Russel Metals Inc. Q1 2023 Earnings Call
Good morning, ladies and gentlemen, and welcome to our first quarter 2023 earnings call for Russel metals today's call will be hosted by Barton Drosky 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 will now turn the meeting over to Mr. Martin Dropsy. Please go ahead Sir.
Great. Thank you operator, good morning, everyone I plan on providing an overview of the Q1 2023 results and if you want to follow along I'll be using a 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.
So let me begin with just a little bit of perspective on the quarter before I go into the detail in.
In Q1, we were we were very pleased with the financial results as we saw a pickup in performance across our business units in.
In addition, we advanced a number of internal initiatives related to our Capex programs systems safety and professional development of our staff. All of these initiatives have set the stage for long term growth of our business. We also published our inaugural sustainability report, which you can find through the link on the main page of our website we are.
Very proud of our sustainability accomplishments, including a very low carbon footprint as measured on both an absolute basis as well as relative to our industry peers.
On governance and attention to safety and engagement in our communities.
So let's begin with going to page five to have a little bit of a discussion around market conditions.
Steel prices picked up late in Q4 and continue that trend into Q1 in particular, both plate and sheet had price increases on the heels of higher scrap prices and remain at levels that are above historical frame of reference.
As you can see from the charts that are on the right hand side of the page supply chain inventories are modest in both Canada and the U S and when combined with the recent pickup in demand. It allows the industry to be well positioned from a supply and demand perspective.
Specifically on the demand side, we are seeing broad based support from our customer base. As we are focused on the industrial side of the North American economy, which from Orlando is doing quite well.
I think the industrial side of the economy is still playing catch up with pent up demand and we're seeing favorable demand dynamics coming from onshoring of North American manufacturing infrastructure products projects spending on renewable energy and as well as a variety of other areas of demand.
If we go to page six you can see a snapshot of our Q1 results.
We saw a sequential pickup in revenues EBITDA margins and returns if we look across the various charts going from top left revenues were $1 $2 billion versus $1 $1 billion in Q4 EBIT.
EBITDA was $160 million versus $97 million in Q4 due to a pick up from each of our business segments. We saw an approximate 100 basis point pickup in EBITDA margins and solid results from each of our segments.
From a bottom line perspective, EPS and return on capital also improved with EPS of $1 19 per share in Q1 2023 annualized return on capital of 27%. We continue to deliver exceptional results in terms of capital structure, we have net cash of 105 million.
Versus net debt of almost $500 million at the end of 202019. This 600 million dollar increase in free cash flow gives us a lot of financial flexibility going forward.
In particular, we are pursuing a range of strategic initiatives that we think should grow the business and I'll talk about those items in a few more a few more minutes.
We go to page seven.
I'll go through a few items related to our detailed financials from an income statement perspective at the top of the page I covered a number of the high level items already but a few other items of note revenues of $1 $2 billion, but 8% higher than Q4 on margins service centers and steel distributors improved while energy field stores.
Once again, our highest margin segment.
Interest expense came down to $4 million as the increase in interest rates is allowing us to generate interest income on our growing cash reserves overall, we generated earnings of $74 million and earnings per share of $1 19 per share.
Our Q4 results were impacted by a few nonoperating items.
For the case of try Marc we picked up $9 million for our share of their earnings and $4 million of cash flow came in from dividends through try Mark in Q1.
Stock based compensation had a $4 million negative impact in the quarter versus $2 million in Q4, we had a small about $3 million decrease in our inventory and our view reserves is the improvement in steel prices reduced the inventory risk and the inventory provision.
From a cash flow perspective in Q1, we used $18 million for working capital.
There were a number of moving pieces with accounts receivable going up due to improved sales activity and E T coming up as well all the while inventory was relatively unchanged.
Capex of $14 million was similar to Q4, but higher than last year. At this time as we are continuing to advance a series of value added equipment projects and facility Modernizations.
As we sit in the past our annual Capex should pick up and be around $75 million on average for the next couple of years.
From a balance sheet perspective, we are a net cash position with net cash of a little over $100 million, which is made up for made up of our term notes of $300 million that is more than offset by a cash position of a little over $400 million, our liquidity is almost $800 million.
Our book value moved up again and is now approximately $26 per share lastly.
Lastly, we have increased our quarterly dividend from 38 cents per share per quarter to <unk> 40 per share per quarter, and I'll talk about that to give a little bit more context to it and a few more minutes.
If we go to page eight you can see our EBITDA variance between last quarter and this quarter.
And looking at service centers, the large pickup in volume was the biggest factor in Q1 as it added around $23 million of EBITDA to the quarter.
Margins picked up a bit as we move through the quarter and that can treat vote $7 million of additional EBITDA via the service centers.
The operating cost for service centers did pick up a little bit as we had higher volumes and higher incentive based compensation for that business unit <unk>.
Energy field stores improved by approximately $6 million in the quarter is the capital spending in the sector continues and steel distributors improved by about $7 million due to the pickup in steel prices.
There was a $12 million unfavorable variance in the other category, which included the slightly lower earnings in Q1 versus Q4 from try Marc the seasonal impact of our Thunder Bay terminal operation and that should shift back the other direction in Q2, and the mark to market on stock based compensation with the <unk>.
Crease in our share price.
If we go to page nine of some of the segments in P&L information.
The service centers continued to do well as the market improved revenues margin EBIT picked up and most of the impact was late in Q1. So we think theres a favorable dynamic heading into the early part of Q2.
And energy field stores, we are continuing to see positive market sentiment overall market conditions remain upbeat as we look into 2023, although there is typically some softening in Q2 due to the Canadian spring breakup phenomenon.
Gross margins came in at 27% for energy field stores and have remained in that 25% to 30% range since the monetization of the Oc T. G line pipe business in mid 2021.
Distributors revenues was down slightly for the quarter, but margins and operating profit were up as they benefited from improving steel prices and a favorable product mix.
If we go to page 10, we were having a deeper dive on some of the metrics specifically related to our metals service Center business.
The top right graph is the last five years for tons shipped and as you can see the typical Q1 dynamic is a pick up from the seasonally impacted Q4, and we did see that in a very positive way. This past quarter in Q1, 2023, with a 16% increase in tonnage and experienced the highest <unk>.
<unk> quarter that we have seen for several years demand continues to look solid into the early part of Q2.
On the bottom left graph, we have the revenues and cost of goods sold per ton or revenue per ton, even though there was a decline for the quarter versus Q4, we did start to see that trend shift late in Q1 with a 3% increase in March versus February .
As I mentioned earlier, we're continuing to see pricing levels that are higher than the long term historical average.
For cost of goods sold it did come down faster than our selling prices as we realized on the lag effect of lower cost inventory in our system.
The bottom right graph shows gross margins and EBITDA per ton margin is picked up by about $20 per ton versus Q4 and remain well above historical levels. The current margin profile of $464 per ton remains healthy as we're seeing the continuing benefits from good demand and the increase in value added processing in the portfolio.
Having impact on our results.
On page 11, we have shown our inventory turns.
This chart shows our inventory turns by quarter for each segment with energy and read service centers in Green and steel distributors in yellow. In addition to Black line is the average for the entire company.
A few high level takeaways overall, our inventory turns improved slightly in the quarter from three 7% to $3 nine when we benchmark ourselves versus our publicly traded peers. We are generally the top performer on this metric by sector service centers improved a bit from four two to 4.5 energy.
Field stores is flat at around three and for steel distributors in yellow the inventory turns increased from two seven to $3 two as our inventory position declined in the quarter as we realized on the backlog in that business.
We go to page 12.
You can see the impact of the inventory turns on inventory dollars total inventory came down by about $60 million from December 31st. This was mostly a reduction in steel distributors that was offset by an increase energy field stores and increase in energy field stores was really to serve its growing backlog of business.
The service center saw a $12 million reduction in inventory, which is mostly due to a reduction in average cost of inventory as opposed to tonnage overall, our inventories are in pretty good shape as we've achieved a really nice balance between managing capital prudently and serving our customers in the marketplace. If we can.
Go to page 13, you can see the overall impact on capital utilization and returns.
Our capital deployment is up a little bit to around $1 $5 billion. Our more importantly, our returns continue to be industry, leading with a strong start to 2023, our LTM return stand at 31%.
If we go to page 14, I want to update our capital structure.
The continuation of favorable market conditions, and our disciplined approach to capital utilization has given us a lot of financial flexibility on the left table you can see that our cash cash position went up to $401 million, which was a $255 million increase over the past year and $38 million increase just.
In the past quarter as I said earlier, we are realizing a return on our cash balance that substantially offset the interest cost on our outstanding term notes or equity base continues to grow and is now over $1 $6 billion and if you look at the chart on the right you can see the continuation over the last number of years, our book value per share is now.
$25.90 was which is an almost $11 increase over the past two years.
If we go to page 15, we have an update on our capital allocation priorities going forward given our strong balance sheet, we have a multi pronged approach to capital allocation.
For investment opportunities, we continue to seek averaged churns over the cycle greater than 15% and we have consistently delivered well above that target. The ongoing initiatives are three fold. We are continuing to identify and pursue new value added projects. We move forward on a number of series of projects in both Canada and.
The U S in the past quarter, and we're seeing more and more opportunities ahead of us that we continue that.
We continue to target.
Two facility Modernizations, we're moving forward with expansions and upgrading projects in Saskatoon Joplin, Missouri in little Rock, Arkansas.
These projects will evolve over 2023 any into 2024. In addition, we are looking at potential projects and several other locations, where we have legacy setups that can be upgraded and consolidated into newer modern operations. These facilities will allow for volume growth increase operating.
Efficiencies improve health and safety conditions and in some cases. They will also allow for the monetization of higher value legacy real estate.
In terms of acquisitions, we remain committed to our financial and operational criteria are that being said the deal pipeline remains active.
In terms of returning capital to shareholders. We have adopted a flexible approach for dividends as I said earlier, we have increased our dividends to <unk> 40 per share per quarter from 38 cents for the M. CIB. We have acquired 1 million shares under the current plan and a $2 2 million shares of availability under that program if.
If we go to page 16, I wanted to give a little bit more context to our dividend increase.
Russell has had a history of dividend increases having raised the dividend four times between 2009 and 2014. However, it has been a static dividend for the past nine years that being said if we look back at the last five years, we generated almost $18 per share.
Earnings and paid out cumulative dividends of $7.60 over those five years, which equates to about a 42% payout ratio.
Our changing business mix over the past few years has resulted in lower free cash flow volatility stronger earnings power and a very strong capital structure. Therefore, we'll feel we feel very comfortable to increase our dividend to <unk> 40.
And also maintain our ability to pursue a range of other capital allocation scenarios going forward, we plan to periodically review our dividend level for potential future modifications by considering the prevailing market condition as well as our earnings capital structure and alternative uses of capital.
In closing on behalf of John and other members of the management team I'd like to express our appreciation to everyone within the Russell family 2023 is off to a great start we are very pleased with our financial results, but equally important we were very pleased with the series of initiatives that led to record.
Low health and safety incidents, thanks to everyone across the company for your contributions on all fronts.
That concludes my introductory remarks, so operator, you can please now open the lineup for questions.
Thank you, Sir ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by one I just touched on the phone you will then hear a three ton prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and 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.
And your first question will be from Michael <unk> at Scotiabank. Please go ahead.
Yeah.
Hey, good morning, guys nice quarter.
Hey, Michael.
So maybe first question just on the so.
Pension margin improving metals service centers I think in your outlook you highlight that demand trends are steel prices increase continue into Q2 I think you also.
In a different section of your opening commentary you talked about the reduced average cost of inventory.
So wondering whether that implies so far higher revenue per ton and.
And EBITDA per ton so far into Q2, and just how maybe your view of the balance that feature in that segment.
Yeah. It is.
Good question, Michael because the the dynamics that occurred within the quarter, we're heading in the right direction. So we had positive trends when we look at Q1 versus Q4 as it relates to overall margins, but the margins got better through the back end of the quarter than in the front end of the quarter and we're seeing positive margin dynamics.
In the early stage of Q2 as well so said another way or margins that we're seeing in April were slightly better than the margins that we saw for Q1 on average.
Got it that's helpful.
And maybe just changing topics here. The fact that you guys have.
Effectively no net leverage just amazing because presumably well this businesses working capital heavy I'm, assuming competitors are being more challenged with interest cost credit availability.
Do you think that's translating or maybe bell translate into market share gains and potentially eventually M&A.
Hey, Michael Yeah, I think you're spot on there I think is going to give us some opportunities in both in market share gains that we're seeing that now.
A lot of that is being led by our value added initiatives and so we're able to become more sticky with our customers.
And again, putting our balance sheet in a position relative to our competitors I think.
It opens opportunities for M&A, but will remain very disciplined to our criteria.
And John is it fair to say too that when we actually look at the industry data. This is not just a new phenomenon I mean, if we look back where we are today versus the period pre COVID-19.
We gain market share.
That's right.
Fair enough guys. Those are my two questions. Thank you.
Great. Thanks, Michael.
Thank you next question will be from Ian Gillies at Stifel. Please go ahead.
Good morning, everyone.
Hey, Ian.
With respect to the strengths in HRC prices through Q1 is there any reason to think you won't be able to pass those on your customers through Q2, as you're actually selling selling that inventory because.
Because there seems to be some commentary around demand being weak in certain instances and we're just trying to get your view on how that that dynamic playing out.
If you look at the market right now, we're seeing a little bit of pressure on HRC go to scrap prices going down we're not having any trouble passing it on keep in mind that Marty mentioned earlier, our turns were at four and a half times. So we're moving through our inventory much faster than the rest of the market. So we're not seeing any trouble since we're sustaining those high margins that we saw at the end of the quarter.
So we're not very concerned about that and the ability to pass those on we'll watch the market, but again I think this is more of a dynamic with scrap which we're not seeing we're not seeing a lot of important opportunities that are out there right now at attractive levels.
Demand is very solid so again, I think you'll see scrap bounce along here.
Fact, HRC up and down.
Okay, that's helpful and so.
Switching gears to the energy product side, it's obviously early days and it's horrible related the Alberta wildfires, but is there any update you can provide on what your intentions are for that business to do in the near term here I know, it's typically a seasonally weak quarter, but nonetheless, it would be helpful.
Yeah.
Fair to say and you're right that the forest fire dynamic, it's just difficult for people operating those situations. It hasn't had that direct impact on what we've seen what we've seen is the normal seasonal dynamic that happens in Canada. At this time of year because of spring breakup hopefully everybody is able to work through the forest fire situation out west but in terms of that.
Being the cause and effect of what we're seeing in our business generally speaking what we're seeing from our energy business in Canada also in the U S is just a generally positive trend. Yes. There is gonna be mother nature that comes to play every now and again for parts of the year, but we're trying to see through that and.
The trend for that segment is pretty positive.
Okay.
That's helpful and then if I could maybe just sneak in one last one with respect to steel distributors I mean, the margins there were great during the quarter.
Has that continued on into the second quarter or is that business normalized out they just I'm trying to get a sense of what's happening there.
It's normalizing out in and that you know there was some timing things that we had we had some material buildup at the port came in late.
Q4, and so it flowed into Q1 as they were able to monetize that.
And the market changed where they'll normalize out as we go through Q2.
Okay I appreciate that I'll turn the call back over thank you very much.
Thanks Ian.
Next question will be from <unk> <unk> of Raymond James. Please go ahead.
Alright, good morning, guys.
Good morning.
There are concerns right now that the tightening credit environment will finally catch up to the segments of the construction sector that have thus far been resilient.
Just wondering what your thoughts are on this and whether you are seeing.
<unk> seen cracks at all and sort of the the big steel heavy projects that you're.
Helping support.
The short answer is no. So right now I mean, how things evolve over the medium to long term with the economy and I think.
It goes to broader issues in terms of interest rates and inflation that are still out there.
Those are those may or may not become relevant as things unfold, but the part of the economy of the deal that we deal with is still doing fine at the margins there may be some pauses in individual projects here and there in regions here and there, but looking at things in their totality across this segment.
<unk> that we deal with and we deal with a very broad range of industrial type consumers. The broader dynamic is is very good yeah, theres little period, Theres little spots here and there where there may be some softening, but that's always going to be the case when you look across the portfolio, but on average.
Things are pretty good how.
How things evolve more over the medium to longer term.
Our crystal ball doesn't go out that far but the short term is generally pretty solid.
Thanks, Thanks for that.
Another question I have is around.
Renewable power, there's a lot of investments being made in North America now to support the energy transition et cetera.
I recall this was sort of an end market that you're feeling pretty good about them can.
Can you provide a bit of an update here and whether that that that comment you made in the past is still stands.
Okay. Thanks Fred.
We're very positive right now on the renewable wind and solar.
We're seeing that money starting to flow now in the U S.
Actual stages, we think it will have a big impact in Q4 of this year and so it will affect the plate market pretty dramatically. So we're we're pretty bullish on what's going on there.
Awesome, that's all I have thanks.
Great. Thanks, Rick.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone and your next question will be from Michael T.
TD Securities. Please go ahead.
Thanks, Good morning.
Good morning, Mike.
Okay.
Quick question about the energy field stores segment and also looking at the JV earnings So energy field stores, you saw an improvement sequentially in EBIT.
The JV earnings, though were down a little bit too much is so strong but down a bit sequentially. So I'm just I realize they are different businesses, but.
At the same time it seems like the driver here is really just the improvement in the energy sector and the level of activity and I would have thought that both would would generally move in the same direction. So just kind of looking for a bit of a.
Clarification on why they moved in opposite directions sequentially.
Yes, so keep in mind that Youll CTG line pipe for the JV again is driven by the downhole or the big project when they have it as timing of the project and really our field stores.
It is driven by what's going on in the market, but they have a big large maintenance component and so they've maintained it for the life of the world as well as installation of the world. So they get some of these pickups intermittently in the period when you've got wells going in for the JV may have will go in and then go into a low they will go throughout and so they'll see that consistent maintenance and MRO type business.
You won't see in the JV.
Okay and in some ways. The contrast between those two businesses is part of the reason we did what we did back in 2021, they both touch on energy, but in different ways and we feel pretty good about the field stores as being a good part of our portfolio on the long term basis because of the dine.
<unk> that John talked about and there are very different dynamics that impact the volatility and seasonality on <unk> line pipe. So in some ways, it's a little bit of a micro test that confirms the path that we started down a couple of years ago in separating out those businesses and monetizing our CTG line pipe.
Okay.
That makes sense.
Second question I don't think you were often asked about this but corporate expenses this quarter looked somewhat higher than certainly than they were a year ago, but also just higher than they've been in general over over recent quarters. So I'm wondering if there's anything.
Just sort of explain that and then secondly, how to think about corporate expenses going forward.
Yes, so there's a variety of moving pieces in there, but using Q1 as a baseline of this year is a good place to start Mike.
When you look over year over year comparison is there's a variety of things that are in play. One is you do have mark to market on stock based comp that has you know.
Some some some variability into it you've seen some inflation and also the way there the connectivity to variable comp also flows in there as well so as market conditions improve or as market conditions come down and profitability goes up and profitability comes down the variable comp.
Moves with it that's why you will see some variance in corporate expenses and then the last piece is there is some inflation that is occurring this year versus last year across all parts of the economy and Thats one place that we're seeing it.
Okay. So what what we saw this quarter, you think thats, a reasonable way to think about it over over coming quarters for this year, yes, that's a good starting point for your model.
Okay perfect.
And then the comment you had in the in the release just regarding.
That you would evaluate a number of potential acquisitions in the quarter.
I mean, I know I know this is part of the strategy and it gets talked about and on quarterly calls quite regularly.
<unk> seen a comment like that and in the release. So just wondering if.
Maybe just clarify for starters, if that is in fact sort of new and the motivation for including that and maybe you know maybe more importantly, like maybe just comment on the pipeline.
And what you are seeing in terms of the opportunity set right now given the strength of the balance sheet.
Yeah, that's fair.
I actually don't remember off hand, what we have said or have some sit in the past to be perfectly honest, but in terms of capturing where things are right now it is active.
Now that being said, we've seen a lot of deal activity in terms of potential deal flow over the past period, but I think there were it was hard to find the right situations for us as we look back to 2022.
I'm, probably more optimistic today in terms of the situations that are in and around us.
But there's still some wood to be chopped in order to move things forward, but I'm more optimistic both the pipeline that I'm seeing today and the pipeline that we are seeing say six months ago.
Okay and is it.
Is it primarily the U S that we should be thinking about is really the focus area.
And then more specifically service centers in the U S.
Yes, but keep in mind, we've said that for years and then we end up doing something in Canada, along the way. So we will remain opportunistic but.
Ideally, yes, it would be U S service centers that we're focused on.
Alright.
Okay. That's all I had thank you.
Great. Thanks, Mike.
And at this time gentlemen, we have no other questions registered please proceed with closing remarks.
Great. Thank you operator, and thank you everyone for joining our call. If you have any questions. Please feel free to reach out at any time, otherwise we look forward to staying in touch during the balance of the quarter. Thank everyone.
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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