

In terms of outlook, let me just give a couple of summary observations one the market is better today than it was three months ago with the early signs in queue for more promising that said, we often do see some seasonal slowdown as we get to the latter part of the quarter, given the Christmas and year end period and fewer operating.

Days at that point in time, but secondly, and perhaps more importantly, we have a lot of flexibility built into our business model as well as the enhanced flexibility in our capital structure. Therefore, we're really well positioned to adapt to the economy as well as take advantage of opportunities.

So in closing on behalf of John and other members of the management team I would like to express our appreciation to everyone within the Russell family tremendously hard work and nice accomplishments over the course of the past quarter backs.

That concludes my introductory remarks, Chris if you could open the line out any questions that would be great.

Thank you, ladies and gentlemen, and we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone.

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Your first question comes from ammonia in his ear Laurentian Bank Mona. Please go ahead.

Good morning, and thank you for taking my question.

Uhm, just firstly hair racing some sequential improvement revenue contraction and kind of the high 20% theme expresses 37% in the prior period and your outlook commentary you stated that you're seeing some improvement, particularly in the latter part of Q3 that may not be fully depicted in quarterly results and just wondering if you could speak.

About revenue contraction exit rates are where things are sitting currently thank you.

Sure <unk>.

Yeah. So your comment about exit rates I think probably the best way to characterize that is particularly on the service center side of it.

We saw within the third quarter.

Progression during the quarter or said another way the September activity was actually at a higher volume then we saw for the Q3 average and generally speaking we saw.

Actually pretty quickly back to normal margins.

We improved gross margins in service centers due to our value added processing.

I think you will see that in the quarter the demand is improving.

The steel mill.

Production rates as a proxy they went from 60%, 70% I think that you are seeing the broader industry move in a similar fashion, but we are seeing margin improvement we are seeing steel prices increase as Marty said earlier.

As we've talked on previous calls you are aware that Canada is a slower turn inventories just because of the.

The difficult challenges to get product into Canada from the United States or from others.

Only sustain are mid cycle earnings power, but also redo some of the volatility along the way.

That's a great point and that was the good segue I guess for the last question I wanted to to sneak in here, but just on the the pipeline in D. O C. T G operating losses, and a quarter any any sense, whether higher steel prices or maybe produced industry uhm inventories are starting to alleviate some of the margin pressure.

I'm into cute for like should we expect continued losses.

The next couple of quarters for that category at least until you guys have sold down uhm your inventory so desired level.

I mean, some manufacturing and starting to return the gradually again as I mentioned earlier suits inland that GDP is starting to come back as well. So we are seeing gradual improvement.

Heavy equipment has shown some signs of life in North America that we weren't anticipating so thats been helpful. Obviously.

Wind towers solar panels have picked up we do participate in those markets are on a limited basis, just to geography, but we do participate in some of those markets.

But we're starting to see people coming back to work and can Mitt.

Third quarter, where we saw just general manufacturing coming back for the bus manufacturers.

Manufactures are coming back to work in getting started so again, we think that will continue forward barring any other shutdowns or anything out there from the government.

That we think will continue to see that this coming forward as people really resurgent work right now.

Great Thats great color. Thank you and then can you talk a little bit about the outlook for steel prices. Obviously, we've seen a pretty strong increase in hot roll coil and Clayton's also call. It are you able to comment at all on your expectations for pricing over the coming months and and also at the 2021.

Yes he is.

Steel prices jumped significantly you've seen in the last six eight weeks.

Coil prices jumped 200 to $250 a ton you see in play in.

Cruise not as much but increase part of that is due to demand is improving again.

Still 70% mill utilization, which typically you would see pricing power around 80%.

And so they are booked well into right now steel mills through December for the most part you can maybe.

Maybe find a little bit of steel now but.

For the most part are booked up through the rest of the year scrap prices, which again are the input.

The main input for steel mills.

Continues to be strong it looks like there would be sideways or up for November.

Historically, they go down in November so that again, that's going back to demands kicking back up so there's more demand for that product. So I think we're good going into first quarter.

From there, we'll just have to see how things progress.

Okay, Great and then I guess lastly from me fat continue to make some progress in bringing inventory down in energy products and you also close several locations related to the realignment underway.

I was wondering if you could talk about how far you are into this realignment and how much more action, we can expect to see over the coming quarters.

Yes, so we closed a couple of pipe yards smaller yards for us.

We've also closed.

Handful of the energy field stores, where we just type equals shut in wells and are not working again as it nicely.

A nice low risk business, it's got a very small these typically one to two year leased in that five to 10000 square foot facility. So we can just move inventory around so we closed some of those that those wells pick back up and we can move back into the area I.

I think there'll be continued.

Closures, there and we'll see in the limited Threed, maybe three more stores in the U.S., maybe one or two in Canada in Q4.

We will continue though to push on the L. CPG in line pipe to bring that inventories down our goal is to get that down over 12 to 18 month period $100 million.

Initially we got enough 31, and we'll continue on that that target to get that down $100 million over the next 12 to 18 months and L. CTG in line pipe inventories.

Great. Thanks for time guys.

Thanks.

Thank you. Your next question comes from Felicia Strider and Raymond James Felicia. Please go ahead.

Really I was just wondering if you can provide some commentary on higher the identity.

Seattle is we've seen a lot of activity in M&A, we've seen a lot of things come across obviously, our focus is service centers.

US being first Canada being second in Canada, with our larger footprint it would need to be a.

Either a niche market that were not end or a very strategic bolt on type of acquisition that would make a lot of sense for us. So we are seeing though a lot of activity. There we have seen activity and the l. CTG in line pipe, we've elected to pass as we're trying to shrink our footprint there.

So I think again I think the activity is fairly robust right now.

Great. Thanks, that's all I have.

Great. Thanks.

Thank you. Your next question comes from Mona Nazir Laurentian Bank Mona. Please go ahead.

Hi, sorry, just a follow up in regard to the animal.

I see it may be early days as you're starting to see a recovery in the Americas linear progression with a plan to reduce your energy Frank but.

Yeah I'm just wondering if you could speak about the pipeline of potential targets and have you seen any potential targets come up on the back of current corporate challenges and just potential timing of such.

Yes, so we are seeing potential acquisitions, LOE, saying to Felicia there.

Low service centers and in energy.

Focus is on the service centers and so.

Some of it may be koby related, but I think it's more of a timing issue in service centers, where there are a lot of private service centers third fourth fifth generation, we're looking to exit and I think they've been have been considering this for two or three years.

The longer and so they're just going through that timing, we've seen from small to medium sized some service centers out there right now so and we're we're very diligent disciplined in our process as we go through looking at acquisitions and we're looking for things that make the right fit for us either geographically, obviously culturally is number one for us.

It fits and typically we like well run businesses when we.

We will occasionally go in and try to improve the business, but we typically like to buy well run businesses.

Thank you so just a clarification the targets really hasn't changed much on the back of comment would that be correct.

That's right.

And then.

Just secondly.

We received 39 million in government subsidies for the period of March to September I. Appreciate your kind of quarterly breakdown for 20 million for the period I'm. Just wondering if you've been able to tally corporate related costs incurred year to date and have it on a quarter by quarter basis aren't even if it's similar to the amount that you have risk.

Thanks.

Yeah. So.

It's something that's difficult to quantify.

We definitely have some koby REIT related expenses, where we can go through things we've implemented either via obviously the PE that we've done.

The social distancing protocols were putting in the plastic garbage and the things that protect us in the field.

The additional staffing that we've had to bring into play just for Covidien to deal to cope with the expenses medical.

And the testing that we've done for our employees.

So those things can be quantified. It's the difficulties that are hard to quantify what it's done to the business and the effects of where we've had to have multiple people, where we would have just had one before.

For the 141 locations is de centralized says we are we're running those location by location. So we haven't spent a tremendous amount of time pending that number down.

But again, it's a it's a substantial number to our to our operation, but we are seeing that Wayne as well, we've got everything in place kind of got a routines down. So there will be some continued protocols that have to stay in place to deal with this obviously there will be helpful. During flu season or at least we hope so but.

There'll be some that stay in place, but as the I think there'll be more in line with the weight subsidies moved down that there will be a natural offset there.

Perfect Thats very helpful. Thank you.

Thank you.

Ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone. Your next question comes from a new pre hire GMP a new please go ahead.

Hi, Good morning, Marty most of my questions have been answered. So just two quick ones number one do you expect to receive a wage subsidy release in Q4 as well.

Yeah.

And.

We do it.

It's a bit of a moving target in terms of the revised government program and what that means our.

Our expectation is it will come down come down a fair amount that exact precision of it is a bit of a mugs game to guess at this point, but if I was to give orders of magnitude it probably would be $5 million to $10 million for Q4 somewhere in that zone. Okay. Perfect and then my second and final question.

Post the quarter on a net basis, you refinanced about a 100 starting to pick up on you retired $150 million worth of bonds.

Can you give me a sense of style onefifty, how much of that was funded by cash versus your available lines.

Yeah well.

Most of it was from cash and as you can appreciate in this environment cash is earning virtually zero return on our September balance sheet, we had about $120 million of cash and as the actual redemption kicked in that gives you. Some order of magnitude. So it was mostly cash a little bit of a revolver and then.

The balance was basically replacing $150 million worth of notes with a new issue of $150 million of nodes and a lower interest rate and a longer maturity, so thats, where the $8 million of annualized interest expense savings comes from.

Great. Thank you.

Okay. Thank you there there are no further questions at this time. Please proceed.

Well, thank you everybody for paying attention and following us for the quarter. If there's any follow up questions feel free to give myself or John a call either this afternoon or or any time other than that we look forward to staying in touch and in catching up over the course of the next quarter. Thanks very much.

Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.

Yeah.