Q1 2022 Russel Metals Inc Earnings Call

Operator: Good morning ladies and gentlemen, and welcome to our first quarter 2022 earnings conference call for Russel Metals. Today's call will be hosted by Martin Juravsky Executive Vice President and Chief Financial Officer, and John Reid, President and Chief Executive Officer of Russel Metals, Inc. 

Operator: Today's presentation will be followed by a question and answer period. At any time, if you have a question, please press star one on your telephone keypad. I will now turn the conference over to Martin Juravsky and John Reid. Please go ahead gentlemen.

Martin Leb Juravsky: Great. Thanks Sylvie. Good morning, everyone. I plan on providing an overview of the Q1 2022 results and if you want to follow along I'll be using the PowerPoint slides that are on our website, just go to the Investor Relations section. If you go to page three you can read our cautionary statement on forward-looking information.

Good morning, everyone.

Plan on providing an overview of the Q1 2022 results and if you want to follow along they'll be using a powerpoint slides that are on our website just go to the Investor Relations section.

If you go to page three you can read our cautionary statement on forward looking information.

Martin Leb Juravsky: Before I go into the detail on the quarter, let me put a little bit of a context around it for a second. We were really pleased. It was a very strong start to the year. We've seen very good market conditions in terms of customer demand, our price realizations, and our margins. We generated record quarterly revenues with strong contributions by each of our three business segments and the outlook remains favorable.

We were really pleased it was a very strong start to the year, we've seen very good market conditions in terms of customer demand our price realizations in our margins, we generated record quarterly revenues with strong contributions by each of our three business segments and the outlook remains favorable.

Martin Leb Juravsky: Let me go to page five now and give a little bit of a context around the market conditions. As you can see from the chart that is on the top left, steel prices are strong and remain above historical frames of reference, and even though [inaudible] moderated down in late 2021 and early 2022, as we talked about during our last conference call, it has since rebounded. Overall, prices have remained at an attractive level for an extended period of time.

As you can see from the chart that is on the top left steel prices are strong and remain above historical frame of reference and even though she'd moderated down in late 2021 in early 2022, as we talked about during our last conference call. It has since rebounded overall prices have remained at an attractive level.

<unk> for an extended period of time.

Martin Leb Juravsky: If you look at the charts on the right side of the page for service center inventories with Canada on the top and the US being at the bottom, and you look both in terms of absolute level of inventory and months of inventory in the supply chain, both came down over the last couple of months and this is likely due to some cautious buying activity in the industry as steel prices were settling out. From a Russel perspective, we are always prudent on inventory management and our service center tonnage came down by about 10% from year-end.

as steel prices were settling out. From a Russel perspective, we are always prudent on inventory management and our service center tonnage came down by about 10% from year-end.

The key thing from our standpoint though really focuses on demand as it remains strong across our regions and across most of our end markets. As we look at our geography coast to coast in Canada, as well as the Midwest and the US and the US. South, we cover a cross-section of industries, non-residential construction, general manufacturing infrastructure, and we're seeing very good demand across most of our business units.

General manufacturing infrastructure and were seeing very good demand across most of our business units.

Hum.

From a Russel standpoint, the other key thing that's important to takeaway for us is when we look at the portfolio changes that have taken place over the last couple of years, they have really positioned us well to generate higher average returns over the cycle. So regardless of whether the cycle is good bad or otherwise, we think we've positioned ourselves much better on a going forward basis than historically.

If we go to historical results on page six, let's start at the top of the page on the income statement for a second. As I said earlier, our record quarterly revenues fell $1.3 billion in Q1. It's nice to have the top line, but most importantly, we generated on the bottom line. So even though margins in percentage terms moderated, the revenues translated into total margin dollars, EBITDA, EBIT, and earnings that were similar in Q1 to what they were in Q4.

We start at the top of the page.

On the income statement for a second as I said earlier, a record quarterly revenues fell one 3 billion in Q1.

It's nice to have the top line, but most importantly, we generated on the bottom line. So even though margins in percentage terms moderated, the revenues translated into total margin dollars, EBITDA, EBIT, and earnings that were similar in Q1 to what they were in Q4.

There were a few notable items in Q1 within the results. The income from a full quarter of Boyd was a very nice contribution. As a reminder, we completed that acquisition at the end of November so we had a one-month contribution in Q4, but a full three months of contribution in Q1. We are very pleased with how the acquisition has performed both financially and operationally. And to put a little bit of context around it, it would add about 10% to our service center business for the quarter from both a top-line and a bottom-line perspective.

Italy, and operationally and to put a little bit of context around it it would add about 10% to our service center business for the quarter from both a topline antibody them line perspective.

We picked up $6 million from the [inaudible] joint venture in quarter one which was up from $3 million in Q4. This arrangement has worked out extremely well for us. When we closed that transaction in July of 2021, it allowed us to repatriate over $100 million worth of capital and keep some skin in the game.

In quarter, one which was up from $3 million in Q4.

This arrangement has worked out extremely well for us when we closed that transaction in July of 2021, and allow us to repatriate over $100 million worth of capital and keep some skin in the game.

As circumstances evolved, the businesses as they come together have performed well and the picking up of our earnings from that joint venture has worked out well in that we have the earnings pickup but we've insulated ourselves from the balance sheet issues associated with that part of the business. 

Stock-based comp had a mark-to-market expensive of nil for Q1, as our stock price was flat from the end of December through the end of March give or take versus a $3 million dollar expense in Q4.

From the end of December through the end of March give or take versus a 3 million dollar expense in Q4.

We move down the page to cash flow. We used about $50 million for a net increase in working capital and this was a function of the building AR because of the high revenues in business activity, which was offset by a pull-down of inventories. As we look across our three business segments, service centers was up, steel distributors was down, and energy was mostly flat. From a cash flow perspective in the quarter, there was also around $83 million tax payments in Q1 both related to 2021 balances due as well as 2022 installments. 

We used about $50 million for a net increase in working capital and this was a function of the building.

Because of the high revenues in business activity, which was offset by a pull down of inventories as we look across our three business segments service centers was up steel distributors was down and energy was mostly flat from a cash flow perspective in the quarter. There was also around $83 million tax payments in Q1 both related.

<unk> 2021 balances due as well as 2022 installments.

We also completed a sale of western fiberglass for $10 million, which was part of our Canadian energy business. It was sold for book value so there's no gain or loss associated with the transaction. And it was a relatively small transaction for us but that business segment, its return profiles were not acceptable to us, and it didn't meet our return thresholds.

So as we've illustrated in the past, we are very focused on our return on capital over the cycle and the divestiture illustrates our discipline in keeping with our financial metrics and our targets. Capex at $8 million was a little bit higher than at this time last year and it should pick up in the latter part of 2022 and into 2023 as we continue to advance our value-added equipment projects.

We are very focused on our return on capital over the cycle and to develop the divestiture illustrates our discipline in keeping with our financial metrics and our targets Capex at $8 million was a little bit higher.

Then at this time last year and it should pick up in the latter part of 2022 and into 2023 as we continue to advance our value added equipment projects.

From a balance sheet perspective, at the bottom of page, our net debt declined from $162 million at the end of the year to $149 million at the end of March. As we continue to generate good cash flow, our liquidity of over $450 million and our credit metrics are extremely strong and it gives us tremendous flexibility as we have within our capital structure to continue to look at opportunistic M&A situations.

Lastly, we declared a quarterly dividend of 38 cents a share. 

If we go to page seven.

If we go to page seven, we have our segmented P&L information and starting with the service centers, they did very well. Revenues were up to $929 million in Q1 as demand remains strong. Tons were up 19% or 13% on a same-store basis versus Q4. As I said earlier, the Boyd acquisition was a nice contribution to us, both in terms of top-line tonnage as well as bottom-line perspective.

$929 million in Q1 as demand remains strong tons were up 19% or 13% on a same store basis versus Q4 as I said earlier. The Boyd acquisition was a nice contribution to US both in terms of top line tonnage as well as bottom line perspective.

The improvement in tonnage was interesting in that it was in spite of losing some shipping days early in the quarter January and February due to weather-related issues and Omicron related constraints.

Average price realizations for the quarter were comparable in Q1 versus Q4. They did however start to pick up towards the latter end of the quarter and when we look at March price realizations they picked up and that trend has continued into April.

As we talked about on our last conference call, we expected margins to moderate down and they did but the monitoring is down to 22%, which is still above historical levels in percentage terms and well above historical terms in terms of dollars per ton.

Bottom-line results for service centers, another strong earnings quarter with EBIT of $95 million.

In energy, we are continuing to see positive market sentiments. Our energy revenues were up 9% versus Q4. Margins were down slightly from Q4, but at 25% remained very strong. As we discussed in the past, this margin is well above historical levels as the divested OCTG line pipe business was a drag on results. We expect to continue to generate margins north of 20% from this segment versus the mid-teens in the past.

<unk> as the divested or CTG line pipe businesses were a drag on our results.

We expect to continue to generate margins north of 20% from this segment versus the mid-teens in the past.

Distributors had another very good quarter with revenues up 17% versus Q4. The margins did moderate down but the net result was earnings of $24 million, which was similar to that of Q4.

We go to page eight. This is a new chart and we wanted to use it to illustrate a little bit more detail around how we think about inventory management and our discipline associated with it. The way this chart is set up-and I apologize for all the color coding on this-quarter over quarter with each of the bars representing our segments, energy in read, service centers being green, steel distributors being in yellow, and in the black line that cuts across the page represents the average for Russell as a whole across all of our business units. 

This is a new chart and we wanted to use it to illustrate a little bit more detail around how we think about inventory management and our discipline associated with it. The way. This chart is set up and I apologize for all the color coating on this.

Quarter over quarter with each of the bars, representing our segments energy and read service centers being green steel distributors being in yellow and in the Black line that cuts across the page is represented the average for Russell as a whole across all of our business units and a few observations.

And a few observations, if you look at the energy segment that is in the red part, the bars to the left, the historical frame of reference from 2019 and early 2020-2021 turns were in the 2-2.5 turns per year range as it was held back by the OCTG line pipe businesses that tied up a lot of inventory and that inventory was also very lumpy and quite seasonal. Since the divestitures and liquidations in mid-2021, you can see how we are now turning that energy inventory around 4.5 turns per year.

Turns were in the two to five turns per year range. As it was held back by the <unk> line pipe businesses that tied up a lot of inventory and that inventory was also a very lumpy and quite seasonal.

The divestitures and liquidations in mid 2021, you can see how we are now turning that energy inventory around four five turns per year.

That level is very similar to the turns at our service Center business as you can see in green has historically been able to realize. For steel distributors in yellow, the inventory turns picked up substantially in Q1 as a sizable amount of in-transit inventory moved through our system through to the customers. So when we look at the black line on this page, which again is total company inventory turns, we have improved the company-wide average turns from what was kind of plus or minus three turns in 2019 to over 4.5 turns in this past quarter, which is frankly a record for us that we haven't seen for the last 20 plus years. And again, I think a lot of this is really driven off the changes that we've made in terms of our portfolio. So keeping a high level in terms of the key focus for our strategy of avoiding speculative inventory positions and it really gets to maximizing returns on capital through the best inventory management in the industry.

company inventory turns, we have improved the company-wide average turns from what was kind of plus or minus three turns in 2019 to over 4.5 turns in this past quarter, which is frankly a record for us that we haven't seen for the last 20 plus years. And again, I think a lot of this is really driven off the changes that we've made in terms of our portfolio. So keeping a high level in terms of the key focus for our strategy of avoiding speculative inventory positions and it really gets to maximizing returns on capital through the best inventory management in the industry.

Really driven off of the changes that we've made in terms of our portfolio. So keeping a high level in terms of the key focus for our strategy of avoiding speculative inventory positions and it really gets to maximizing returns on capital through the best inventory management in the industry.

If we go to page nine, you can see the impact of that inventory turns on our absolute inventory dollars. Total inventory of $894 million on March 31st came down by about $92 million from year-end. This was driven by energy remaining in check which was a reduction of tonnage at service centers, which I mentioned earlier. And the translation of the backlog of business that our distributors as well and you can see that inventory came down over the quarter as well.

Total inventory of $894 million on March 31st came down by about $92 million from year end. This was driven by energy remaining in check which was a reduction of tonnage at service centers, which I mentioned earlier.

And the translation of the backlog of business that our distributors as well and you can see that inventory came down over the quarter as well.

As we step back and look at the Q1 profitability with this level of inventory versus a lower level of profitability a few years ago and a similar level of inventories of over $1 billion, it has translated into a much-improved capital utilization and a much better return on assets deployed and you can see that on page 10 in terms of capital utilization and returns.

In terms of capital utilization and returns.

Our capital deployed is up to around $1.4-$1.5 billion, which is similar to 2018, 2019, early 2020 however, that capital is being used much more effectively today. As previously discussed, the improvement inventory turns the divestiture of the OCTG line pipe businesses, the reinvestment in acquisitions, and the investments in value-added processing equipment has resulted in very strong returns, which as you can see from this chart has averaged nearly 50% over the past 12 months. This level is attractive by historical comparisons as well versus our competitors. I think this also provides a frame of reference for what John and I have been saying over the past 18 months.

<unk> and value added processing equipment as a result in very strong returns, which as you can see from this chart has averaged nearly 50% over the past 12 months. This level is attractive by historical comparisons as wells versus our competitors. I think this also provides a frame of reference for what John and I have been saying over the past 18 months.

We think that our portfolio changes as we will continue to evolve in our margins and returns through the cycle should be higher and with lower volatility going forward than they have been in the past.

In closing, on behalf of John and the other members of the management team, again I'd like to express our much greater appreciation and gratitude to everyone within the Russel family for all their hard work and tremendous efforts in generating these results. We had a really nice start to 2022, and we look forward to continuing our progress on our key initiatives.

We had a really nice start to 2022, and we look forward to continuing our progress on our key initiatives.

Operator that concludes my introductory remarks, if you'd now I'd like to open the line to questions we're available.

Operator: Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please slowly press star followed by one on your touchtone phone. You will then hear is [inaudible] prompt acknowledging your request. And if you would like to withdraw yourself from the question queue, please press star followed by two. And lastly, if you're using a speakerphone you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions.

the handset before pressing any keys. Please go ahead and press star one now if you have any questions.

And your first question will be from Frederic Bastien with Raymond James. Please go ahead.

Frederic Bastien: Hi, good morning everyone, and great quarter. Question on your service center, the volumes have been modestly exceeding those of the industry in recent years, but this outperformance appears to have picked up recently. Is this observation right and if so can you tell us what's been driving that? Thank you.

And great quarter. Thanks.

Thanks, Brett.

Question on your service center, the volumes have been modestly exceeding those of the industry in recent years, but this outperformance appears to have picked up recently.

Is this observation right and if so can you tell us what's been driving that thank.

John Gregory Reid: Frederic, that's exactly right. Really it's a reflection of the value-added processing initiatives continuing to grow that are out there for us in our individual markets and so we're seeing that just gradually continue to pick up share as we move kind of through this five to six-year journey on the value [inaudible].

No thats exactly right.

Really it's a reflection of the value added processing initiatives initiatives continuing to grow that are out there for us and our individual markets and so we're seeing that just gradually continue to pick up share as we move through.

Kind of through this five to six year journey on the value of it.

Frederic Bastien: And you mentioned markets, the strength you're seeing in the markets right now, does it really help the product segments that you're focusing on? It seems like energy, obviously, you picked up, the plate business has been quite solid, prices have held up across the industry. So is that really benefiting your business right now?

Are the markets and in the market the strength youre seeing in the markets right now.

Does it.

Does it really help.

The product segments that you're focusing on it seems like NRG, obviously, you picked up that Tom.

The plate business has been quite solid.

It held up across the industry. So.

Is that really benefiting your business right now.

John Gregory Reid: Yes, so end-use demand is good across most of our end markets if not all, especially what you just mentioned there. Plate is very strong right now. Plate is a challenging product to get and so us growing that market share we've seen probably more growth in other products other than plate. We're getting all of our allocation plus a little bit more than we've got in the past, but again plate is not as readily available to the marketplace right now as the other products.

Especially what you just mentioned there.

Is very strong right now played as a challenging product to get and so and us growing that market share we've seen.

Probably more growth in other products other than plate, we're getting all of our allocation plus a little bit more than we've got in the past, but again plays is not as readily available to the marketplace right now as the other products.

Martin Leb Juravsky: And Fred just to supplement the first part of year question as well about market share, that was our focus on the service center side of it. The other interesting thing for us is within our energy businesses, our field store businesses, they've continued to gain market share over the past period of time as well, and when we benchmark them against the publicly traded peers that are out there that focus on that market, they actually have done very well. Sometimes it gets lost in the context of the macro energy market environment, but that business has done well and has gained market share over the past period of time as well.

<unk> is well a boat market share that was.

Our focus on the service center side of it the other interesting thing for US is within our energy businesses, our field store businesses, they've continued to gain market share over the past period of time as well and when we benchmark them against the publicly traded peers that are out there that focus on that market. They actually have done very well, sometimes it gets lost in the context of the macro entered.

The market environment, but that business has done well and has gained market share over the past period of time as well.

Frederic Bastien: Okay, great. I know that the Board discusses the dividend every quarter, every meeting, were the discussions this go around a little longer and a little more intense or-- just curious where you are standing right now? Obviously, your balance sheet is quite strong and you have lots of optionality with respect to potentially doing M&A and all that stuff. So just wondering if you could give us your thoughts on where you stand with respect to that allocation right now.

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Meeting.

Or that discussion this go around a little longer and little more intense or is it just curious where you are standing right. Now obviously your balance sheet is quite strong and lots of optionality with respect to potentially doing M&A and all that stuff. So just wondering if you could give us your thoughts on where.

Where you stand with respect to that allocation right now.

Martin Leb Juravsky: It's a great observation. The way you characterize it is in some way the way the discussions have evolved which is our focus is really around deploying capital opportunistically. So more of the discussion is around both internal investment opportunities as well as being opportunistic on the M&A landscape. So we like having our dry powder to focus on those attractive opportunities that are out there both internally as well as externally and that's where a disproportion amount of the discussion has taken place, not just in this last board meeting, over the last couple of board meetings as well.

To focus on those attractive opportunities that are that are out there both internally as well as externally and that's where a disproportion amount of the the discussion has taken place not just in this last board meeting over the last couple of board meetings as well.

Frederic Bastien: Okay, thanks. That's all I have, I'll turn it back.

Martin Leb Juravsky: Thanks Fred.

Operator: You next question will be from Michael Doumet of Scotiabank. Please go ahead, sir.

Michael Doumet: Hey, good morning, guys.

Martin Leb Juravsky: Hey, Mike.

Michael Doumet: Very nice quarter. You talked about how the market condition changed intra- quarter. In addition to price, can you speak to how maybe the supply shock impacted demand and purchasing patterns across the space? And also, with metal prices fading somewhat I would say following the late quarter surge, maybe at least in the futures curve, do you have a sense for how Q2 service center margins could shake out versus Q1?

You talked about how the market condition changed intra quarter.

In addition to price can you speak to how maybe the supply shock impacted demand and purchasing patterns across the space and also with the metal to metal prices fading somewhat I would say following the late quarter surge maybe at least in the futures curve do you have a sense for how Q2 service center margins could shake.

Versus Q1.

John Gregory Reid: Thanks, Michael. And you've talked about the supply shock and then going through again as you saw January, February, you're looking at price declining. If you look at the service center trends, I think some of the graphs that Marty had there for both the industry in Canada and the US you saw people were pulling back on inventory anticipating lower prices, both the service center industry and probably from the customer base as well.

And you've talked about the supply shock and then going through again as you saw January February Youre looking at pricing was declining.

If you look at the service center trends I think some of the graphs that Marty had there for both the industry in Canada and the U S. You saw people were pulling back on inventory anticipating lower prices, both the service center industry and probably from the customer base as well.

When we had the Russian invasion of Ukraine take place, obviously limited pig iron, which a large supply on the world market comes from the Ukraine. So it drove the pig iron price up, drove scrap pricing up, and immediately went into steel pricing late February, early March, we saw the prices jump in and the industry's caught on the very low side of inventory from the service center side, which means the supply chain is getting very thin, so it allows pricing to move quickly through that. 

Russian invasion of Ukraine take place, obviously limited pig iron.

Which is a large supply on the world market come from the Ukraine. So drove the pig iron price drove scrap pricing up.

Immediately went into steel pricing late February early March we saw the prices jump in.

And the industry's code on the very low side of inventory from the service center side, which means the supply chain is getting very thin, so it'll our pricing to move quickly through that.

Seems like we're coming to a peak now.

It seems like we're coming to a peak now. If you're reading any of the industry rags out there right now it looks like anticipation of scrap will come off now, maybe up to $100 a ton in May. However, I think with the recent pullback on pricing, a fair amount of that's already baked into the price. So I don't think we'll see any supply shocks that are out there for the second quarter. We would anticipate our service center margins to look probably a little better but similar to Q1.

Fair amount of that's already baked into the price so. So I don't think well see any supply shocks. That are out there for the second quarter, we would anticipate our service center margins. Probably a little better but similar to Q1.

So I don't think well see any supply shocks. That are out there for the second quarter, we would anticipate our service center margins. Probably a little better but similar to Q1.

That are out there for the second quarter, we would anticipate our service center margins. Probably a little better but similar to Q1.

Probably a little better but similar to Q1.

Michael Doumet: Thanks, John. That's helpful. And then on the steel distributors, inventories there were still somewhat high. Do you expect to deliver that largely in Q2 and I guess given the recent supply shock does that in your view extend the runway for more imports and kind of like a larger profit opportunity for the remainder of 2022 for that segment?

Do you expect to deliver that largely in Q2 and I guess given the recent supply shock does that in your view extend the runway for more imports and kind of like a larger profit opportunity for the remainder of 2022 for that segment.

John Gregory Reid: Yeah, so the turns were again up at a very high turn rate. I would anticipate that normalizing somewhat, maybe pulling back to a more historical level, but again, there are lots of opportunities as we're coming through right now we've had things clearing the dock went immediately into sale, and so we're in a very good position on inventory.

Turns were again they were up at a very high turn rate. Dissipate that normalizing somewhat maybe pulling back to more historical level, but again. Lots of opportunity as we were coming through right now we've had. Things clearing the Doc when immediately into sale and so we're in a very good position on inventory.

Dissipate that normalizing somewhat maybe pulling back to more historical level, but again. Lots of opportunity as we were coming through right now we've had. Things clearing the Doc when immediately into sale and so we're in a very good position on inventory.

Lots of opportunity as we were coming through right now we've had. Things clearing the Doc when immediately into sale and so we're in a very good position on inventory.

Things clearing the Doc when immediately into sale and so we're in a very good position on inventory.

Again, we're not seeing any dramatic shifts other than we're coming out of the St. Lawrence Seaway being frozen so we're getting transportation back through again, so that's a natural thing that happens every year.

Again, I wouldn't say we're seeing any big disruptions to the import markets that would cause unusual opportunities right now.

Michael Doumet: Understood. 

Okay.

Martin Leb Juravsky: Mike, one frame of reference too on the inventories when you look at steel distributors as examples about $150 million in dollars at the end of March, which was lower than it was at the end of December but higher than it had been historically. But if we're talking about inventory that's at a price point, that's very different than it had been a few years ago. So in tonnage terms, it's not all that different at the end of the quarter for what it might have been 2020, 2019 type of timeframe.

It we're talking about inventory thats at a price point, that's very different than it had been a few years ago. So in tonnage terms, it's not all that different at the end of the quarter for what it might have been.

2000, 22019 type timeframe.

Michael Doumet: Got it. So maybe turns here is more important in dollar amount, understood. And then maybe just one last one, on capital allocation, maybe a little different from the first question, but it looks like the setup for this year is for another strong free cash flow year, presumably you will get another one next year. So with the shares and the book value of the share has gone up quite a bit. What's your view on kind of supplementing M&A with a buyback at this point?

On capital allocation, maybe a little different from France question, but.

Looks like the setup for this year is for another.

Strong free cash flow year, presumably you will get another one next year.

So with the shares and the book value of the share has gone up quite a bit.

Whats your view on kind of supplementing M&A with with a buyback at this point.

Martin Leb Juravsky: Yes, it's a fair question, and all options are on the table for us and it's really about being opportunistic. So I referenced Fred's question that was around internal investments as well as M&A and share buybacks are something that we will contemplate as well as we look forward over the course of time. So whether it is internal investments, whether it's M&A, whether it's deploying capital returning to shareholders in different forms, those options are all on the table and we'll consider them. And to your point, I think it's spot on which is we're looking at a generally favorable outlook this year, and frankly, who knows what next year going to look like because there is always going to be volatility. But this has been an extended play already and the circumstances related to the market are continuing so we're in a very good free cash flow position and we look forward to continuing to have that flexibility to deploy whether internally, externally, return to shareholders deployed in a variety of forms, those options are all on the table.

It's a fair question and all options are on the table for us and it's really about being opportunistic. So I mentioned referenced Fred's question before that was round. Internal investments as well as M&A and share buybacks are something that we will contemplate as well as we look forward over the course of time, so whether it is internal investments, whether it's M&A, whether it's deploying capital returning to shareholders in different forms those options are all on the table and we'll consider them and to your point I think is spot on which is we're looking at a <unk>.

Internal investments as well as M&A and share buybacks are something that we will contemplate as well as we look forward over the course of time, so whether it is internal investments, whether it's M&A, whether it's deploying capital returning to shareholders in different forms those options are all on the table and we'll consider them and to your point I think is spot on which is we're looking at a <unk>.

Generally favorable output outlook this year, and frankly, who knows what next year going to look like because there is always going to be volatility, but this has been an extended play already and the circumstances related to the market are continuing so we're in a very good free cash flow position and we look forward to continuing to have that.

Flexibility to deploy whether internally externally returned to shareholders deployed in a variety of forms those options are all on the table.

Michael Doumet: Great. Again, nice quarter, thanks for the answers guys.

Martin Leb Juravsky: Thanks, Michael.

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

Michael Tupholme: Thank you and good morning.

Martin Leb Juravsky: Hey, Mike.

Michael Tupholme: First question is regarding service centers and the demand. Look, it sounds like you are quite constructive on demand, and as you pointed out you did see a nice improvement in same-store ton shipped on a quarter-over-quarter basis. I guess I'm wondering if you can just talk about how you see same-store tons shipped demand evolving in service centers as the year progresses. Although you were up on a sequential base, if we look year-over-year down a little bit, at what point do you think we could see the year-over-year ton shipped turn positive?

A nice improvement in our same store ton shipped on a quarter over quarter basis.

I guess I'm wondering if you can just talk about how you see same store tons shipped.

No.

Demand evolving in service centers as the year progresses.

Although you were up on a sequential basis, if we look year over year.

Down a little bit at what point do you think we could see the year over year ton ship turned positive.

John Gregory Reid: I think if you look quarter-over-quarter, I should say next quarter I think will be positive again. I think demand if you look at the Abi Index is very strong as it turns up so we're seeing construction being eight nine months for the fabricators, if you look at the purchasing manager index again very positive again, so we are seeing good pull through from our OEM customers and other equipment manufacturers that are out there. So really we're hitting on all cylinders there, energy has had positive growth for both the service centers and for the energy side. So I think you'll see a continued increase up to say positive from zero to 2%-3% in the quarter. But again, we're at a very good demand level right now so we're pretty happy with it.

Next quarter I think will be positive again, I think demand. If you look at the Abi Index is very strong has turned up so we're seeing construction.

Eight nine months for the fabricators, if you look at purchasing manager index again very positive again, so we are seeing.

Good pull through from our OEM customers and other equipment manufacturers that are out there. So really we're hitting on all cylinders. There energy said, it's positive for both the service centers and for the introduced.

So I think youll see a continued increase.

Up to.

So positive from zero to two 3% in the quarter, but again, we're at a very good demand level right now so we're pretty happy with it.

Martin Leb Juravsky: And Mike I know this wasn't the nature of your question because you are probably focusing more on same-store basis as well, but if we look sequentially, including the pro forma impact of the acquisitions, volume is up so as we're looking both at the market dynamics being strong as well as potential things that we are doing to add to our business, we are seeing volume pick up when you put that all together on a year-over-year basis.

We are seeing volume pick up when you put that altogether on a year over year basis.

Michael Tupholme: Okay, perfect. And I think John, just to clarify, you were talking quarter-over-quarter, so the zero to maybe 2%-3% this is Q2 relative to Q1, right?

You were talking quarter over quarter, so the zero day.

Maybe two 3% this is Q2 relative to Q1 right.

John Gregory Reid: That's correct.

Michael Tupholme: Okay, perfect. And can you talk about the extent to which the market as a whole and or Russell has started to see any demand pull from the infrastructure spending package in the US? I know, it's still fairly early and other companies are talking about that sort of amping up as the year progresses, and really being more of an impact next year, but what are you seeing there?

Talk about.

The extent to which the market as a whole and or Russell has started to see.

Any demand pull from the infrastructure.

Spending package in the U S. I know, it's still fairly early and other companies are talking about that sort of.

Amping up as the year progresses, and really being more of an impact next year, but what are you seeing there.

John Gregory Reid: Very limited at this point. More of the stages, but we're looking probably for Q4, if we see any of it this year [inaudible].

More of the more of the stages, we're looking probably for Q4, if we see any of it this year.

Michael Tupholme: Got it. The next question is on margins. You addressed sort of the near-term outlook for service center margins as we looked ahead to Q2 and where they may land versus Q1. I guess, a similar question on the energy product side. We did see the margins there come down a little bit, but still a very strong 24.5% gross margin in energy products. How should we think about those margins evolving I guess, both over the near-term and then with the changes in the business, what do you see as sort of a normalized margin for energy products?

Next question is on margins you addressed sort of the near term outlook for service Center margins.

As we look ahead to Q2 and where they may land versus Q1, I guess, a similar question on the energy product side.

We did see the margins there come down a little bit, but still a very strong 25% gross margin in energy products.

How should we think about those margins evolving I guess, both over the near term and then and then with the changes in the business. What do you see as sort of a normalized margin for energy products.

Martin Leb Juravsky: It's a great question, Mike, because in some ways it gets to our path forward on the energy business looks an awful lot different than our historical frame of reference. And if you look to the service center margin profile, historically, which was in a reasonably narrow band not a lot of volatility in that 20% to 25% zone, that's actually a frame of reference for what our field store businesses have historically generated. It just got diluted down by the OCD line pipe. So as we've seen that mid 20% type gross margins for the last couple of quarters, we should see energy segment now that it's really just the field stores looking very similar to service centers on a go-forward basis, not necessarily precise but within spitting distance of one another, so certainly north of 20% margins on a go-forward basis. 

It's a great question, Mike because in some ways it gets too. Our path forward on the energy business looks an awful lot different than our historical frame of reference and if you look to the service center margin profile, historically, which was in a reasonably narrow band not a lot of volatility in that.

Our path forward on the energy business looks an awful lot different than our historical frame of reference and if you look to the service center margin profile, historically, which was in a reasonably narrow band not a lot of volatility in that.

20% to 25% zone.

It's actually a frame of reference for what our field store businesses has historically generated it just got diluted down by the OCD line pipe so as we've seen that.

Mid 'twenty, 20% type gross margins for the last couple of quarters, we should see energy segment now that it's really just the field stores looking very similar to service centers on a go forward basis, not necessarily precise but within the same split within spitting distance of one another so certainly north of 20% margins on a go forward basis.

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Michael Tupholme: Okay, thanks. And then sorry, just as far as the Q2 like you mentioned in service centers you think you could actually see maybe a little bit of an improvement quarter-over-quarter in the service center gross margins, would the same thing apply to energy products?

John Gregory Reid: I think energy products, probably would be flat to maybe slightly up. I would feel more comfortable saying flat on those margins for the second quarter.

I would.

I feel more comfortable saying flat on those margins.

Second quarter.

Michael Tupholme: Okay. Alright, I will get back in the queue. Thank you.

Alright, I will get back in the queue. Thank you.

Martin Leb Juravsky: Great. Thanks, Mike.

Operator: Thank you. The next question will be from [inaudible] at Laurentian Bank Securities. Please go ahead.

Unknown Speaker: Good morning, gentlemen. Maybe just a quick follow-up on-- going back to the comment on the value-added products that you guys are investing in, I'm just trying to get a sense of how we should be thinking about the pricing sensitivity for those items from a client's perspective. Just trying to gauge, are these typically the items that clients have to order regardless of the pricing environment or this is something that they do have some leeway in terms of deferring the purchases. So just any color there, please.

Maybe just a quick. Although up on going back to the comment on the value added products that you guys are investing in. Just trying to get a sense of how we should be thinking about the pricing sensitivity for those items. From a client's perspective, just trying to gauge are these typically the items that clients have to order regardless of the pricing environment or this is something that they. They do have some leeway in terms of deferring the purchases. So just any any color there. Please.

Although up on going back to the comment on the value added products that you guys are investing in. Just trying to get a sense of how we should be thinking about the pricing sensitivity for those items. From a client's perspective, just trying to gauge are these typically the items that clients have to order regardless of the pricing environment or this is something that they. They do have some leeway in terms of deferring the purchases. So just any any color there. Please.

Just trying to get a sense of how we should be thinking about the pricing sensitivity for those items. From a client's perspective, just trying to gauge are these typically the items that clients have to order regardless of the pricing environment or this is something that they. They do have some leeway in terms of deferring the purchases. So just any any color there. Please.

From a client's perspective, just trying to gauge are these typically the items that clients have to order regardless of the pricing environment or this is something that they. They do have some leeway in terms of deferring the purchases. So just any any color there. Please.

They do have some leeway in terms of deferring the purchases. So just any any color there. Please.

John Gregory Reid: Yes, they'll have leeway, obviously based on their volumes and so it's not a take-or-pay situation, but again, when you're looking at it from the value added and the pricing perspective, keep in mind there's a labor component and there's a steel component on a percentage of the total part. And so when we're looking at parts that are made, that can swing wildly, but that labor component is pretty fixed and so the steel prices will move up and down, so that does normalize the margin somewhat. It's out there, but as far as them having to take things or demand, it's just whatever order they've got in the queue at the time we're in the purchase order with us they're responsible to take. So if they're out 2,3,4 months on those orders they are responsible for that but it's not a long-term contractual basis.

On a percentage of the total part and so when we're looking at parts that are made.

And that can swing wildly, but that labor component is pretty fixed and so the steel prices will move up and down so that does normalize the margin some.

It's out there, but as far as them, having to take things or demand. It's just whatever order they've got in the queue. At the time were in purchase order with us they're responsible to take sulfur out 234 months on those orders that are responsible for that but it's not a long term.

Contractual basis.

Martin Leb Juravsky: The one thing that's also interesting and somewhat related is that one of the fasting dynamics of the linkage or lack of linkage between pricing and demand over the last year and a half, we've seen an elevated pricing environment for steel over an extended period here and steel prices went from 500 to 2000, now back to 1500. It really hasn't changed the model on demand during that period of time. So I think a lot of people are really having a revisiting of the elasticity or any key elasticity of demand. Pricing hasn't really been a big factor.

It really hasnt changed the model on demand.

During that period of time, so I think a lot of people are really having a revisiting of the elasticity or any key last city of demand pricing hasnt really been a big factor.

Unknown Speaker: I see, no thats' super helpful. We definitely have seen some very similar commentary from some of the peers that reported earlier in the cycle and maybe just a quick follow-up on again the value-added products here. Any difference in terms of the payment terms like any meaningful impact on the collection schedule in general versus I guess, more commoditized products?

Definitely have seen some very similar commentary from some of the peers that reported earlier in the cycle and maybe just a quick follow up on again the value added products here.

Any difference in terms of the payment terms like any meaningful impact on.

The collection schedule in general versus I guess more commoditized products.

John Gregory Reid: No, they're very much the same.

Very much the same.

Unknown Speaker: Okay, great. That's super helpful. I guess, maybe just the last one from me, more of a bigger picture question. Obviously, the pricing remains very elevated at the moment, supply chain is still very tight, and any major capacity addition in North America that you are anticipating over let's call it the next six to 12 months?

Supply chain is still very tight and any major capacity addition, in North America that you are anticipating over let's call. It the next.

Six to 12 months.

John Gregory Reid: So there is more capacity coming on in both plate and flat roll throughout the year, but again that'll be welcome capacity because again, we are running at very tight supply right now, imports are very limited, do I think it's something that can be absorbed in the North American market what comes on over the next year.

Operator: I see, super helpful. That's it from me, thank you.

Super helpful. That's it for me thank you.

Martin Leb Juravsky: Great, thanks.

Operator: Next question will be from Alexander Jackson at RBC Capital markets. Please go ahead.

Alexander Jackson: Good morning, thanks, guys. Most of my questions have been asked but I'm just curious, are you still expecting to spend about $50 million Capex this year? And then could you remind us what the split is between more sustaining versus more value added equipment additions. Thank you.

More value add equipment additions. Thank you.

Martin Leb Juravsky: Hey, Alex. That's still our target for this year as I mentioned earlier it's going to be back-end of the year weighted. There's always a possibility that some things that were planned for Q4 slip into Q1 next year, but it goes to our broader theme, which is we are increasing the components of value added and that's not just for 2022, where frankly, we did a bunch over the last number of years. Well, this is a multi-year path for us, so we're going to see continuing spending on those three-year type payback projects over an extended period of time. But for planning purposes, $50 million is still a good frame of reference for 2022.

That's still our target for this year as I mentioned earlier is going to be back end of the year weighted.

There's always a possibility that some things that were planned for Q4 slip into Q1 next year, but it goes to a broader theme, which is we are.

Increasing the components of value add and that's not just a 2022, where frankly, we did a bunch over the last number of years as well. This is a multi year path for us. So we're going to see continuing spending on those three year type payback projects over an extended period of time, but for planning purposes $50 million is still a good frame of <unk>.

Reference for 2022.

In terms of the components, there is probably a maintenance element within our Capex spending let's probably call it $10-$15 million in the discretionary component is on top of that that has the return component attached to it.

The return component attached to it.

Alexander Jackson: Got it, that's helpful. And then maybe just one more quick one. Are there any more divestments coming like the Western fiberglass business that you guys expect?

Are there any more divestments come in like the Western fiberglass business that you guys expect.

Martin Leb Juravsky: No that was frankly, it was a little bit unique, it was a little bit opportunistic. But no, we've cleaned stuff up a fair amount primarily on the OCTG line pipe side of it as you're well aware and so this was a one-off and it was relatively small by comparison.

But no we've cleaned stuff up a fair amount primarily on the <unk> line pipe side of it as you're well aware and so this was a one off and it was relatively small by comparison.

Alexander Jackson: Got it, thanks. That's all from me.

Martin Leb Juravsky: Great. Thanks.

Operator: Once again, a reminder to please press star one if you do have a question. And next will be Ian Gillies at Stifel. Please go ahead.

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

Ian Gillies: Morning, everyone.

Martin Leb Juravsky: Hey, Ian.

Ian Gillies: With respect to the value-added processing and the upgrade capital, is there any gating factors or reasons why you wouldn't accelerate that given the strength of the balance sheet and that's helping us capture market share?

John Gregory Reid: Again, we're moving at a pretty quick pace, but it's a hub-and-spoke process. So you develop a hub and you take it out to the spokes in our field. And so we're dealing with different supply chains as well so we're educating both our customer base going through the engineering desk and the purchasing desk. There's a step process that's almost a franchise process that we've developed, if you will, so it just takes time. So it's not quite as easy as Goldman grabbing a copier plugging it in and starting to make copies. We have to go out and develop a market, develop the customer base slowly, and as we do we add the additional equipment. So we're pretty much through phase one of initiating all of the hubs and now we're going back through and developing the spokes behind that to determine what machines are appropriate there and to make sure we have the right infrastructure. So it's just really a timing of how fast the market can absorb it.

Again, we're moving at a pretty quick pace, but it's a hub and spoke process. So you develop a hub and you take it out to the spokes in our field.

And so we're dealing with different supply chains as well so as we're educating both our customer base going through the engineering desk is due to the purchasing this theres a step process. That's almost a franchise process that we've developed that if you will so it just takes time.

So it's not quite as easy as Goldman grabbing a copier plugging it in and starting to make copies.

We have to go out and develop a market develop the customer base slowly and as we do we add the additional equipment so were.

Pretty much through phase one of initiating all of the hubs and now we're going back through and developing the spokes behind that to determine what machines are appropriate there and to make sure. We have the right infrastructure. So it's just really a timing of how fast the market can absorb it.

Ian Gillies: Got it. That's helpful. With respect to the field stores and energy products, if we go back to a more normalized year in the energy patch, call it 2019, the unit pricing for the products tailored to the stores, is it up in a commensurate amount as there are changes in steel prices or are there other things impacting what you might be selling those products for? I'm just trying to get a sense of what the lift may be or could be over that period of time.

That's helpful.

With respect to the field stores and energy products. If we go back to a more normalized here in the energy patch call. It 2019.

The unit pricing for the products tailored to the stores is it up in a commensurate amount is the change in steel prices or are there other things impacting what you might be selling those products for I'm, just trying to get a sense of what the lift may be or could be over the over that period of time.

John Gregory Reid: So you won't see as much price volatility in the field stores, because it's a highly engineered product. Again, you're going to have a lot more of it again just be highly engineered raw components. It will have some swing, but not as much as you will see in steel prices, so it'll be a much more narrow bandwidth. When we looked at our energy portfolio, when you pulled out our OCTG line pipe again, you had the pulsating right with the rig count. This business again, it's going to have a more narrow bandwidth of earnings because there is a maintenance component of maintaining the rigs long-term whether new rates are being built or not and they do get the increase in lift with new rigs and drill rig count is increasing. But as far as the cost of material and again, it's highly engineered so it's not as volatile as steel.

Again, youre going to have a lot more of it again just be highly engineered.

Raw components.

It will have some swing, but not as much as you will see in steel prices, so it'll be a much more narrow bandwidth.

When we looked at our energy portfolio, when you pulled out or CTG in line pipe again, you had the pulsating right with the rig count.

This business is again, it's going to have a more narrow bandwidth of earning earnings because there is a maintenance component of maintaining the rigs long term.

New rates are being built or not and they do get the increase in lift with new rigs and drill rig count is increasing.

But as far as the cost of material and again, it's highly engineered so it's not as volatile as Steve.

Ian Gillies: Okay, that's very helpful. And then, there is obviously a large tax catch up in the first quarter as we move through the remainder of the year, and given the outlook do you think there's going to be larger tax installments on the cash flow statement this year when we compare it to last year? How are you thinking about planning for that just trying to sort out how it may impact free cash flow?

There is obviously a large tax catch up in the first quarter as we move through the remainder of the year and given the outlook do you think there's going to be larger tax installments on the cash flow statement. This year when we compare it to last year. How are you thinking about planning for that just trying to sort out how it may impact free cash flow.

Martin Leb Juravsky: Well to be honest, it's directly related to earnings. So the payments that were made in Q1, were really a true-up of the 2021 balance that was outstanding plus the normal course installments that we'd be doing based upon estimates for 2022. So the bad news-good news is if earnings are up, taxes are up. But as of right now, we've made an estimate of what they might be for run-rate and we will adjust either up or down as earnings move around. But the lumpy pieces are typically in Q1, because that's the time of year, where it's a bit of a double whammy catch up for last year if there's any true-up plus the first installments that start kicking in for the current tax year.

So.

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The payments that were made in Q1 was really a true up of the 2021 balance that was outstanding plus the normal course installments that we'd be doing based upon estimates for 2022.

So the good news or the bad news. Good news is if earnings are up taxes are up.

But as of right now we've made an estimate of what they might be for run rate and we will adjust either up or down as earnings move around but.

The lumpy pieces are typically in Q1, because thats the time of year, where there is both it's a bit of a double whammy catch up for last year, if theres any true up plus the first installments that start kicking in for the for the current tax here.

Ian Gillies: Okay, that's useful. I'll turn the call back over, thanks very much.

That's useful ill turn the call back over thanks very much.

Martin Leb Juravsky: Thanks Ian.

Operator: Thank you. Next is a follow-up from Michael Tupholme at TD Securities. Please go ahead.

Michael Tupholme: Thank you. I haven't talked much about steel distributors, the revenues in that segment one, $199 million. I think that's a record for that segment from what I can tell. How should we think about the revenue progression in that particular segment and revenue potential moving forward here over the next several quarters?

I haven't talked much about steel distributors the revenues in that segment one.

$199 million I think that's a record.

For that segment from from what I can tell.

How should we think about that.

The revenue progression in that particular segment.

And revenue potential moving forward here over the next several quarters.

John Gregory Reid: I think you'll see that normalize somewhat Michael. There are two things going on: one, you've got steel prices are really running at a high level. So that's obviously helping even if they're selling the same amount of tonnage. So there is an increase there but they also had some pent-up demand just due to issues coming in at the port. So once it came in it was immediately out of the door so they had some backup there that was probably two to three months long and it all came flushed out so we saw some pickup in the quarter on that. There'll be a little bit flush out in this quarter, but I would say that will come back down in the second quarter.

Two things going on one you've got steel prices are really running at a high level. So that's obviously, helping even if they're selling the same amount of tonnage. So there is an increase there but they also had some pent up demand just due to.

Issues coming in at the Port So once it came in it was immediately out of the door. So they had some backup there that was probably two to three months long and.

Okay and flushed out so we saw some pickup in the quarter on that there'll be a little bit flush out in this quarter, but I would say that will come back down in the second quarter.

Michael Tupholme: Okay. And then I guess, along the same lines, the margins in that segment, any help on how we should think about those moving forward? They seem to be quite elevated still in the first quarter.

I guess, along the same lines that the margins in that segment.

Any help on how we should think about those moving forward.

To be quite elevated still in the in the first quarter.

John Gregory Reid: I think they were in the 17 range in the first quarter. Probably you can maintain in that range, it may be drift a little bit, but I think they are going to maintain in that range because keep in mind, we're usually selling well in advance there. So a lot of our stuff, especially in Canada, is already pre-sold for the quarter so we've got a fixed margin.

Probably you can maintain in that range may be drift, a little bit, but I think they are going to maintain in that range because keep in mind, we're usually selling well in advance there. So a lot of our stuff, especially in Canada is already pre sold for the quarter. So we've got a fixed margin.

Michael Tupholme: Okay, two more. The share of earnings from the Trimark joint venture, I think Marty mentioned earlier in the call up $6 million this quarter so it was a nice step up. Is that the kind of level we should be thinking about going forward? Or any help on that front would be great.

Two more the the share of earnings from the.

The <unk> joint venture I think Marty mentioned earlier in the call it $6 million this quarter.

A nice step up.

Is that the kind of level, we should be thinking about going forward.

Or any help on that front would be that would be great.

Martin Leb Juravsky: No, I mean, it was a really, really strong quarter and a whole bunch of things came together. The business combination between the two predecessor entities is working out well and the timing of the market has worked out very well, but that's a pretty elevated level.

Michael Tupholme: Okay, and then lastly, I mean, there was talk over the course of a few of the questions just about capital allocation, and M&A was obviously mentioned, but I'm not sure we got a lot of details, so just wondering if you can comment on the pipeline. How do things look now as far as the opportunity set and do you see an opportunity to potentially execute some transactions over the balance of the year?

I mean, there was talk over the course of a few of the questions just about capital allocation.

M&A was obviously mentioned, but I'm not sure we got a lot of details. So just wondering if you can comment on the pipeline out.

How do things look now as far as the opportunity set and do you see an opportunity to.

To potentially execute some transactions over the balance of the year.

John Gregory Reid: The pipeline is still very active. There are some things that we're kicking some tires on, there are some other things we're obviously passing on but I wouldn't say anything is imminent right now, but there are a lot of things that are attractive out there to look at. I would probably be remiss to talk about anything before the end of the year just [inaudible] anything. But again, I would think that we will be taking a serious look at some things over the next 90 days.

So some things that were kicking some tires on there are some other things were obviously passing on but it's up.

I wouldn't say anything is imminent right now, but there is there is a lot of things that are attractive out there to look at.

I would.

Probably be remiss to talk about anything for the end of the year just under it.

So anything but again I would.

I would think that we will be taking serious look at some things over the next.

90 days.

Michael Tupholme: Great, thank you.

Martin Leb Juravsky: Thanks, Mike.

Operator: Thank you. And at this time, I would like to turn the call back over to our host for closing comments.

Martin Leb Juravsky: Great, thanks, Operator. Well, again, really appreciate everybody for tuning in and good questions and we look forward to staying in touch. If there are any follow-ups, please feel to reach out at any time, and look forward to connecting again. Thanks, everyone.

Operator: 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.

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