Q4 2021 Russel Metals Inc Earnings Call
Speaker 1: Good morning, ladies and gentlemen, and welcome to our 2021 year-end and fourth quarter results conference call for Russell Meadows.
Good morning, ladies and gentlemen, and welcome to our 2021 yearend and fourth quarter results conference call for Russel metals.
Speaker 1: Today's call will be hosted by Martin Jurowsky, Executive Vice President and Chief Financial Officer, and Mr. John Reed, President and Chief Executive Officer of Russell Meadows Inc. Today's presentation will be followed by a question and answer period. At that time, if you have a question, please press Star 1 on your telephone keypad. And I would like to turn the meeting over to Mr. Martin Jurowsky. Please go ahead.
Today's call will be hosted by Martin Jurowski Executive Vice President and Chief Financial Officer, and Mr. John Reid, President and Chief Executive Officer of Russel Metals, Inc. 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.
I would like to turn the meeting over to Mr. Martin Dropsy. Please go ahead Sir.
Speaker 2: Great. Thank you, operator. Appreciate it. Good morning, everyone. I plan on providing an overview of the Q4 and full year 2021 results. If you want to follow along, I'll be using the PowerPoint slides that are on our website. You just go to the investor relations section. If you go to page three, you can read
Great. Thank you operator appreciate it good morning, everyone I plan on providing an overview of the Q4 and full year 'twenty 'twenty. One results. If you want to follow along they'll be using the Powerpoint slides that are on our website and just go to the Investor Relations section.
If you go to page three you can read our cautionary statement on forward looking information.
Speaker 2: on forward-looking information. Before I go into detail, let me just put a context around 2021 for a second.
Before I go into detail, let me just put a context around 2021 for a second the financial results were incredibly strong by any basis measure, but equally as important for us. The results go beyond the financial performance and include accomplishments related to employee safety and engagement customer service so social.
Speaker 2: The financial results were incredibly strong by any basis of measure, but equally as important for us, the results go beyond the financial performance and include accomplishments related to employee safety and engagement, customer service.
Speaker 2: social responsibility and giving back to our communities. It was very broad based in terms of what we think we accomplished in 2021. And we are very proud of that on all fronts.
And giving back to our communities. He was very broad based in terms of what we think we accomplished in 2021 and we're very proud of all of that on all fronts from a financial standpoint. The 2021 revenues were our highest ever achieved at a little over $4 $2 billion, but more importantly, we translated that into a record.
Speaker 2: From a financial standpoint, the 2021 revenues were our highest ever achieved at a little over $4.2 billion, but more importantly, we translated that into record EBITDA earnings and return on capital.
EBITDA earnings and return on capital.
Our initiatives over the past 12 months to 15 months allowed us to benefit from the strong market conditions that we experienced last year, but they also put us in a really great position and a springboard going forward.
Speaker 2: Our initiatives over the past 12 to 15 months allowed us to benefit from the strong market conditions that we experienced last year, but they also put us in a really great position and a springboard going forward. So now let's turn to page five, market conditions.
So now, let's turn to page five market conditions.
Speaker 2: The market continues to be very good across our various regions in Canada and the U.S. And even though there's more inventory in the supply chain today than there was three to six months ago, it is still at a reasonable level. In addition, we saw price realizations actually increase in Q4 versus Q3.
The market continues to be very good across our various regions in Canada, and the U S and even though there's more inventory in the supply chain today than there was three to six months ago. It is still at a reasonable level. In addition, we saw price realizations actually increase in Q4 versus Q3.
Speaker 2: Steel prices and margins have recently declined, but remain above historical averages, and we continue to remain optimistic on the overall business conditions that we're seeing for our business in 2022.
Real prices and margins recently declined but remain above historical averages and we continue to remain optimistic on the overall business conditions that we're seeing for our business in 2022.
In terms of the reallocation of capital investments. This is really been at a transformational change for us.
Speaker 2: In terms of the reallocation of capital investments, this has really been a transformational change for us. When we look at Russell's profile today, it's very different than it was 18 months ago and expect it will continue to evolve in the years ahead.
Russell's profile today is very different than it was 18 months ago and expect it will continue to evolve in the years ahead.
Speaker 2: As we have discussed before, the objectives behind the portfolio changes were to both enhance returns and reduce risk over a cycle.
As we have discussed before the objectives behind the portfolio changes work to both enhance returns.
And reduce risk over a cycle.
Speaker 2: There's a few initiatives that we completed. Number one, the OCTG line pipe monetization is now done with about $300 million of capital permanently removed from that business.
Theres a few initiatives that we completed.
One the OCG line pipe monetization has now done with about $300 million of capital permanently removed from that business. One item to note is that the structure that we use to monetize the Canadian business just worked out exceptionally well as not only did we repatriate a significant amount of cash, but we also retained an equity interest in the joint.
Speaker 2: One item to note is that the structure that we used to monetize the Canadian businesses worked out exceptionally well, as not only did we repatriate a significant amount of cash, but we also retained an equity interest in the joint venture that has performed well. The equity interest has given us earnings upside, but also kept the joint venture's working capital volatility, which can be quite extreme, off of our balance sheet.
Sure. It has performed well the equity interest and has given us earnings upside, but also kept the joint venture is working capital volatility, which can be quite extreme off of our balance sheet.
Speaker 2: Item two, capital reinvestment and value-added projects. It's a multi-year process for us. We are seeing very good results from the recent investments and we'll be adding a series of new project in 2022 and the additional years ahead. In total, our cap X for 2021 was around $29 million and we expect this to grow to closer to $50 million in 2022 with an increased focus on additional value-added equipment projects throughout our system.
Item two capital reinvestment and value added projects, it's a multiyear process for us we're seeing very good results from the recent investments and we'll be adding a series of new projects in 2022.
Additional years ahead.
In total our cap ex for 2021 was around $29 million and we expect this to grow to closer to $50 million in 2022 with an increased focus on additional value added equipment projects throughout our system.
Speaker 2: The third item is the M&A funds. We closed the Boyd acquisition at the end of November , and we are very pleased with how the people and business from Boyd fit within Russell's culture and platform. Even though it's relatively early, their financial contribution to Russell is noticeable.
The third item is the M&A front, we closed the <unk> acquisition at the end of November and we are very pleased with how the people and business from Boyd fit within Russell's culture and platform.
Even though its relatively early their financial contribution to Russell is noticeable.
In terms of capital structure flexibility from a financial standpoint, we're in really good shape typically.
Speaker 2: In terms of capital structure flexibility, from a financial standpoint, we're in really good shape.
Speaker 2: Typically during a market upswing, like we have seen over the past year, the higher costs of inventory would be placing pressure on our liquidity. In our case, we've transformed the business so dramatically that we've been able to easily manage through the higher cost of inventories and maintain a lot of dry powder to take advantage of potential opportunities going forward.
Typically during a market upswing like we have seen over the past year, the higher cost of inventory would be placing pressure on our liquidity in our case, we've transformed the business. So dramatically that we've been able to easily manage through the higher cost of inventories and maintain a lot of dry powder to take advantage of potential.
Opportunities going forward.
Speaker 2: Cash flow is strong with $156 million in Q4 and $639 million for all of 2021. Liquidity, $495 million is very strong. And the upgrade that we received recently by S&P and the initiation of investment grade rating by DBRS,
Cash flow was strong with $156 million in Q4, and $639 million for all of 2021 liquidity, Oregon $95 million and very strong.
Upgrade that we received recently by S&P and the initiation of investment grade rating by Drs.
Speaker 2: will further lower the cost of our bank debt under the recently extended bank credit facilities. And just to put a little bit of that around context for the benefit, the cost of our bank debt today is currently less than 2%.
We will further lower the cost of our bank debt under the recently extended bank credit facilities, and so just to put a little bit of that around context for the benefit the cost of our bank debt today is currently less than 2%.
Speaker 2: If we go to our financial results on page 6, let me start with providing a couple of data points from an income statement perspective at the top of the page. Revenues of over $1.1 billion in Q4 were higher than Q3, and the total of $4.2 billion for 2021, as I said earlier, was a record. In Q4, gross margins and earnings did moderate from the records that were set in Q3, but were still very high by any historical basis of measure.
If we go to our financial results on page six let me start with providing a couple of data points from an income statement perspective at the top of the page revenues of over $1 $1 billion in Q4 were higher than Q3, and the total of $4 $2 billion for 2021 as I said earlier was a record.
In Q4 gross margins and earnings did moderate from the records that were set in Q3, but we're still very hi, binnie by any historical basis of measure.
Speaker 2: There were a few items of note in Q4, a couple of which were positive and a couple of which were negative that I just want to bring out now before I go into some more detailed operating information. A couple positives, we did, as I mentioned earlier, close Boyd at the end of November , so we had the income from Boyd for one month, for the month of December , and it was a positive contributor to us, notwithstanding around $2 million of transaction costs and the accounting treatment that were recorded in Q4.
There were a few items of note in Q4, a couple of which were positive in a couple of which were negative that I just want to bring out now before I go into some more detailed operating information.
A couple of positives we.
We did as I mentioned earlier close Boyd at the end of November . So we had the income from Boyd for one month for the month of December and it was a positive contributor to us notwithstanding around $2 million of transaction costs and the accounting treatment that will recorded in Q4.
Speaker 2: The Trimark joint venture, as I mentioned earlier, has done well and has been an earnings contributor to us and had a similar level of profitability in Q4 as it did in Q3.
The <unk> joint venture as I mentioned earlier, she has done well and it's been an earnings contributor to us and had a similar level of profitability in Q4 as it did in Q3.
Speaker 2: Stock-based compensation was a negative as it had a mark-to-market expense of $3 million in Q4 versus a recovery of $3 million in Q3, and that's really just a reflection of the change in our share price, the increase in our share price.
Stock based compensation was a negative as it had a mark to market expense of $3 million in Q4 versus the recovery of $3 million in Q3, and that's really just a reflection of the change in our share price the increase in our share price during Q4.
Speaker 2: during Q4. Lastly, we had a $2.6 million pre-tax non-cash impairment for one of our Canadian energy units. This is the only item that we do an add back when we distinguish between adjusted and unadjusted results.
Lastly, we had a $2 $6 million pretax noncash impairments for one of our Canadian energy units. This is the only item that we do an add back when we distinguish between adjusted and unadjusted results.
Speaker 2: From a cash flow perspective, we used $136 million due to an increase in working capital. This was built in inventory within the service centers and steel distributor segments. It's not so much on tonnage, and it's more a reflection of the cost of inventory. There was also a seasonal dynamic in accounts receivable, which came down due to the lower sales volume and higher collections in December .
From a cash flow perspective, we used $136 million due to an increase in working capital. This was building inventory with within the service centers and steel distributors segments. It's not so much on tonnage and it's more a reflection of the cost of inventory. There was also a seasonal dynamic in accounts receivable, which came down due to the lower sales volume and higher.
Collections in December .
Speaker 2: There was $157 million Canadian used for the cap of cash related to the Boyd acquisition. Most of the purchase price was related to tangible net assets with inventory of about $56 million, receivables $54 million, property plant equipment of $39 million, less around $25 million of payables.
$157 million Canadian used for the cap of cash related to the Boyd acquisition.
Most of the purchase price was related to tangible net assets with inventory of about $56 million receivables 54 proper.
Property plant equipment up $39 million less around $25 million of payables.
Speaker 2: CapEx was $9 million for the quarter, and this continues to be modest, but as I said earlier, we'll increase our CapEx going into 2022, and it should be closer to $50 million for the year 2022, with a continuing emphasis on more value-added equipment.
Capex was $9 million for the quarter.
The modest but as I said earlier, we will increase our capex going into 2022, and it should be closer to $50 million for the year 2022, with a continuing emphasis on more value added equipment.
Speaker 2: From a balance sheet perspective towards the bottom of the page, our borrowings went from net cash of $42 million at the end of September to net debt of $162 million at the end of December . The biggest item in this $200 million swing was the use of capital on the closing of the Boyd acquisition at the end of November . Our liquidity of $495 million, which I mentioned before, is very strong, and our credit metrics are in really good shape.
From a balance sheet perspective towards the bottom of the page our borrowings went from net cash of $42 million at the end of September to net debt of $162 million at the end of December the biggest item in this $200 million swing was the use of capital on the closing of the Boyd acquisition at the end of November .
Our liquidity of $495 million, which I mentioned before is very strong and our credit metrics are in really good shape.
Speaker 2: Lastly, we've declared our quarterly dividend for $0.38 per share.
Lastly, we have declared our quarterly dividend for 38 per share.
Speaker 2: we shift to page seven and talk a little bit more about each of the individual business segments. Let's start with the service centers. They did exceptionally well in Q4. Again, revenues were up to $780 million in Q4, which is a bit of an increase from Q3, as demand remained strong.
We shift to page seven and talk a little bit more about each of the individual business segments, let's start with the service centers.
Did exceptionally well in Q4.
Revenues were up to $780 million in Q4, which is a bit of an increase from Q3 as demand remained strong.
Speaker 2: Tons were down due to the seasonal dynamic in December , which we typically see at that time of year, but some of that December dynamic was offset by the contribution of the Boyd volumes in the month. Overall, Boyd should represent around 10% of our total service center volumes in a typical month, and so it will be a meaning contributor for us.
Tons were down due to the seasonal dynamic in December which would typically see at that time of year, but some of that December .
Dynamic was offset by the contribution of the blade volumes in the months overall blade should represent around 10% of our total service center volumes in a typical month and so it will be a meaningful contributor for us.
Speaker 2: Average price realizations were up 6% in Q4 versus Q3. Margins came down from the 31% that we saw in Q3 to 26% in Q4, but they still remain well above historical averages, both in percentage terms and dollar per ton terms. Bottom line results for our service centers were another strong earnings quarter with EBIT of $109 million.
Average price realizations were up 6% in Q4 versus Q3 margins came down from the 31% that we saw in Q3 to 26% in Q4, but they still remain well above historical averages both in percentage terms and dollar per ton terms bottom line results for our service.
Centers were another strong earnings quarter with EBIT of $109 million.
Speaker 2: In energy, we are seeing positive market sentiment as well as the impact from the removal of our OCPG line pipe businesses. Our energy revenues were comparable in Q4 versus Q3, but we generated higher margins and earnings. I've used the cliche before, but it truly is doing more with less.
In energy, we are seeing positive market sentiment as well as the impact from the removal of our OCD line pipe businesses. Our energy revenues were comparable in Q4 versus Q3, but we generated higher margins and earnings.
He is the cliched before but it truly is doing more with less.
Speaker 2: Our same store revenues from the field stores were up in Q4 versus Q3, and our energy margins of 27% were very strong, and in fact, slightly higher than those in our service center segment. This highlights the margin in earnings drag, not to mention the volatility that was created by the now-divested OCPG line pipe businesses. Going forward, we expect the energy field stores to generate a similar margin or return profile to that of our service centers over a cycle.
Our same store revenues from the field stores were up in Q4 versus Q3, and our energy margins of 27% were very strong in fact slightly higher than those in our service Center segment. This highlights the margin and earnings drag not to mention the volatility that was created by the now divested OTG line pipe businesses.
Going forward, we expect the energy field stores to generate a similar margin or return profile to that of our service centers over a cycle.
Speaker 2: Distributors had another very good quarter, the revenues were continuing at a comparable level in Q4 versus Q3, but margins and earnings did moderate due to changed market conditions. That said, the current margins and earnings remain above historical averages and the backlog of business is continuing to be realized into Q1 2022. If we
Distributors had another very good quarter. The revenues were continuing a comparable level in Q4 versus Q3, but margins and earnings did moderate to a changed market conditions that said the current margins and earnings remain above historical averages and the backlog of business is continuing to be realized into Q1.
<unk> 2022.
If we carry on to page eight.
I wanted to show this inventory trends slide.
Speaker 2: I want to show this inventory trend slide as a frame of reference around the business transformation that we've made over the last three years.
As.
A frame of reference around business transformation that we've made over the last three years.
If you look back to late 2018, and early 2019, we carried about $1 billion of inventory, but around half of it was energy as you see depicted in the Red bar today, our energy business is closer to 12% of the total inventory position of about $1 billion. So it.
Speaker 2: If you look back to late 2018 and early 2019, we carried about a billion dollars of inventory, but around half of it was energy, as you see depicted in the red bar. Today, our energy business is closer to 12% of the total inventory position of about a billion dollars. So at the same time that we pulled capital out of the energy, we reinvested it in our other segment.
The same time that we pull capital out of the energy we reinvested in our other segments in the fourth quarter, we added to the service centers with the <unk> acquisition as I mentioned before which is around $50 million of inventory plus the inventory both service centers and distributors built into the cost of inventory growth.
Speaker 2: In the fourth quarter, we added to the service centers with the Boyd acquisition, as I mentioned before, which is around $50 million of inventory, plus the inventory in both service centers and distributors built at the cost of inventory growth.
This realignment has resulted in more effective and efficient capital utilization as we put our money into higher and better uses.
Speaker 2: This realignment has resulted more effective and efficient capital utilization as we put our money into higher and better use.
In the service Center segment. The increase is in dollar cost rather than tons as we continue to hold our inventory levels in check and focus on maintaining high inventory turns I'd like to commend our business unit leaders for their exceptional and ongoing work and working capital management through this market upswing.
Speaker 2: In the service center segment, the increase is in dollar cost rather than tons as we continue to hold our inventory levels in check and focus on maintaining high inventory terms.
Speaker 2: I'd like to commend our business unit leaders for their exceptional and ongoing work in working capital management through this market upswing. And to put a little bit of this in
And to put a little bit of this in context in 2018, we had a comparable amount of total revenues for 2021 revenues, but almost double the earnings in 2021 versus 2018. In addition between 2018 and 2021, we've grown the service center business through acquisitions and steel.
Speaker 2: In 2018, we had a comparable amount of total revenues toward 2021 revenues, but almost double the earnings in 2021 versus 2018.
Speaker 2: In addition, between 2018 and 2021, we've grown the service center business through acquisitions and steel prices have more than doubled. But the total inventory is still only about a billion dollars, which is the same level that we saw in 2018. So as a result of the much higher profitability in 2021 versus 2018, and a really strong and continually disciplined working capital management, that has really resulted in exceptional return on capital in 2021.
Prices have more than doubled but the total inventory is still only about $1 billion, which is the same levels that we saw in 2018. So as a result of the much higher profitability in 2021 versus 2018, and a really strong and continuing disciplined working capital management that has really resulted in.
The exceptional return on capital in 2021.
Speaker 2: If we are to roll this chart forward, a couple of observations. One, as steel prices moderate down, we expect to generate a fair amount of cash from the release of working capital that is tied up in higher cost inventory. As an example, you can see on this chart, our historical service centers and steel distributors' inventories were about $300 million lower in past periods than they are today.
If we are to roll this charge forward.
A couple of observations one is steel prices moderate down we expect to generate a fair amount of cash from the release of working capital that is tied up in higher cost inventory. As an example, you can see on this chart, our historical service centers and steel distributors inventories were about $300 million.
Lower in past periods than they are today as.
Speaker 2: As we've said in the past, our business is counter-cyclical and we do generate a lot of cash from working capital when the cycle moderates.
As we said in the past our business is counter cyclical and we do generate a lot of cash and working capital when the cycle moderates.
Speaker 2: The second item, as we think about this chart on a roll forward basis, is we are continuing to look at opportunities to grow by acquisition.
The second item as we think about this chart on a roll forward basis is we are continuing to look at opportunities to grow via acquisition.
So if we go to page nine you can see the overall impact on capital utilization and returns when we benchmark ourselves against our competitors, we generate top quartile returns over a cycle.
Speaker 2: So if we go to page nine, you can see the overall impact on capital utilization and return.
Speaker 2: When we benchmark ourselves against our competitors, we generate top quartile returns over a cycle with an overall goal of around 15% EBIT return. We have far exceeded that on average and we
With an overall goal of around 15% EBIT return, we have far exceeded that on average and Florida.
Speaker 2: far exceeded it in 2021. As you can see on the red line, 2021 has been off the charts with a year-to-date average of over 50%.
Far exceeded it in 2021 as you can see on the Red line 2021 had been off the charts with year to date average of over 50%.
Speaker 2: And as I mentioned before on the earlier chart, this is really a function of really strong discipline in terms of working capital management at the same time that the cycle has had really strong results. So, it wasn't just a function of market conditions, it was the market conditions in combination with the working capital discipline that has been applied over the last period of time.
As I mentioned before on the earlier chart. This is really a function of really strong discipline in terms of working capital management at the same time that the cycle has had really strong results. So it wasn't just a function of market conditions. It was the market conditions in combination with the working capital discipline that has been.
Applied over the last period of time.
Speaker 2: Equally as important to the percentage returns are that in Q4 we were able to actually redeploy capital in effective ways. Our invested capital is now around $1.4 billion and we have additional flexibility to continue to explore other investment opportunities. That being said, we remain disciplined with respect to those opportunities and only pursue those that meet our financial and operating criteria.
Equally as important to the percentage returns are that in Q4, we were able to actually redeploy capital in effective ways.
Invested capital is now around $1 $4 billion and we have additional flexibility.
To continue to explore other investment opportunities that being said, we remain disciplined with respect to those opportunities and only pursue those that meet our financial and operating criteria.
Speaker 2: 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 growing Russell family.
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 growing Russell family.
Speaker 2: I believe that we have demonstrated significant progress and results through 2021 and we look forward to advancing the business in the years ahead.
I believe that we have demonstrated significant progress and results through 2021, and we look forward to advancing the business in the years ahead.
Speaker 2: That concludes my introductory remarks. So, operator, if you can now open the line for questions, that would be appreciated.
That concludes my introductory remarks, so operator, if you could now open the line for questions that would be appreciated. Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a threefold prompt acknowledging your request and if you would like to withdraw your question.
Speaker 1: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw your question, simply press star followed by two.
Simply press Star followed by two and if you're using a speaker phone. We do ask that you. Please lift the handset before pressing any Keith. Please go ahead and press Star one now if you have a question.
Speaker 1: And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star 1 now.
And your first question will be from Michael demand at Scotia Bank. Please go ahead.
Speaker 1: And your first question will be from Michael Dumais at Scotiabank. Please go ahead.
Speaker 3: Hey, good morning, John and Marty. Congrats on the quarter and the strong close to 2021.
Hey, good morning, John and Marty Congrats on the quarter and the strong close to 2021.
Thanks, Michael.
Speaker 3: First question, could you provide some color on the buildup in inventories for steel distributor, you know, and maybe your expectations on how quickly you can turn that inventory?
The first question.
Could you provide some color on the buildup of inventories for still distributor.
And maybe your expectations on how quickly you can turn that inventory.
Okay. Thanks, Michael This is John .
Speaker 4: Yeah, we did have a buildup in inventory and steel distributors predominantly in our Canadian division through work.
Yes, we did have a buildup in inventory in steel distributors predominantly at our Canadian Division through works.
Speaker 4: which does sell the vast majority in a back-to-back situation, so it's pre-sold. The timing of coming into the docks with the backup at the port did create some of that build, but we anticipate the capital release, we're starting to see it now, and continue through Q1, maybe into the first month of Q2, but we should see this pretty strong release there as it's now come in inventory.
Which does sell.
The vast majority of them back to back situation. So it's pretty so.
The timing of coming into the docks.
The backup at the Port.
Did create some of that bill.
We anticipate the capital release, we're starting to see it now continues through Q1, maybe into the first month of Q2, but we should see a pretty strong release. There is that's now.
Come in.
Inventory turn it into receivables so.
Speaker 4: So we think that's just a bit of a phenomenon due to the backup of the pool.
We think thats, just a bit of a phenomenon due to the backup to support.
Speaker 3: That makes sense. And maybe just a higher level question, and this goes back to your page nine, Marty, you know, obviously, this goes without saying, you know, there's been an incredible year for Russell. And naturally, I would think that the 2021 EPS is going to be a challenge to replicate. So I'm hoping maybe you pity us analysts here who have to provide some EPS forecasts, maybe just help us kind of think about the earnings power for Russell. I mean, historically.
Makes sense and maybe just a higher level question and this goes back to your.
Page nine Marty obviously this goes without saying there's been.
Incredible year for Russell and naturally I would think that the 2021 EPS is going to be a challenge to replicate.
So I'm, hoping maybe you pay us analysts here, who have to provide some EPS forecasts, maybe just help us kind of think about the earnings power for Russel historically.
Speaker 3: Russell's return on investment capital has averaged about 15%, so maybe that's a little higher now given the changes you've made, particularly on the energy side, but still prices moderate here from their highs.
Yeah Russell return on invested capital has averaged about 15%. So maybe that's a little higher now given the changes you've made particularly on the energy side, but the steel prices moderate here from their highs.
Speaker 3: You know, should we think about, you know, earning is kind of coming back towards something that's more reflective of that 15% or just any, any guidelines there would be helpful.
Should we think about earning is kind of coming back towards something thats more reflective of that 15% ROIC just any any guidelines there would be helpful.
Speaker 2: Sure. It's a really good question and I think it goes to my comment earlier about the business does look very different today than it did a year or two years ago. And that's not just a function of the steel market. That's a function of the transformation that we've made. And so, a couple of data points. One, you talked about the 15%. It's actually closer to 20% of what we've realized on average over the last five or so years.
Sure let me give.
Really good question and I think it goes to my comment earlier about the business does look very different today than it did a year or two years ago and thats not just a function of the steel market. That's a function of the <unk>.
Transformation that we've made and so a couple of data points. When you talk about the 15% its actually closer to 20% of what we've realized on average over the last five or so years.
Speaker 2: That being said, the drag that went with the OCTG line pipe business cost us about $300,000.
That being said the drag that went with the <unk> line pipe business cost us about 300 basis points. So that that 20% return would have been closer to 23% if not for the drag of the Oc TG line pipe business and then you layer on some of the additional initiatives that where we've deployed capital.
Speaker 2: So that 20% return would have been closer to 23%, if not for the drag of the OCPG line pipe business. And then you layer on some of the additional initiatives where we've deployed capital. We've done some value-add, we're doing more value-add equipment. Those projects are incredibly lucrative from a return perspective. The individually, they've got three-year type payback.
We've done some value add we're doing more value add equipment. Those projects are incredibly lucrative from work from a return perspective.
Individually they have got three year type paybacks.
Speaker 2: We did the Boyd acquisition, and we think we did that at a fair value that's going to generate an appropriate return for us as well, given our metrics. So I think when we, you know, using your data points historically, all other things being equal, the go forward returns should be better than the historical returns by a meaningful amount, given the changes that have taken place within the portfolio.
We did the Boyd acquisition, and we think we did that at a fair value that's going to generate an appropriate return for us as well given our metrics. So I think when we.
Using your data points historically, all other things being equal the go forward returns should be better than the historical returns by a meaningful amount given the changes that have taken place within the portfolio plus.
Speaker 2: We're continuing to look at opportunities going forward. So the story isn't completely written yet at this point in terms of changes that we've made to the portfolio.
We're continuing to look at opportunities going forward. So.
The stories and completely written yet at this point in terms of changes that we've made to the portfolio.
That's perfect. Thank you.
Great. Thanks, Michael.
Speaker 1: Great. Thanks, Michael. Thank you. Next question will be from Frédéric Bestier at Raymond James. Please go ahead.
Thank you next question will be from <unk> <unk> of Raymond James. Please go ahead.
Speaker 5: Hi, good morning, guys. As expected, the margins on metal service center side and steel distributors came off their peak levels in Q4, but you noted, and I also noted, that there was a considerable improvement in the margins on the energy product side. You quoted 27 percent,
Hey, good morning, guys.
As expected the margins on metal service center side, and still distributors came off their peak levels in Q4, but you noted.
I also noted that there was a considerable improvement in the margins on the energy product side, you quoted 27% which is <unk>.
Considerably more than I was expecting can you provide a bit more color there.
Speaker 5: so considerably more than I was expecting. Can you provide a bit more color there?
Speaker 4: Yeah, and Fred, when we pulled out the OCTG line pipe, again, much lower margin business. When you pull that out, when you look at our energy field store business, it really looks and feels like our service centers.
Yes.
When we pulled out the <unk>, but again much lower margin business, we pull that out when you look at our energy field store business, it really looks and feels like our service centers.
Speaker 4: from margin perspective, earnings perspective, inventory turnings perspective, so it manages capital very similar to our service centers. So again, as Marty said, we got actually maybe you got smaller there, but we're doing more with less. And so, again, that is going to be a pretty consistent reflection with our service centers given the cyclical nature of the steel business and the energy business.
From a margin perspective earnings perspective inventory turns perspective, so it manages capital very similar to our service centers.
So again as Marty said, we got actually maybe you got smaller.
But we're doing more with less so.
Again that was going to be.
Pretty consistent reflection with our service centers given the given the cyclical nature of the steel business in the energy business. So we think that thats going to give us some more normalized earnings bandwidth over the cycle.
Speaker 4: So, we think that that's going to give us a more normalized earnings bandwidth over the cycle and take out some of the volatility we had seen from the OCTG line policy.
And take out some of the volatility we could save <unk> line pipe.
Okay, and then I mean, your banner 2021 was pretty much.
Speaker 5: Okay, and then, I mean, your banner 2021 was pretty much.
Speaker 5: result of very strong steel prices and and all the good initiatives you had on the on the go but energy products did not was not a big contributor to that so how's your outlook for that particular business?
As a result of very strong steel prices and all the good initiatives you had on the on the go but.
Energy products did not it was not a big contributor to that so how is your outlook for that particular business.
In 2022.
Sure.
Directionally positive and frankly, we actually saw that during 2021 not in a step function change, but from the beginning of the year to the end of the year. There was a noticeable uptick both in terms of topline and bottom line results for our field store businesses and we're seeing that trend continue into 2022.
Speaker 2: directionally positive. And frankly, we actually saw that during 2021, not in a step function change, but from the beginning of the year to the end of the year, there was a noticeable uptick, both in terms of top line and bottom line results for our field store businesses. And we're seeing that trend continue into 2022. And one of the things that was interesting for us is when we kind of compare 2021 with about $4.2 billion worth of revenue.
And one of the things that was interesting for US is when we kind of compare.
2021, with about $4 $2 billion worth of revenues.
Speaker 2: to 2018, which also had about $4.2 billion worth of revenue.
2018, which also had about $4 $2 billion worth of revenues in 2000 2018.
Speaker 2: In 2018, there was much more contribution of the energy part of the business. So, one of the things that we're expecting going forward is that
There was much much more contribution out of the energy part of the business. So one of the things that we're expecting going forward is that.
Speaker 2: Energy did better during 2021, but there's still more upside associated with that business, and we saw that with the progress during the year. So, the run rate at the end of the year was better than the run rate at the beginning of the year. So, notwithstanding the cycle that we always see in some parts of our business, that really wasn't kicking in all cylinders in 2021. So, we're expecting a better 2022 out of our energy business than we did in 2021.
Energy did better in 'twenty during 2021, but there is still more upside associated with that business and we saw that with the progress during the year. So the run rate at the end of the year was better than the run rate at the beginning of the year. So notwithstanding the cycle that we always see in some of the some parts of our business.
That really wasn't kicking on all cylinders in 2021, so we're expecting a better 2002.
With me a better 2022 out of our energy business than we did in 2021.
Okay. Thanks, Thanks Marty.
Speaker 5: Thanks, Marty. George caught on to the inventory bill on the steel distributor side.
George.
Caught onto the.
Inventory build on the acetyl distributor side can you.
Can you confirm that this this is all pre sold youre not going to see any pressure from sort of the movement the volatility youre seeing in prices and how quickly should we expect this.
Speaker 5: Can you confirm that this is all pre-sold, you're not going to see any pressure?
Speaker 5: of the movement, the volatility you're seeing in prices, and how quickly should we expect this inventory to be?
This inventory.
Insight into sales.
So on the Canadian side, yes. It is.
Speaker 4: So, on the Canadian side, it's 90-plus percent sold back-to-back. We've got confirmed selling prices on that, so the volatility is very, very low on that side. The U.S. is more transactional, but they're not the big user of capital there. They've maintained their capital and their inventory levels at historic levels during this.
90 plus percent so tobacco.
Confirm selling prices on that so the volatility is very very low so the U S. It's more transactional.
<unk>, they're not as a big user of capital there they've maintained their capital in.
And their inventory levels at historic levels during this.
Speaker 4: I think you'll see during Q1, maybe a little bit of a lingering effect into April for that to turn back into cash and bring that inventory level back in line where it has been historically.
I think youll see during Q1, maybe a little bit of a lingering effect into April .
So thats turned back into cash.
Towards level back in line.
Historically.
Okay, Great and John will have you.
Cheap prices have come off their highs, but play continues to show relative strength and that's helped to restore the premium that Plaid has historically held over.
Speaker 5: Sheet prices have come off their highs, but Plate continues to show relative strength, and that's helped restore the premium that Plate has historically held over.
Speaker 5: HRC, um, what's providing more support to plate than, uh.
HRC.
Whats providing more support to plate then.
Than it does for sheet.
Yes.
Speaker 4: I think sheet actually overpriced, and I think it's probably overcorrected on the downturn just a little bit. Plate is holding very strong. The demand is very strong right now for the plate products. We have seen some softening, anticipate a little bit of softening in plate, not as dramatic as the sheet price.
She'd actually overpriced and I think it's probably overcorrected on the downturn just a little bit.
<unk> is holding very strong the demand is very strong right now for plate products, we have seen some softness and anticipate a little bit of softening in place not as dramatic as the chief pricing.
Speaker 4: But again, the lack of import and the domestic mill is maintaining a pretty full run rate right now at the mill level with what we're seeing in all the end-use markets that we use. Again, our big plate users, we feel pretty bullish that plate will continue to get back in that balance that you mentioned, Fred.
But again the lack of import.
The domestic mills, maintaining a pretty full run rate right now at.
At the mill level with what we're seeing in all of the <unk>.
Markets that we use.
Our big play play users, we feel pretty bullish that playbook continue to get back into balance as you mentioned Greg.
Play pricing to coils, so that the hot roll coil probably come.
Speaker 4: plate pricing to coil, so the high-roll coil will probably come, you know, flat line, maybe come up a little bit, plate may come down a little bit, but overall we see it's pretty solid.
That line, maybe come up a little bit slightly come down.
Overall, we see it is pretty solid.
Okay. Good.
Fred just a reminder.
Speaker 2: Fred, just to refine one comment earlier, just a little bit more information, when you're asking about the distributors and the inventory, and John was talking about the Canadian part of our business.
Sorry, just to refine one comment earlier.
Just a little bit more information.
You were asking about the distributors and the inventory and John was talking about the worst part of the Canadian part of our business, where it's really back to back and there is just a timing dynamic attach that with relatively low risk.
Speaker 2: where it's really back to back and there's just a timing dynamic attached to that with relatively low risk.
Speaker 2: that part of our inventory is about 70% of the inventory. It's the vast majority of where that inventory is. When you see the shift from September to December in terms of steel distributors' inventories, that is really that part of the business. It's relatively low risk.
That part of our inventory is about 70% of the inventory. So it's the vast majority of where that inventory is and when you see the shifts from September to December in terms of steel inventories excuse me distributors' inventories that is really that part of the business.
So it's relatively low risk.
Okay Cool now we're halfway through.
Q1, I mean.
You had a stellar year I think Q1 is still a from last year from a year ago is a relatively easy comp, but it's going to get tougher and tougher any any any color you can provide us or guide post you can provide us with respect to where.
Speaker 5: stellar year. I think Q1 is still a, from last year, from a year ago, is a relative
Speaker 5: comp, but it's going to get tougher and tougher. Any color you can provide us or guidepost you can provide us with.
Speaker 5: where you expect sales and perhaps margins to settle in Q2.
We expect sales and perhaps margins to settle.
In Q2 and heading into Q2, sorry in Q1 heading into Q2.
Yes, so thus far coming out of the gate again.
Speaker 4: So, thus far, coming out of the gate, again, it's going to be very comparable, maybe slightly better. Demand is stronger than we saw in Q1 of a year ago, barring some of the temporary interruptions that we've seen. You know, buyers are waiting to the last minute, trying to make sure they're getting to the bottom of pricing. If you've read any of the industry commentary on some of the articles, they're talking about a buying strike, which typically means they're over-inventory.
It's going to be very comparable maybe slightly better demand is stronger than we saw in Q1 a year ago.
Barring some of the.
So Gary interruptions that we've seen.
Buyers are waiting to the last minute trying to make sure theyre getting to a bottom of pricing.
Read any of the industry commentary some of the articles that are talking about a buying strikes, which particular events or over inventory, but.
Speaker 4: You've also had the interruptions from Omicron where plants have been shut down temporarily for four or five days. You've seen other delays just for lack of employment there.
<unk> also had the interruptions from almost Ron.
Plants have been shut down temporarily for four five days.
Other delays just for lack of employment there.
Some pretty severe weather events from really from the southern U S. All the way through Canada, including what's going on at BC. So.
Speaker 4: pretty severe weather events from really from the southern U.S. all the way through Canada, including what's going on in B.C., so.
Speaker 4: Those are temporary interruptions, and we think those will settle out, so there's probably some pent-up demand there as well.
Those are temporary interruptions and we think those will settle out so there's probably some pent up demand there as well.
Speaker 4: Overall, we feel like Q1 will be very comparable, but again, I think that the earnings potential and the revenue potential will probably be a bit stronger.
Overall, we feel like Q1 will be very comparable but I think that the.
Earnings potential and revenue potential will probably be a bit stronger.
Okay. Thanks for that color I'll pass it onto others. Thanks.
Thanks, Brad.
Speaker 1: Thank you. And your next question will be from Devin Dodge at BMO Capital Markets. Please go ahead.
And your next question will be from Devin Dodge of BMO capital markets. Please go ahead. Thanks.
Speaker 6: Thanks. Good morning. I wanted to start maybe with the dividend.
Thanks, Good morning.
I wanted to.
Start.
With the dividend.
Look at your balance sheet, Marty I'd agree with you. It seems like it's in really great shape, you seem to be constructive on the outlook for.
Speaker 6: Your balance sheet, Marty, I'd agree with you. It seems like it's in really great shape. You seem to be.
Speaker 6: business in 2022. Now in the past I think Russell's targeted a pay a ratio of around 80 percent.
But the business in 2022 now in the past I think Russell has targeted a payout ratio of around 80% over the cycle, how should we be expecting Russell to start.
Speaker 7: Should we be expecting Russell to start bumping up the dividend, is there a willingness to do that, or should we be recalibrating maybe to another target?
Bumping up the dividend is there a willingness to do that or are should we be recalibrating, maybe to another target for shareholder distributions.
Speaker 2: Our focus right now is keeping our financial flexibility so that we can be opportunistic with situations that present themselves. That's how we think about our capital structure right now. It's obviously a cyclical business, and sometimes the best opportunities are when the cycle turns down. And so we want to make sure that we have really good flexibility.
Our focus right now is.
Keeping our financial flexibility so that we can be opportunistic with situations that present themselves. That's how we think about our capital structure right now.
Obviously cyclical business and sometimes the best opportunities are.
When the cycle turns down.
And so we want to make sure that we have really good flexibility.
To take advantage of opportunities that present themselves and if we don't see the right opportunities in terms of.
Speaker 2: take advantage of opportunities that present themselves. And if we don't see the right opportunities in terms of M&A, then we'll reconsider capital return scenarios at that point. But right now our focus is really about maintaining our dry powder, keeping our flexibility, and keeping our eyes open to look at opportunities to generate appropriate returns on capital through growth opportunities.
M&A, then we will reconsider.
Capital return scenarios at that point, but right now our focus is really about maintaining our dry powder.
Keeping our flexibility and keeping our eyes open.
To look at opportunities to generate appropriate returns on capital through growth opportunities.
Okay. Okay. Thanks for that.
Speaker 6: You mentioned M&A, I think, a few times already, including the last answer there. Just can you comment on how that M&A pipeline looks right now? And can you give us a sense of what seller expectations are like and if that bid-ask spread has kind of widened out or given some of the strong profits across the sector in 2021? Well, you know,
You mentioned M&A I think a few times.
Already including the last answer there just can you comment on how that M&A pipeline looks right now and can you give.
Give us a sense of what seller expectations are like and if that bid ask spread has kind of widened out or given some of the strong profits across the sector in 2021.
Well.
<unk>.
There is activity that is out there and so we are seeing a deal flow you're seeing deal flow through 2021, and we're seeing deal flow and opportunities in early 2022 that being said we are extremely selective and in spite of.
Speaker 2: And so we are seeing a deal flow, we're seeing deal flow through 2021, and we're seeing deal flow and opportunities in early 2022. That being said, we are extremely selective.
Speaker 2: in spite of, you know, a fair number of opportunities that we looked at in 2021, we found one that meet our, that met our criteria and met the vendor's expectations as well. So, there's a, there's a lot of dancing that takes place in order to find those right opportunities. So, it's hard to handicap.
A fair number of opportunities that we looked at in 2021, we found one that meet that met our criteria and met the vendors expectations as well so.
There's a lot of dancing that takes place in order to find those right opportunities. So it's hard to handicap exactly how things will shake out other than we are seeing deal flow. We saw deal for last year will continue and you can see it. This year. So we are optimistic that we will find opportunities, but we're not driven to do something for the sake of doing it it has.
Speaker 2: exactly how things will shake out other than we are seeing deal flow. We saw deal flow last year, we're continuing to see it this year. So we are optimistic that we will find opportunities, but we're not
Speaker 2: driven to do something for the sake of doing it, it has to meet our criteria.
Our criteria.
Okay makes sense thanks for that.
Speaker 8: kind of ties into one of John's answers earlier but you know typically in markets where steel prices are falling or at least look vulnerable for a pullback I think some of your smaller service center competitors you know push hard to kind of lower their inventory position. Now this cycle is obviously a little bit different for a lot of
Just kind of ties into one of John's answer.
Earlier, but typically.
In markets, where steel prices are falling or at least look vulnerable for a pullback I think some of your smaller.
Service Center competitors.
Push hard to kind of lower their inventory position. The cycle is obviously, a little bit different from a lot of reasons, but.
Speaker 6: You know, can you share with us what you're seeing on the competitive front for the service center business as we think about industry?
<unk>.
Can you share with us what youre seeing on the competitive front for the service center business as we think about industry conditions for 2022.
Speaker 4: Sure. And really, you kind of hit on something there. This is a very different cycle. If you remember going through 2021, there was really, service centers were extremely thin on inventory, had a hard time getting inventory. Going into Q4, we saw that start to rebound and people get to more historical levels of their inventory. So, in a traditional downturn, historical downturn, we've seen these big inventory bulges in the system.
Sure.
And really.
Kind of hit on something there this is a very different cycle.
If you remember going through 2021 that was really the service centers were extremely clean on inventory.
Getting inventory.
Going into Q4, we saw that start to rebound and people get to more historical levels of their inventory.
So.
Additional downturn historical downturn, we've seen big inventory bulges in the system.
Speaker 4: Those are not there right now that we're seeing broad-based across the board. So, inventory levels are at a very, very reasonable turn level. So, we're not seeing as much pressure there. We do see some of the service centers that, you know, they may be selling around their high-priced inventory, and that'll catch up in time. So, there will be some short-term inventory price pressure.
Those are not there right now that we're seeing broad based across the board so inventory levels are.
A very very reasonable level.
So we're not seen as much press.
Pressure there, we do see some of the service centers.
So in the round the high priced inventory.
And Tom So there'll be some short term inventory price pressure.
But we don't see it as we go back to the always on that period, where everybody was sitting on extended inventory.
Speaker 4: We don't see it as we did if you go back to the 0809 period where, again, everybody was sitting on extended inventory and having to work through it. So we're not seeing that kind of pressure that we've seen.
And having to work through it so we're not seeing that kind of pressure that we've seen in the past.
Okay. Thanks for that and maybe just one last quick one.
Speaker 6: Thanks for that. And maybe just one last quick one, Marty. Are you able to frame – there's a lot of moving pieces on that pricing basket that you guys kind of sell into. Just can you frame how selling prices in January have compared to last year either relative to the Q4 average or year-over-year basis or however you want to frame it, just any color.
Marty are you able to frame look theres a lot of there's a lot of moving pieces on the net pricing basket.
You guys are.
Sell into just can you frame how selling prices in January .
Compared to last year, either relative to keep our average or year over year basis, or however, you want to frame. It just any color there.
Speaker 2: Sure. Within service centers, our price realizations have held.
Sure within service centers.
Our price realizations.
<unk> has held for the last number of months on an average basis, obviously different products are moving in different directions, but if you look across the portfolio.
Speaker 2: for the last number of months on an average basis. Obviously, different products are moving in different directions, but if you look across the portfolio, it's held for a number of months. And so the margin compression that...
It's held for a number of months and so the margin compression that we've talked about in the moderation that we've talked about that's really a function of prices, we're holding but the higher cost inventory that's kind a takes a while to roll through the system that was flowing into cost of goods sold so that was sort of the dynamic of <unk>.
Speaker 2: talked about in the moderation that we've talked about, that's really a function of prices we're holding, but the higher cost inventory, that kind of takes a while to roll through the system, that was flowing into cost of goods sold. So that was sort of the dynamic of, you know, revenues were going sideways.
Revenues were going sideways to costs were coming up because of the lag effect that flows through and that's where the.
Speaker 2: costs were coming up because of the lag effect that flows through and that's where the margin moderation was kicking in.
Margin moderation was kicking in.
Okay. Thanks for that I'll turn it over.
Okay. Thanks.
Thank you next question will be from Michael <unk> of home at TD Securities. Please go ahead.
Speaker 1: Thank you. Next question will be from Michael Tupholme at TD Securities. Please go ahead.
Speaker 6: Thanks. Good morning. Maybe just to pick up on that last question that you just addressed, Marty, are we now, in the fourth quarter, were you, were you sort of in an equilibrium as it relates to the higher costs flowing in and the margins that was generating in service centers? Or is this, does that still play out further in the first quarter?
Thanks, Good morning.
Maybe just to pick up on that last question.
You just addressed Marty are we now in the fourth quarter, where you where you're sort of in an equilibrium as it relates to the higher cost flowing in and the margins that was generating in service centers or is that still play out further in the first quarter.
Speaker 6: such that we should be thinking about some further margin compression. I mean, you're obviously still well above your averages in even in the fourth quarter in service centers, so just trying to look at how we should think about that margin trending going forward here in the near term. Yeah, your analysis is correct. There is a lag effect of how that all flows through as markets are moving through, and not to be overly simplistic, but, you know.
Such that we should be thinking about some further margin compression, but you're obviously still well above yours averages and even in the fourth quarter in service centers. So just trying to look at it.
How we should think about.
That margin trending going forward here in the near term.
Yes.
Analysis is correct. There is a lag effect of how that all flows through as markets are moving through and not to be overly simplistic but.
Speaker 2: Prices that are in the market take a while before they show up in our inventory, and then they show up in our inventory before they show up in our cost of goods sold. Then we have different timing dynamics about that lead time between Canada and the U.S. By definition, when you see posted rates for steel prices, that doesn't flow all the way through on day one. There is that lag effect, which basically means
Prices that are in the market take a while before they show up in our inventory and then they show up in our inventory before they show up in our cost of goods sold and then we have different timing dynamics about that lead time between Canada and the U S. So by definition when you see posted rates for steel prices that doesn't flow all the way through one day.
So there is that lag effect, which basically means.
Speaker 9: some of that steel price compression that we've seen over the last little bit, that won't be flown into our cost of goods sold in a meaningful way for a couple months and it'll be coming in in phases into the US first and then into Canada second. So that migration in terms of costs, it'll start coming down over the next two to four months.
Some of that.
Price steel.
Steel price compression that we've seen over the last little bit that won't be flowing into our cost of goods sold in a meaningful way.
For a couple of months and it will be coming in in phases into the U S. First and then Canada second so that migration in terms of costs Youll start coming down over the next.
Two to four months.
Other things being equal.
Okay, that's helpful and.
Speaker 6: It feels like or it seems like there's sort of some different dynamics playing out with respect to margins across the various segments. So I think, generally speaking, what you just described should sort of apply across the business. But obviously, there are different products in different segments and you're
It feels like or it seems like there's sort of some different dynamics playing out.
With respect to margins across the various segments. So I think generally speaking what you just described should sort of apply across the business.
Obviously, there are different products in different segments and you're.
Speaker 6: and the way the steel distributors segment works with respect to bringing some product.
And the way the steel distributors segment works with respect to bringing some product.
<unk>.
In sometimes from overseas.
Speaker 6: in, sometimes from overseas, you know, there's different dynamics. I'm just wondering, as we look at the margin profile in both energy products and steel distributors, any commentary you can provide around how to think about the progression there vis-a-vis what you just described in services?
AMIC. So I'm just wondering as we look at the margin profile in both energy products.
Steel distributors.
Any commentary you can provide around how to think about the progression there.
Vis vis what you just described and service centers in the near term.
Okay service centers and steel distributors will move very similarly.
Speaker 10: And service centers and steel distributors will move very similarly. You'll see the similar pricing dynamic. They'll come off a little bit more closer to historical levels, probably, in distributors. And when you look at energy, keep in mind that 2021 was not a bad year. Things are starting to improve. Rig counts are improving. Oil prices are improving. So they're actually going to see some margin improvement, we think.
Youll see the similar pricing dynamic they'll come off a little bit more and more closer to historical levels probably in distributors.
And when you look at energy keep in mind.
'twenty one does not a banner year things are starting to improve rig counts are improving oil prices, improving so they're actually going to see some margin improvement we think.
In 2022.
Speaker 4: 2022. And so we saw that in the fourth quarter. We think we'll continue to see that in the 1st and 2nd quarter again. All things remaining flat where they are today.
So we saw that in the fourth quarter. We think we'll continue to see that in the first and second quarter again, all things remaining flat where they are today.
Speaker 6: Okay, that's helpful. And just to clarify that on your comments on energy, John , I get year-over-year improvement for full year 2022 versus 2021, because earlier in the year in 2021, the margins were not particularly robust relative to what you just did in the fourth quarter. But you think we can see some further margin
Okay. That's helpful. And then just to clarify that on your comments on energy John .
I get year over year improvement for full year 2022 versus 2021 because.
Earlier in the year in 2001, the margins were not particularly robust relative to what you just did in the fourth quarter, but you think we can see some further.
Margin improvement in energy products.
Speaker 6: uh... in in the early part of twenty twenty-two versus what you just did in the fourth quarter of of uh... twenty-one that but i'm under
In the early part of 2022 versus what you just did in the fourth quarter of 'twenty.
'twenty, one is that what I'm understanding.
Speaker 11: Yes, there could be some. Again, it would be modest. There could be some. And again, keep in mind as we flushed out now of the OCTG line pipe, which is predominantly done in Q4. So, it should be similar, modestly up and going forward. Okay.
Yes, there could be some again it would be modest there could be some and again keep in mind as we flushed out now.
<unk> line pipe, which is predominantly done in Q4, so it should be similar modestly up going forward.
Okay. That's helpful. Thank you.
You mentioned Marty a couple of times, the Capex expectation for 2022 going up to about $50 million.
Speaker 12: You mentioned, Marty, a couple of times the CapEx expectation for 2022 going up to about $50 million. The change versus the $29 million in 2021, is that entirely driven by investments in value-added processing, equipment and projects, or is there anything else going?
The change versus the $29 million in 2021 is that entirely driven by investments in value added processing equipment and projects or is there anything else going on there.
Speaker 2: It's what you said. It's all discretionary and increment is all associated with all, virtually all, related to projects that have attractive return profiles attached to them.
Yes, it's what you said, it's really our discretion, it's all discretionary and increment is all associated with all virtually all related to projects that have attractive return profiles attached to them.
Okay perfect and.
Speaker 6: Okay, perfect. And just for, I mean, I don't know if we can just look at the changing CapEx to get a sense for this, but it certainly sounds like heavier investment in value-added processing in 2022. Can you just give a bit of background there? I mean, I know this has been a strategic priority for the company for a long time, but what sort of, how do we explain sort of the ramp up? You know, are there just...
Just for I don't know if we can just look at the change in Capex to get a sense for this but.
Certainly sounds like heavier investment in value added processing in 2022.
Can you just give a bit of background. There I mean I know this has been a strategic priority for the company for a long time.
But what.
Sort of how do we how do we explain sort of the ramp up or are there just.
I mean is it a function of the balance sheet is it.
Speaker 6: function of the balance sheet? Is it, you know, I guess just trying to understand sort of why now that they sort of accelerate?
I guess, just trying understand sort of why now sort of acceleration.
Speaker 13: It's not a function of the balance sheet. We've, I think, been consistent with value-added investing.
It's not a function of the balance sheet, we've I think been consistent with value added invest.
Investing.
Speaker 2: investing in value-added equipment has been a core part of our strategy.
Investing in value added equipment has been a core part of our strategy.
Speaker 2: and it doesn't happen with the flick of a switch. A lot of the projects that are coming to the table in 2022 were in the planning stage in 2021, in 2020. It takes a while for them to come to the table.
And.
It doesn't happen with the <unk>.
Have a switch and.
So a lot of the projects that are coming to the table in 2022, we're in the planning stage in 2021 in 2020. So it takes a while for them to come to the table and so it's really a function of we see some good opportunities and some of them are just becoming available this year in terms of.
Speaker 14: And so it's really a function of we see some good opportunities and some of them are just becoming available this year in terms of when all the planning may send.
When all of the planning made sense. So it's really not driven by anything other than what is the right commercial time to be doing those sorts of project, but it is a multi year journey for us. So this is not something that is new for 2022. It's just we found more projects that are making sense for this year and the timing comes together, but we've been doing.
Speaker 2: So it's really not driven by anything other than what is the right commercial time to be doing those sorts of projects, but it is a multi-year journey for us. So, you know, this is not something that is new for 2022. It's just, we found more projects that are making sense for this year and the timing comes together. But we've been doing value-added projects for several years now.
<unk> added projects for several years now.
And so this is just.
Speaker 2: And so this is just and and if we kind of roll past 2022.
And if we kind of roll past 2022.
Speaker 2: Mike, we're probably going to see some additional investments continuing in 2023 and 2024 as well. So this isn't just a one-year phenomenon for us in terms of identifying opportunities on value-added equipment.
Mike.
You're going to see some additional investments continuing in 2023 and 2024 as well. So this isn't just a one year phenomenon for us in terms of identifying opportunities on value added equipment.
Speaker 15: Okay, perfect. Can you comment on anything you're seeing in terms of wage inflationary pressures and labour availability? What sort of an impact do you think that those factors could have in 2022 and how you're moving forward?
Okay perfect.
Can you can you comment on.
On anything Youre seeing in terms of wage inflationary pressures in labor availability.
What sort of an impact you think that those factors could have.
In 2022, and how you're managing those those factors.
Yes.
Speaker 16: Yeah, so you've got the inflationary pressures out there, and again, obviously, you're seeing that come out with the recent reports, so we'll see some wage pressure. Again, keep in mind how much of our compensation, again, is bearable, and so we've seen a strong bearable component this year. As we look through, though, there will be some wage inflation there. It'll be somewhat of a reset industry-wide in what the cost parameters are.
<unk> got the inflationary pressures out there and again, obviously youre seeing that come out with recent reports.
So we will see some wage pressure again keep in mind, how much of our.
Compensation again is variable and so we've seen the strong variable component. This year as we look through though there will be some wage inflation, there there'll be somewhat of a reset industry wide.
And what's the cost parameters are.
Speaker 4: Again, I don't see it being a huge impact, but again, the wage pressure is there and it's real.
So again, we don't see it being a huge huge impact, but again the wage pressure is there it's real.
Speaker 4: When we talk about finding employment, employees, those types of things, it is a challenging marketplace right now, but we've been successful, again, running those decentralized models where we have them out in the field so they're dealing with it on an individual basis, along with our corporate HR group that's working very diligently to make sure we're fully staffed.
When we talk about cloud and employing those employees those type of thing.
It is challenging marketplace right now.
But we've been successful again running those decentralized models, where we have them out in the field. So they are dealing with them on individual basis, along with our corporate HR group is working very diligently to make sure we're fully staffed.
Speaker 4: So, you have that based on the specific geographic that you're in, but overall, we're not seeing enormous pressure in that area. Again, it's more targeted to where we're seeing pressure, and so we're not having problems filling our staffing requirements at this point in time.
Based on the specific geographic that youre in but overall, we're not seeing enormous pressure in that area.
So again, it's more targeted to where we're seeing pressure and so.
We're not having problems filling their staffing requirements at this point in time.
Okay. That's helpful I'll get back in the queue. Thank you.
Great. Thanks, Mike.
Speaker 17: Thanks, Mike. Thank you. And your next question will be from Stephen Page at BMO. Please go ahead.
Thank you and your next question will be from Steven page at BMO. Please go ahead.
Hey, good morning.
Speaker 18: Hey, good morning. I was just wondering if you could provide any thoughts on that capital structure over the coming year, just recognizing your strong liquidity position and the fact that the call premium on the 26 bond steps down.
I was wondering if you can provide any thoughts on that capital structure over the coming year, just recognizing your strong liquidity position and the fact the call premium on the 26 bonds steps down next month and.
25 bonds are also callable in October so just any color on that would be very helpful. Thank you Sherry.
Speaker 19: bonds are also callable in October , so just any color on that would be very helpful.
Speaker 2: Sorry, I color on you spoke a little too quickly there. I couldn't quite follow what your question was.
Color on you spoke a little too quickly there I couldnt quite follow your question was.
Speaker 18: Sure, yeah, I was just wondering if you had any thoughts on the capital structure over the
Sure. Yes, I was just wondering if you had any thoughts on the capital structure over the coming year.
Speaker 18: Just recognizing your strong liquidity position and your 2026 bonds, the call premium steps down next month.
Just recognizing your strong liquidity position.
2026 bonds the call premium steps down next month and that 2025 bonds are callable in October .
Speaker 2: As I mentioned to somebody who asked the question earlier in terms of our capital allocation, we like maintaining our flexibility on a dry powder, so we have no plans right now on changing anything in terms of our capital allocation. And so, you're correct that those notes do step down in terms of the call premium next month, and we haven't made any decisions on what to do on that front.
Right.
As I mentioned to somebody who asked the question earlier in terms of our capital allocation.
We like maintaining our flexibility and dry powder. So we have no plans right now on changing anything in terms of all of our capital allocation and so you're correct that those notes do step down in terms of the call premium next month.
And we haven't made any decisions on what to do on that front.
Understood. Thank you very much.
Speaker 1: Great, thanks. Thank you. As a reminder, ladies and gentlemen, if you do have a question, you will need to please press star 1 on your telephone keypad. And your next question is from Alex Jackson at RBC Capital Markets. Please go ahead.
Great. Thanks. Thank.
As a reminder, ladies and gentlemen, if you do have a question you will need to please press star one on your telephone keypad.
And your next question is from Alex Jackson at RBC Capital markets. Please go ahead.
Speaker 20: In terms of the steel distributors segment, what's visibility like right now for 2022? Are you still seeing those opportunities that you had in 2021 in terms of generating strong margins and strong volumes?
Yes. Good morning, guys. Most of the might've been asked but I was just curious in terms of the scale distributor segment.
What's the visibility like right now for 'twenty two like are you still seeing those.
Those opportunities that you had in 'twenty, one in terms of generating strong margins and strong volumes.
Yes, the volume the volumes haven't changed a lot.
Speaker 21: The volumes haven't changed a lot. Margins, well, again, predominantly from the U.S. side, will see some compression. Margins will be pretty stable on the Canadian side. So, again, we'll watch what the pricing does. Dynamics have shifted a little bit as to supply and supply chain and where it's coming from. But overall, again, demand is very, very stable for them.
Margins will again.
Some lift from the U S well see some compression.
Margins were pretty stable on the Canadian side.
So again, we'll watch what the pricing does.
Dynamics have shifted a little bit as to supplier and supply chain, where it's coming from.
Overall again demand is very very stable for them.
Got it thanks.
Thanks, Alex.
Speaker 22: Thank you. Next is a follow-up from Michael Tubholm at TD Securities.
Thank you next is a follow up from Michael <unk> at TD Bank I'm, sorry at TD Securities. Please go ahead.
Speaker 23: Thanks. Just two follow-ups. First off, in the outlook in the release, when talking about improved availability of steel continuing into 2022, you do note though that there are still some constraints, specifically COVID-related staffing constraints, but also transportation issues. The comment about transportation issues, is that reflective of what we're seeing just sort of recently now in the last few weeks here, or is this something
Hi, Thanks, just two follow ups.
First off in the in the outlook in the release when talking about improved availability of steel continuing into 2022, you do note though.
There are still some constraints specifically COVID-19 related.
And constraints, but also transportation issues the comment about transportation issues is that.
Is that reflective of what we're seeing just sort of recently now.
In the last few weeks here or is this something.
Is there something broader that youre, referring to.
Speaker 24: You've got the transitory issue that's in the recent weeks that I think will...
You've got the transitory issue that's in the recent weeks.
Sure.
Speaker 25: obviously a bait sometime in the future. But you've also got the freight issues with the cost of freight coming in from overseas or shipping. And so those costs have inflated, and so we can pass those through typically. But that does occasionally have some strain on the lead times at the docks where there's been issues unloading. So it's taken a little longer to get material than it has in the past. So that was our primary point there.
Obviously, it by sometime in the future.
But you've also got the freight issues with the cost of freight coming in from overseas are shipping.
And so those costs have been plaguing.
And so we can pass those through typically.
That does occasionally some strain on the lead times that the box, where there are issues on loading.
A little longer to get material.
As in the past so that was our primary point there.
Okay. That's helpful. Thanks, and then.
Secondly, I wanted to go back to something I think you mentioned earlier on the call Marty.
Speaker 26: Secondly, I want to go back to something I think you mentioned earlier on the call, Marty. If I got this correctly, I thought I heard you say that you may not be done with portfolio changes and I just want to clarify, I think you were also talking about M&A as part of that comment.
If I caught this correctly I thought I heard you say that you may not be done with portfolio changes and I. Just wanted to clarify I think you were also talking about M&A as part of that comment so.
Is this a comment about potentially seeing sort of.
Speaker 27: Is this a comment about potentially seeing more transformational changes like you undertook with respect to getting out of OCTG and Linepipe and reassessing the overall business and the portfolio in that sense, or are you more talking about growing the business through M&A? I'm just trying to understand what the comment is.
Sort of more transformational changes like you undertook with respect to.
Getting out of Oc <unk> and line pipe and reassessing the overall business in the portfolio in that sense or are you or are you more talking about.
Growing the business through M&A I'm, just trying to understand sort of what the what the comment was there.
Speaker 2: Thanks, Mike. Actually, that's a good question, a good clarification. It's the latter. We're not looking at hiving anything off. That was done last year with OCTG Linepipe, and we're done with that exercise. This is more about growing within our existing portfolios. Okay. That's helpful. Thanks.
Thanks, Mike actually that's a good question good clarification, it's the ladder.
We're not looking at Hiving anything off.
That was done last year with Oc TG line pipe and we're done with that exercise. So this is more about growing within our within our existing portfolio.
Okay. That's helpful. Thanks.
Okay. Thank you.
Speaker 28: Thank you. And at this time, Mr. Jaworski, we have no further questions. Please proceed.
Thank you and at this time Mr. Jurowski, we have no further questions. Please proceed.
Speaker 2: Great. Thank you, operator. And thank you, everybody, for joining our call today. We very much appreciate it. If you have any follow-up questions, just feel free to reach out at any time. Otherwise, we look forward to staying in touch during the quarter, and we'll touch base with everybody soon. Thank you.
Great. Thank you operator, and thank you everybody for joining our call today, we very much appreciate it if you have any follow up questions just feel free to reach out at any time, otherwise we look forward to staying in touch during the quarter and we'll touch base with everybody soon thank you.
Speaker 29: Thank you sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time we do ask that you please disconnect your lines. Thank you.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Yeah.
Okay. Thanks, operator.
Alright Bye bye.
Okay.
Okay.
[music].
Speaker 30: I.