Q4 2023 Russel Metals Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to our 2023 yearend and fourth quarter results conference call for Russel metals. Today's call is being hosted by Marty Jurowski Executive Vice President and Chief Financial Officer, and John Reid, President and Chief Executive Officer of Russel metals.
Today's presentation will be followed by a question and answer period.
At any time, if you have a question you will need to press star one on your telephone keypad.
I will now turn the call over to Marty Trusty, CFO and John Reid CEO. Please go ahead gentlemen.
Great. Thank you operator, and good morning to everyone I plan on providing an overview of the Q4 2020 results and if you want to follow along I'll be using the slides that are located on our website and all and you need to do is go into the industrial relations section is located in the area called conference call and you'll find the slides there.
If you go to page three you can read our cautionary statement on.
Forward looking information.
Let me start with a little bit of a perspective and context around 2023.
First of all I want to thank the 3500 people that are part of the Russell family. The team effort has been truly exceptional and we were very proud of how the group came together and delivered not just in 2023, but over the last number of years.
Second I want to thank our shareholders for granting us the patients and so we implemented a series of initiatives over the past few years, it probably sounds like a cliche to say that we are focused on advancing the business for the long term, but we tried to be very targeted in how when and where we deploy capital.
If we look at 2023, our safety record is the best in our history and we were recently recognized with an award by our industry peers.
A robust pipeline of internal investments with some projects being completed in 2023 and many more in progress for 2024 and beyond this pipeline of projects is targeted value added equipment facility Modernizations and that pipeline is now the largest backlog in our history.
Announced the Samuel acquisition, which is expected to close in Q2. This acquisition was a long time in the making and would position our business well in Western Canada and the U S. Northeast. We also completed a small tuck in acquisition within our energy field store business in Q4.
So let me start with page five and.
Begin with.
Bit of a discussion around market conditions.
So after some volatility with sheet prices in Q2, and Q3, both sheet and plate.
A relatively steady in December and January that being said she prices have declined somewhat over the past couple of weeks. When we look at both benchmarks today. There are a few interesting observations the absolute prices are at levels that are higher than in previous cycles because of good demand a higher cost curve for producers as well as better disciplined by produce.
There's the <unk>.
Current spread between sheet and plate is making more sense than it had over the past few years, we saw periods in 2021, where she was in fact higher than plate, which is a bit of an anomaly. We also saw periods, where plate was $7 $800 per ton higher than sheet, which is also an anomaly. The current spread is more reasonable compared to historical spread levels.
You can see from the right charts in terms of inventories within the service center supply chain that in that the industry remains at reasonable levels for inventory at the same time the demand is solid.
On page six we have a snapshot of our results.
23 was the third best year in our history from a topline bottomline and return perspective, we generated significant free cash flow and have the strongest capital structure that we've ever experienced and that is it gives us a lot of flexibility to pursue a range of opportunities.
If we look across the various charts going from top left revenues were $1 billion in the quarter versus $1 1 billion. In Q3, EBITDA was $82 million in March EBITDA margin was 8% both of those were down from Q3, but without the Q3 contribution that came from <unk>.
Mark the Q3 and Q4 results would have been very similar from an EBITDA EBITA margin EPS and return perspective, we think there is a very good outcome as Q4 is typically impacted by seasonality.
Our annualized return on investment capital came in at 19% for the quarter and our total for 2023 was 25%.
When I mentioned, our financial discipline and focus on returns I think the bottom Middle chart illustrates how we have delivered over an extended period of time, our target is over 15% through the cycle and to be first quartile in the industry. The portfolio changes that have experienced over the last number of years have led us to achieving these goals.
Lastly in terms of capital structure, you see that on the bottom right hand chart.
We have net cash of $332 million versus net debt of almost $500 million at the end of 2019. This capital structure shifts as I said earlier it gives us a lot of financial flexibility going forward.
If we go to page seven there is some more detailed information on our financial results just starting at the top of the page from an income statement perspective.
I covered several of the high level items already but a few other items to note as I said earlier revenues of $1 billion for the quarter. It was down 8% from Q3 price release realizations were down a little bit and we had a small decline in service center volumes.
On margins all segments were up by about 100 basis points and I can discuss these in more detail in a few minutes interest scheme came down to $1 million for the quarter. As we are generating interest income on our growing cash reserves are.
Our Q3 results were impacted by a few non operating items trademark we picked up $12 million in Q3, but had nothing in Q4 as our interest in <unk> was sold in early September.
Stock based compensation was $7 million for the quarter due to the increase in our share price in the quarter and we had a $3 million increase in our inventory and our view of reserves.
Going down to the middle of the page from a cash flow perspective.
In Q4, we generated $82 million from working capital, primarily driven by a reduction in inventory and a R, which was somewhat offset by a reduction in accounts payable.
Capex capex of $28 million was higher than in the past couple of quarters as the pace of our various projects is picking up some steam.
The 2023 Capex of $73 million is in line with the $75 million that we had expected for the year.
Going forward, we expect our 2020 for capex to be over $100 million.
As there are additional value added and modernization projects that are coming that.
That are coming through during the next 12 months.
From a balance sheet perspective, we are a net cash position of $332 million. This is a $60 million improvement in the past quarter. Our liquidity is over $1 billion and we have the strongest balance sheet that we've experienced as I've mentioned earlier, we manage the company with a conservative bias and we've demonstrated this approach through market volatility.
One item of note is the Kinane dollars did strengthen in the quarter, which did have a negative impact on our OCI account in translating our U S based financial results from U S dollars to Canadian dollars.
In the quarter, we picked up 390000 shares under our CIB, which brings the total to $3 2 million shares since we put it in place in August of 2022, our average purchase price to date.
$34 65.
Our book value per share remains north of $27 per share notwithstanding our share buybacks in the quarter. Lastly, we declared a quarterly dividend of <unk> 40 cents a share.
If we go to page eight.
Our EBITDA variance comparing last quarter this quarter.
Starting at the left if we look at the service centers the volumes were down a little bit compared to Q3, but our margins were up a little bit and we also benefited from a $4 million variance related to a reduction in our <unk>.
Our operating costs, which is mostly variable compensation.
Towards the middle of the page energy field stores were down on an EBITDA basis as Q4 was impacted by some seasonal slowdown in our U S business and because Q3 included some lumpy projects at one of our Canadian divisions.
Steel distributors was up $3 million due to good business activity and lower costs.
There was a $13 million unfavorable variance in other.
Earlier in Q3, we had.
$12 million pickup from the trademark components and obviously there was nothing in Q4, because it was divested we had a slight decline in our Thunder Bay terminals operation and there was also an additional expense related to the mark to market on our stock based comp is a variable is a favorable variance excuse me other expenses came down by $4 million in quarter.
<unk>.
If we go to page nine there is our segmented P&L information.
For service centers revenues were down, but both margins and EBIT were up I'll go through more detailed metrics on our service centers on the next page, but our overall results were very good and what is typically a weak quarter.
Energy field stores, we are continuing to see solid performance in Q4 revenues were down versus Q3 with some seasonal dynamics that I talked about before particular for one for our U S operation.
Margins did come up a bit as a reminder, and as I said earlier one of our divisions moved some volume in Q3 for project work.
That was a below normal margin, which is why our Q4 revenues were down a bit but our margins were up steel distributors segment revenues were down slightly but margins and profitability were better than Q3.
On page 10, there's a deeper dive on some of the metrics for our service Center operations.
Top right graph is volumes for the last number of years Q4, 2023 volumes were good they.
We're down 1% versus Q3.
But given the seasonal comparison, if you look compared to Q4 of last year. They were up 5% versus this time last year.
Bottom left graph, we have the revenue and cost of goods sold per ton.
Revenue per ton or price realizations decreased by 114 per tonne versus $115 decrease in cost of goods sold which resulted in a slight pickup in margin per ton that is shown on the bottom right graph.
When we look at operating results over the past number of months five six months the margins were declining on a month over month basis as prices were coming down and we're working through the lag effect of some higher cost inventory. This downward margin trend reversed towards the latter part of Q4. So our margin profile was better at the end of Q.
Four than at the beginning of Q4.
For Q4, our gross margin was $443 per ton, which remains at a pretty good level compared to the historical levels, which were closer to $300 time.
As we've said many times in the past our initiatives.
That are related to value added processing equipment and the other.
Investment profiles that we have should lead to higher average margins and lower volatility over the cycle as compared to our legacy margins.
On page 11, we have illustrated inventory turns the chart shows turns by quarter for each segment energy and read service centers in Green steel distributors in yellow. In addition to Black line is the average for the entire company overall, our inventory turns declined from 4.0 at September to three eight.
At December 31st this is typical at this time of year as our Q4 turns do come down a bit with the pullback in shipments in the last few weeks of December.
That being said the $3 eight for Q4 of this year is better than we normally see in a typical Q4.
By sector. Our service centers were four four turns which is again an industry, leading our energy field stores came down to two eight but that should improve in Q1 were all up while our steel distributors improved from three 2% to three five.
On page 12.
However, the impact of the inventory turns on inventory dollars total inventory declined by $43 million with a small decline across all three segments in service centers, we had a decline in prices that more than offset.
A small increase in tonnage. This is consistent with our expectation that I mentioned, a number of months ago on our Q3 call.
On page 13, we of the overall impact on capital utilization and returns our capital deployed came down to $1 $3 billion because of our working capital reduction in the quarter.
More importantly, our returns continue to be industry, leading as mentioned earlier, our 2023 returns on invested capital was 25% for the year.
If we go to page 14, and provide an update on our capital structure. The continuation of the strong free cash flow gives us a lot of flexibility on the left table, our cash position went up to $629 million, which is a $660 million increase versus September.
It's also a $266 million increase in serious time last year.
Our equity base remains over $1 $6 billion and the chart on the right shows that our book value per share remains over $27 per share, which is over $2 increase since this time last year.
On page 15, we have an update on our capital allocation priorities going forward.
Given our strong balance sheet, we continue to have a multi pronged approach across all of these bubbles that are on the page where investment opportunities towards the top left of the chart. We seek returns over the cycle greater than 15% as Ive already discussed and we have delivered well above that target the ongoing opportunities are threefold.
We're continuing to identify and pursue additional value added projects in total we have over 40 equipment projects on the go right now.
Facility Modernizations, we have five projects underway. They are tracking for completion at various times in 2024 and into early 2025.
In total our Capex was $73 million for last year as I said earlier, we expect that number to go up to over $100 million for 2024 as our project pipeline is currently over $200 million. That's a multi year number as we continue to identify more and more opportunities.
In terms of acquisition.
Looked at a lot of deals over the last couple of years in Q4, we closed the acquisition of alliance supply, which is small tuck in for our Canadian energy field store business. In addition, the Samuel deal is expected to close in Q2.
In terms of returning capital to shareholders. The bottom part of the page we've adopted a flexible and somewhat more balanced approach for dividends in may we increased our dividend to <unk> 40 per share per quarter and will continue to reevaluate.
Reevaluate the appropriate level on a regular basis for the NCI being we've acquired 390000 shares in the quarter and since August of 2022, we acquired $3 2 million shares an average price of $34 65.
We expect to continue to utilize the NCI b on an opportunistic basis.
If we compare the 2023 activity of our NCI b versus dividends the dividend run rate was around $96 million versus $82 million of share buybacks for last year. So we are close to a balance between the two forms of capital repatriation.
That 50 50 frame of reference is not a hard wired target, but it's a good litmus test to see if we're being somewhat balanced.
On page 16, I want to provide a context around the cumulative impact of the actions over the past few years.
In total we generated $1.7 billion worth of cash with $1 2 billion coming from operations $400 million coming from asset sales, which is mostly the monetization of the <unk> line five businesses.
$35 million from option exercises, if we compare that one $7 billion on the left to the capital redeployment on the right graph. It is split into roughly three equal buckets in orange are our reinvestments, which in total is just under $600 million and it includes 100.
$81 million of completed acquisitions $225 million for the pro forma impact of Samuel transaction and $170 million for internal Capex. The.
The blue part the Blue part excuse me totals around $500 million, which was the cap, which was the capital returned to shareholders through both dividends as well as the more recent initiatives under our share buyback program and the last bucket is in green, which is around $600 million in debt reduction cash buildup, which provides us the financial flexibility that is.
And earlier again, when we look back at this it just provides an interesting frame of reference of the amount of cash thats been generated the cash thats been redeployed in very similar buckets about a third a third a third also it's interesting to note that when we look at the asset sales of around $400 million that is rough.
We'll lead the equivalent of the amount that has been invested through acquisitions and in the announced acquisition. So it comes down to a situation of trying to do more with effectively the same amount of capital just better capital redeployment and you see that on page 17.
The top left is invested capital and it has averaged around 131 4 billion over the last decade, but biggest differences that we reallocated capital away from some underperforming businesses and reinvested in our core business. The result is we are doing more with the same amount of capital bottom left.
Chart shows returns which are.
At the higher tier over the last couple of years and they have been in the past.
On the top right is EBITDA margins, we've consistently said that one of the outcomes of our actions should be to raise the floor raise the ceiling and reduce the volatility through the cycle and you could see some of that result being demonstrated over the last couple of years.
By comparison, there were some tough times in the past 2015, even the front end of <unk> of 2020.
The sustainability of the business and financial performance is different than it has been in the past.
Because of some of those initiatives. The net result is somewhat illustrate also on the bottom right graph, which is our book value per share.
We've been elevated baseline and are a pretty good position to continue to grow through the cycle.
In closing on behalf of John and other members of the management team I'd like to express our appreciation to everyone within Russell. Thank you to everyone across the company for your contributions.
That concludes my introductory remarks, so operator, if you would now like to open the line for questions that would be great. Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a three pronged acknowledging your request and if you would like to remove yourself from the question queue. It will need.
The press Star two.
Using a speaker phone please lift the handset before pressing any Keith. Please go ahead and press Star one now if you do have any questions.
And your first question will be from James Macgregor at RBC capital markets. Please go ahead.
Hey, guys. Congrats on the strong result.
Thanks James.
Hey, Jim.
Looking at the results sequentially at your service centers.
We've seen steel prices up significantly versus the lows from last year.
Wanted to higher volumes quarter over quarter.
So how should we be thinking about sequential trends in particular on the <unk>.
Gross margin side, given the higher pricing and a focus on value added services kind of within the context of <unk>.
Your historical seasonality.
Yeah, well I think.
Without being too short term focused that this is more a function of what is the trend line look like.
I think we've.
Tried to be consistent in saying that these initiatives should add a couple of hundred basis points on average over the cycle now of a cycle does move around a little bit and sometimes it gets more pronounced than others, but overall it should be a couple of hundred basis points of impact through the cycle now that being said, we just happened to have had a couple pretty good.
Years from a cycle perspective, but even when cycles turn south and even with the volatility and they have turned a little bit soft from time to time in 2023, we still demonstrated some pretty good results.
As evidenced by the margins that we that we had in Q3 and Q2, where there was some softening in pricing so overall James.
To get to your question.
The initiatives over the course of time should add on average a couple of hundred basis points to our results.
Okay and then.
Another one on some of the recent Capex spend.
Hi, This is a two part question so.
Alluded to potential.
Share gains for from some of those initiatives and what's the opportunity.
Trinity.
If we look longer term.
And with regards to share gain and then on the.
The uptick.
Capex from prior guidance. It is a pull forward of spend or additional spend and can you just comment a little more specifically on what you saw in the market.
That kind of prompted that increase in Capex, Brian and after that I can turn the line over thank you.
Sure. Thanks, James So when I answered the last question first and then John can deal with the first question in terms of the market.
In terms of Capex its not so much a pull forward what we have is sort of an average evergreen list and.
The backlog of projects in the Gulf and is constantly getting updated every day every week every month and the timing is a little bit in precise but it effectively is a multi year plan.
And then in terms of the specifics of when certain things come to fruition.
It's a function of lead time in certain equipment in some cases, it's readiness of certain facilities in some cases, it's both equipment as well as buildings in buildings can sometimes be driven by permit requirements. So it is not so much we pull stuff forward. It was really a function of there was an evergreen list that we always have and this is just.
What that 12 month window between January one and December 31, it looks like but we tend to get more focused on the evergreen list that as the multi year Evergreen list.
What we've said is that we expect it to be north of $75 million per year on average and 2024 is going to be one of the years thats a little bit above average.
Yes, James to your first part of the question on share gains a lot of the share gains are actually coming directly from the end user customers and so were they bought.
Both are still in the past from us or someone like us.
And then that.
Steel will be processed in their plant and they might have 234 process has done with its value added equipment. We've now installed we're able to bring that in house and do that for the manufacturers.
Our end users to where they can free up that space at the time and the working capital.
We're able to do that.
Typically at a more competitive price because it's not a multi step process, where we just have some more sophisticated equipment.
It can do all those in one step so that's where the majority.
Majority of the gain is coming from.
We feel like we will continue down that road as we're seeing this kind of evolve into the next step of things people are wanting us to do.
Did you have any further questions James.
Oh, Thank you very much I'll turn the line over.
Thank you.
Next question will be from Michael <unk> at Scotia Bank. Please go ahead.
Hey, good morning, guys.
Hey, Michael.
So on the topic of capital deployment.
You've invested a lot of growth capital Marty good presentation, Theyre just a tick.
To connect the dots on what you've done in the last three years.
I guess the issues that in the last three years, you've managed to out earn what <unk> spend so I'm thinking maybe longer term here what your thought is on the optimal balance sheet.
For Russel metals leverage targets.
I have to get to longer term as you continue to invest.
Yes, it's a good question Michael because at the end of the Youre right.
Built a really strong position.
Some of it was by design because of the initiatives that we did and some of it was being in the right place at the right time as the cycle turned very favorably.
And building dry powder is a good thing because we don't have the crystal ball on the house cycles evolve, but having that flexibility is extremely important.
So obviously, we've got tremendous flexibility right now.
This is probably more of a philosophy than a hard wired numbers attached to targets, but.
Our philosophy is we want to maintain good flexibility at all points in the cycle. So that we can always be in a position to take advantage of opportunities that are presented to us because we don't know what's presented to us and so what that means is yes, we're sitting on position today Thats net cash.
That's not the long term plan, but at the end of day, we do want to have a philosophy that gives a tremendous amount of flexibility to seize on opportunities.
When we look at historical metrics Theres frames of reference of Theres been times, you can do 30% net debt to invested capital we can do something like that within the frame of our liquidity today, but it's not so much a hardwired target as it is more of an overall frame of reference of maintaining strong liquidity at all parts of the cycle.
So that if the cycle turns up we do certain things if the cycle turns down we do different things and so that liquidity flexibility as more of a qualitative underpinning than a hard wire number it should be this or it should be that.
I'm sorry, if it's really like the answer and then maybe just.
Switching over to the numbers, yes, the steel distributors.
2020 through pretty outstanding near maybe maybe if you can breakdown Jon the reasons behind the outperformance, especially into Q4.
And then just wondering.
As we think about 2024 and the overall sustainability of the margin profile.
Yes.
Barry.
Steve.
With their own steel distributors and primarily driven in Q4.
And really throughout the year by our Canadian steel distributors and again, we've typically done in back to back contracts as the market moves up and down in price that will lock in so back to back.
<unk> had an opportunity to get some windows. This year to do some more transactional things that were in favor just due to the market and available tonnage that was brought to us from suppliers. So they were able to take.
Take advantage of that opportunity.
Overall again, I think that gave them some margin windows that are typical.
We will go back to a more normalized margin that we've seen historically in 2024 foreign steel distributors are U S.
And it's highly transactional it had an average year for them there'll be probably stronger in 'twenty four so there'll be some balancing there, but as far as the gross margin profile. So I think it'll be more historical.
Perfect. That's it for me thanks, guys.
Great. Thanks, Michael.
Next question will be from David Brandon at BMO capital markets. Please go ahead.
Hi, Good morning. This is David on for Devin Dodge.
Hey, Davis.
Thanks for taking my question regarding the Samuel acquisition and expanding into the northeast how quickly can rustle adds scale to that region.
Some of it.
Out of our control because it is a function of opportunity.
And we don't want to hard wired targets are hardwired timing, because it would kind of force the wrong situation, perhaps at the wrong time in and just kind of Davis to Peel back.
John I've lost track of how many acquisitions, we've looked at in the last number of years, probably close to 100.
And so building scale is not hard.
Building quality.
Businesses that fit financially fit culturally fit operationally that is hard.
And so we don't have hardwired timelines, our targets to say, we need to be of a certain size in certain regions.
At various points in time, we're just going to continue to be opportunistic and we think that that is the region, where we actually have some operations already in Wisconsin.
Relocations in Pittsburgh Buffalo for for Samuels are at a nice extension of that so we actually do have a good platform and we will be opportunistic as new situations present themselves and if they don't present themselves. We're not compelled to grow in that region, where we've got good scale for what we have if theres better opportunities.
Terrific and if there arent the right opportunities we've got a good platform as it currently stands.
Yes.
Okay, Great I appreciate the context, and then switching gears, maybe a little bit here.
Are your five MS facility modernization process is still expected to be completed in calendar year 2024.
Yes, mostly in 2024, a couple might spill into early 2025.
Okay got it thanks, I'll turn it over.
Great. Thanks, Dave.
Next question will be from Jonathan Lamers Laurentian Securities. Please go ahead.
Good morning.
Hey, Jonathan.
Yeah. Thanks for the commentary on the share gains in Q4.
So I mean, just to circle up on that the volume growth was pretty good in Q4, just over 4%.
So am I understanding correctly that that was mainly in Canada with the transactional items in the market and.
Also some share gains on the value add initiatives that John discussed.
Okay.
Michael was asking specifically about steel distributors only so if youre looking more broadly across the service centers I think is what you're touching on.
Share gains based on the percentages you gave there. So again those were again different that was that was driven by the value added initiatives that we've done.
Primarily that are out there. So again two different segments to our business I think you might have blended the two together.
Right. Okay. Thanks, I was just wondering if you could give US an example of one of the value add initiatives.
<unk> seen success, that's allowed you to.
Gained share with your customers and our turn inventory faster.
I think it is kind of underappreciated that youre, leading the sector in terms of inventory turns for the <unk> would just like to web.
I understand that a little better.
So just.
Yes, just a couple of without getting too granular around specific as we were.
Inventory player we put in a beam line.
That allowed us to go in and that we're actually taking those beams, where our customers that were in fabrication. We're doing value added downstream that may include.
In a project of scale, maybe a $1 million project demand in the half we're now adding a component of a couple of hundred thousand dollars of labor margin to that by being able to do that on that line within a monthly period that would be one projects.
No.
With this.
It's Marty Marty said over 40 underway.
Probably well over 100 completed we're seeing that in each in each individual location happen over and over again, so we become now not just a.
Commodity supplier to that.
To our customer but were value add extension of them, where they can go out and take on more additional work if they don't have the capacity in their shop or if they do not have that process. It gives them an avenue into that sort of allows us to go out and do that without a lot of cases without adding to our inventory profile because we're just adding the labor component.
Thank you.
And Marty on the acquisitions, you mentioned you look to close to 100 last year for the ones that you are saying no to.
Are there any key.
Common reasons, why you'd be saying no is it valuation primarily or.
And how much higher do you find that the margins for your service centers are versus the targets that you see.
So the 100 was not last year. It was over a couple of years, but regardless it was a big number that we looked at.
In terms of reasons.
It's all over the map to be.
Some of it is valuation and within that 100.
There were some deals that came back to market multiple times and we had issues not just the first time, we had issues the second time or in some cases, a third time when they would come to market.
Sometimes it is valuation sometimes it is.
Cultural fit.
There are some things that are non negotiable in terms of things like safety.
And obviously there are situations, where you can bridge from legacy safety culture as to what our standards are and suffering sometimes you cant sometimes there's entrepreneurs who have run really successful businesses.
Leaf and is there a backup plan in place behind them. So there's a whole variety of reasons and I wouldn't pinpoint to saying, it's only one item. It is really a whole series of things that are important criteria to us which is why we tend to be fairly selective.
And I apologize if I missed this on your Capex plans for 2004.
Which include over $100 million.
Do you have a breakdown for how much of that would be for the samuels integration, how much would be for value add and how much is maintenance capex.
Yes, so the maintenance capex component of that is probably.
$30 million $35 million, plus or minus so the balance of it is discretionary and so that goes kind of go back to the core pieces.
Of the value added projects.
The things that John was just talking about as examples.
As well as those facility modernization so about two thirds of that is discretionary.
Yes.
And how are you thinking about the dividend and the NCI b here.
Here.
Given the share prices recovered somewhat but the stock still.
It looks compelling on valuation now that you are flushed with cash and we'll be visiting with integration.
On Samuels as far as large acquisition scale.
Yes so.
In terms of dividends we will.
We made the dividend increase from 38 cents per share per quarter in may to <unk> 40 per share per quarter, and we'll continue to revisit on a periodic basis I can't tell you exactly what the period is going to be.
But it's something that we'll probably revisit more actively on a go forward basis than had been done over the last number of years.
Hard to completely forecast, what that would look like but it will probably be a periodic.
Reassessment on the NCI, it's opportunistic and in some ways. It's the sort of the same circumstances as M&A M&A is opportunistic.
We're not interested in doing everything.
That is available out there from an M&A landscape by the same token there is times it will be more active or less active on the CIB. There is certain price points will be more aggressive than others and so we've tried to articulate it as an opportunity.
Excuse me opportunistic approach the NCI B and I think that's going to just continue to be the frame of reference.
Thanks for your comments.
Great. Thanks, Jonathan.
Next question will be from Michael <unk>.
TD Securities. Please go ahead.
Thank you good morning.
Hey, Mike.
Hi.
Maybe just to pick up.
On one of those last questions just regarding the dividend Marty you mentioned you will you expect to continue to reassess periodically.
Is there a is there a payout ratio you have in mind that we should be thinking about.
As we try to think about how the dividend may evolve over time.
The short answer is no.
It's not viewed that way that we've got a hard wire dividend ratio that we're going to do a recalibration on every quarter every year, it's looking at things more holistic than that for a whole variety of criteria. So I wouldn't want to sit here and say, we've got a hard wired formula that you can plug into a model.
The way we've looked at it.
<unk> and its probably not the way we're going to look at it on a go forward basis.
Okay that makes sense.
As far as the quarterly performance for service centers, we did see gross margins improve quarter over quarter in the in the fourth quarter I know you commented earlier about.
How we should think about sort of gross margin improvement potential over time, given the value added initiatives, but in the short term here just given the way Steve.
Steel prices have moved.
We saw them move up.
Through the early part of this year and then I guess recently, there's been a little bit of a.
A check back.
Can you just help US think about Q1 service center gross margins versus Q4, just given kind of the movements. We saw in Q4 in steel prices and kind of what we've seen so far this year, just because again it sort of rising and then.
And then now falling a little bit so just trying to understand where that leaves us for Q1 versus Q4 service centers gross margins.
Sure.
Your last observation is spot on they do move around that is for sure and I think overall.
It kind of under underpins another point, which is there is still a cyclicality attached to this business and we pay attention to that a lot. We don't predict it we don't control it but we recognize that it's there and we try and adapt to it.
So part of the dynamic attached to margins is also just the lag effect between prices changing on product and incoming inventory that may be committed to a couple of months in advance of actually product going out the door and that whole lag effect of how it flows through which is why on a very short term basis, usually measured by a couple of months you off.
And do see times, where.
Top line might be going up bottom line.
Cost of goods sold might be coming down or vice versa and that translates into dynamics with margins Q4 was a little bit of that because there is there.
There is a point, where we actually saw.
Pricing coming down actually Q3, and Q4 pricing coming down but cost of goods sold was coming down more on a lag effect basis. So they werent working in cemetery, what that ultimately meant for US is that when you.
Breakdown Q4 into its components.
<unk> picked up in December versus what they were in October or November and that kind of the level. That's maintained itself into January. So the January level is kind of similar to December and December was a little bit higher than it was in November.
So where we are right now all other things being equal the general level is probably sustainable which is a little bit higher than the than it was.
Coming into Q4.
But there is obviously as you point out some moving pieces in terms of steel prices. So it's hard to be too predictive.
But at the end of day. It was a better story coming out of Q4, then going into Q4 from a margin perspective.
Okay. That's helpful.
Well thank you.
Can you provide.
An update on where things stand in terms of the approvals for the Samuel service centers acquisition and what key items are still required to.
To achieve before closing.
Yes.
So there's a whole variety of things that are taking place in terms of planning and readiness and all that and we're spending an awful lot of time.
There's a lot of elements attached to coordination theres lot of people elements attached to.
Readiness a lot of back office elements attached to that there is ongoing dialogue with the regulators. So it's really a multi pronged approach and there is a lot of resources that are going into it it's up it's a carve out from an existing company. So there's complexity attached to that by definition, there's locations in various offer in various.
<unk> locales, so theres a lot of components attached to.
Kind of going from concept going from an agreement to closing, which is why it takes a little bit of time. So there's a whole variety of those things taking place in parallel right now.
Okay.
But Q2 is the expectation for closing.
Correct.
And you were asked about Capex earlier, the $100 million and gave the breakdown between maintenance versus discretionary does the.
Does the $100 million include what you intend to spend.
If anything in the context of of the Samuel.
Acquisition and whatever you plan to do once you once you do close in.
Terms of any value added related initiatives.
Yes.
Let's put it this way the $100 million.
What I said is is greater than $100 million, so whatever needs to be done in terms of samuels.
Definition would be inclusive in it but we don't know enough right now to know exactly what we would want to do and to be more specific to from a timing perspective.
There is a lead time associated with doing any kind of investment. So we wanted to do something within our existing operations today, There's a lead time to the planning there is a lead time associated with.
When approval process, there's a lead time associated with the equipment. So for all intensive purposes. It wouldn't be a big dial mover element in 2024 anyways okay.
Okay makes sense.
And then just regarding the energy field stores I don't think there's been a lot of discussion on this call about that segment.
The outlook commentary you provided in the release sounds fairly constructive as it relates to that segment.
Through the first part of this year at least we have seen.
It looks like North American rig counts are down versus last year I'm not sure they've changed much sort of sequentially, but just on a year over year basis, Theyre down a fair bit maybe more so in the U S and in Canada, We've obviously seen some natural gas price weakness of late.
I'm, just wondering how youre thinking about.
That business for sort of full year 2024 versus last year is this is this a business. You think you will see growth in 2024, and if so where is that coming from or how youre thinking about it would be helpful to better understand.
So for the broader industry.
It's fairly flat, we will see a little maybe a little bit of a bump in Canada with some of the large projects that are starting to come to fruition.
We're pretty bullish on that we're taking share on both sides of the border right now and Thats, where we saw growth.
Last year, and so we will continue to see that.
We will continue to grow share.
Opened in Canada, and the U S.
Okay got it and we'll leave it there thank you.
Thanks, Mike.
Next question will be from Ian Gillies.
Stifel. Please go ahead.
Good morning, everyone.
And.
Okay.
It's.
Relative to three months ago, when you do the bottom up analysis through your various operating jurisdictions.
Sentiment better or worse from your customers and I guess your operators.
When we're looking at specifically one division or are you talking about each one yes, sorry, sorry, I apologize thats, specifically for metals service centers.
Metals service centers interesting demand is.
It's pretty flat overall, what <unk> seen is the interest rate sensitive projects that are out there or maybe industries that are out there. They will obviously pull back a little bit based on what's going on with the increased interest rates.
There is some anticipation that they'll take back office interest rate structure rollover it come down.
But overall, we've seen a very steady demand or tonnage is very steady, we're seeing price fluctuations up and down. So there is some sensitivity there, but we're in a very very healthy pace right now for our industry. When you look back historically again.
Our best year ever and we're holding that type of rate right now so we're pretty bullish over services.
Okay.
And John I suppose the follow on to that and I know, it's incredibly hard to tell but do you get the sense yet of whether you're seeing any demand pick up from whether it be IHA, a the IRI or any of these various government bills or.
Do you think that ends up being a net tailwind as we move through the middle and maybe back half of this year and into 2025.
Yes.
A little bit.
But it's not a huge tailwind.
Immediate portrayed it is early on but I do think we'll see that mid year late year with it being an election year.
The interesting, especially in the U S election, so that.
Could get delayed a little bit, but we are starting to see things move forward. It's out of the ground now and so we're starting to see things leaves the planning process.
Procurement process for some of those projects.
Okay.
On the pricing side I mean, we tend to spend a lot of time focusing on HFC in play, but there is a pretty large chunk of your book that it didn't really either of those two products.
What are those are the prices in those other products that are harder to find or David stickier are they holding in a bit better or like how should we be thinking about those.
And so we do spend a lot of time focusing on HRC in place Youre exactly right. Some products again, that's the base substrate metal for them, so if its tube and pipe.
Things are coming from a substrate. So they are driven by the <unk>.
Others are more sticky and less volatile. So if you look at your traditional power stocks youre beans angles channels.
Valves are highly engineered products, if you shift over to energy. So in her energy field stores flat screens. So those are highly engineered so they just don't move as much there's not as much raw material to move their commodity item to move.
Exactly what the others are more sticky the nonferrous, we will see movement in.
Based on the indexes that are out there.
Input coming in so it has more volatility as well as we continue to grow that initiative would get larger nonferrous will probably start to talk more of that pricing as well.
Okay. That's helpful.
And as you think about the facility modernization products projects that are ongoing.
I presume you've embedded dose in growth capital and so could you maybe talk a little bit how youre going to generate returns just from upgrading facilities and alike.
So there is two real avenues that are there when we're upgrading facilities. One is just modernization efficiencies.
We've got some of our.
So these are older.
Antiquated as we come in will come in with better equipment as well as expanded facilities will allow us to again improve efficiencies through our warehouses and handling.
And the additional space also allows us to grow and the value add space to add equipment.
Now we can take on additional share sales that are out there. So we're growing we might be running that capacity of the facility now by doing this it will allow us to expand further.
Okay. That's helpful. Thanks, very much I'm going to turn the call back over.
Thanks Amy.
Next question will be from Maxim <unk> with National Bank Financial. Please go ahead.
Hi, good morning, gentlemen.
Okay.
Most questions have been asked already but just wanted to try.
Maybe to ask a slightly different tack in terms of visibility because one of the things we've heard is that as.
Steel pricing was kind of a rising throughout Q1.
There was a bit of a slowdown in terms of the pace of.
Whether inquiries or maybe less kind of inventory destocking I'm, just curious to see what you guys are seeing on the ground and whether that's a bit different in your universe.
Any comments would be appreciated thanks.
So we did see steel pricing going up you're right into Q1.
We've seen it rollover now and you can see some of the indexes are starting to rollover inventories for our industry as far as the service.
Very good level and what I mean by this work to work through low so theyre turning in a very normalized level, so youre not going to see pricing pressure from one side or the other from it being too low.
Or too high.
The mills are running at capacity level around that 75%, 74%, which is very healthy for the mills.
So again on all those levels I think we're in pretty good shape going forward.
We are seeing that steady demand out there so again the.
This is a steady state that we're in right now, we'll just see pricing fluctuations based on raw material inputs from scrap.
Any any.
Up or down will have an effect, but right now it looks to be a very steady state for us in first quarter.
Okay. That's super helpful. Thank you and Marty just because you made a comment around sometimes cost of goods sold obviously moving in the opposite direction too in the short term in terms of the revenue but in.
Terms of what you have.
Inventory and what's going to be flowing through the through the Cogs.
Do you mind, maybe commenting a little bit on directionality.
We should be thinking about this.
Yes, most of that.
If steel prices didn't move and they will but if they didn't move for the next couple of months, we've probably seen that lag effect already factored in.
Two our cost of goods sold.
So some of that dynamic that I was talking about before where prices were moving around prices were coming down, but our cost of goods sold were still going up a little bit in the reverse has happened it's kind of.
All other things being equal.
That lag effect has worked itself through our inventories and into our cost of goods sold now.
Does that get to your question Max.
Absolutely, yes, so I guess like a bit of stability, assuming things kind of stay as they are right.
Maybe staying with them.
Yeah.
Okay. Okay understood and then just just last one.
Obviously, it's an election year in the U S.
Any chance of section 232.
Being potential removed.
I guess, how that hybrid likely perspective.
Yes, I think both sides need 232, right now with Pittsburgh, Greensburg, Pennsylvania, I'm, sorry, we had a swing state.
I think they are both.
Very keen to stay with $2 32 and to keep it as is and not make any changes there because that state makes when the election and so it's both.
Both are pandering to the unions that are out there in those states both sides of the party. So I just don't see any changes at all to $2 32 going going into the election.
Okay, Okay excellent thats. It from me. Thank you so much.
Okay. Thanks.
As a reminder, ladies and gentlemen, if you would like to ask a question you will need to press star one on your telephone keypad and your next question will be from Betsy <unk> with Raymond James. Please go ahead.
Hey, good morning, guys.
Morning, Greg.
Interest in our Russel metals that's awesome.
Yeah.
Okay.
John I recall, you're flagging at the sensation reduction Act and some investments in renewable power is a really positive a source of growth.
12, 12 or 15 months ago.
Is this sort of a market you're very excited about obviously demand seems to be drawn strong and broad across geographies and things like that but.
Any any specific.
Markets that you're really excited about.
So solar is something we're really excited about believe it or not a lot of solar goes on in Alberta.
So again, we're very excited about so we're participating on both sides of the border there.
And also wind and so as we continue to see the wind projects go forward that money is now available.
Was kind of really were kind of running out with late last year. Those funds are now available to be reused again from them.
Government acts that you mentioned, so that will start to ramp back up as well.
Again, good users of our product in that and so we participate again on both sides of the border. There. So we think both of those are good obviously, the DB plans are continuing to grow.
We're seeing that transition starting to happen, we don't typically participated in automotive.
On the EV side, we do have some participation through some of our to blow through value added work that we're doing.
Okay.
You've been at this for a while.
Is this.
Is this the base that's markets best opportunities you've ever seen in euro and your timing of the steel sector and it seemed like Oh, we're going to be in for a couple of good years of a.
Strong demand strong prices.
I guess, that's a nice way of telling me I'm old Fred's since I've been at it for a while but.
Well, we've known each other in a while.
Yes.
Bucket.
It's definitely been a very robust market compared to anything I've seen in <unk> and really the sustainability of that over three years.
Been some peaks and valleys in there, but everything at a very high so the demand has been very good and also the price of steel has been very good. So it appears that the pricing is reset with the new floor owns deal when you look at where we're at.
Still will come through when things slow down will be interesting to see.
And it looks like the cost of those things that it went and have reset the bar for our industry.
And so it's been it's been a really nice ride for the last three years, where we don't see anything really pulling back on that for the next.
Yes.
Next two or three years as far as we can see we just don't see anything to change that right now.
So my next question is going to be what's keeping you up at night. It doesn't seem like your it seems like youre sleeping well, but what are the concerns that you are having right now.
Potentially with.
The people and.
Yeah.
The strategy going forward.
Got it.
Marty you touched on it in his opening comments and just so.
So proud and excited for our team that they wanted to MSCI safety Culture Award. They continue to set records every year with our safety performance. We can all time low again this past year and are on our LTE is.
That's really what keeps me up at night is our we've got 3500 Russell family members that are out there every day. This is a dangerous product.
And we think we've put things in place.
To stop the risk keep it from happening, but access to happened and so the things keep me up at night worrying about our teammates their safety, making sure. They go home safely to their families every night and that we're doing everything we can do.
As a company and as a Russell family to take care of them, so that would be the number one.
When we look at it.
From a business operating side.
It's really we've got great people.
A good job with succession building depth in the organization.
So that's what I think separates us in mix was really strong so that definitely does not keep me up.
What do we see in the economy, what's going to come in as a black Swan event, we've got a balance sheet, that's very flexible that allows us to.
We really take advantage of opportunities.
Manage markets as they turned down.
Is there another COVID-19 around the corner or financial crisis thing those things were out of our control what they do concern you.
Alright, Thanks, that's all I have.
Thank you very much thanks.
Thanks, Greg.
And at this time Mr. Jurowski, we have no further questions. Please proceed.
Great. Thank you operator, I appreciate everybody for joining our call today. If you have any follow up 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 you 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 you to please disconnect your lines have a good weekend.
Okay.
Yes.
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