Q3 2024 Russel Metals Inc Earnings Call
Ladies and gentlemen, and welcome to our 2024 third quarter results called for Russel metals.
All will be hosted by Mr might be your own ski 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.
Time, if we have a question. Please press star one on your telephone keypad.
I'll now turn the meeting over to Mr. Martin Jurafsky. Please go ahead. Thank you.
Great. Thank you operator, and good morning, everyone.
On providing an overview of the Q3 2024 results and if you want to follow along they'll be using the Powerpoint slides that are on our website and you can find them in the Investor Relations section and it's located in the conference call menu a subtype.
If you go to page three you can read our cautionary statement on forward looking information.
So let me start with a little bit of a perspective on Q3.
As we think about the quarter Theres, a few summary observations.
One there was an awful lot on the go this quarter and I'll talk about that in more detail in a minute, but a special. Thank you to so many members of the Russell team, who worked tirelessly and with such a high level of commitment over the past period of time.
But to the diversity of our business was very evidence, there's a different cycle attached or steel service centers versus our energy field stores.
In this past quarter the service centers encountered the challenges of lower steel prices, but the energy field stores did really well and provided stable margins and a higher bottom line results.
Three of.
The counter cyclicality of our cash flows is discussed often and this quarter was a very good example, while earnings came down cash flow went up we generate $163 million of cash from operating activities.
Adding 170 $107 million from non cash working capital and if we exclude the 56 million impact of the working capital change that related to the Samuel transaction, our same store reduction in working capital and cash generation was $51 million.
Enforced item speaking at the Samuel acquisition, the Samuel integration.
Is going well the transaction closed earlier in the quarter, there's a lot of moving pieces related to our ongoing initiatives to integrate systems blend our operations together and generate efficiencies that should lead to further capital reduction and margin improvement and I'll talk about those more in a second.
So now let's go to page five and give a context around market conditions.
We've seen underlying steel prices exhibit a fair amount of volatility over the past well as both sheet and plate prices came down over the past few quarters.
Supply chain inventories in both Canada, and the U S remain modest and suppliers have recently been fairly proactive on the supply side with curtailments, both maintenance as well as a market related curtailments from our customer base, our shipments have been fairly steady other than the seasonal dynamics that did occur in Q3 and will.
Occur at our typical in Q4, as we get into the holiday periods.
Given all those moving pieces on supply and demand there are piece appears to be a basis for more favorable pricing environment as we're heading into 2025.
On page six we have a snapshot of our historical results.
If we look across the various charges going from top left.
Revenues.
We're up a bit versus Q2 and comparable with the past number of quarters EBITDA was $67 million EBITDA margin was 6% earnings per share was 59 cents per share all of these were down versus Q2, given the lower margins in our steel service centers.
Our annualized return on invested capital came in at 13% and it's a fairly decent result, taking into account the down quarter for service centers and the deployment of the extra capital for the Samuel acquisition that didn't yet benefited from a full quarter of contribution even though our return on invested capital was down for the quarter. It.
Above the levels reported by our U S based comparables.
Lastly in terms of capital structure, we have net cash of $73 million at the end of the quarter and this is after the closing the Samuel transaction. So we continue to retain a high level of dry powder to deploy opportunistically.
If we go to page seven have a more detailed financial snapshot and starting at the top of the page from an income statement perspective, a number of the items I've already covered off but just to go into a few more items of detailed revenue of $1 $1 billion was up 2% from Q2, and this was primarily driven by a 69 million.
Dollar contribution from the former Samuel branches.
Gross margins and EBITDA margins were down but some of this was due to the margin drag from the Samuel acquisition as we've talked about before the lower Samuel margins were expected to negatively impact. The overall average service center margins and they did so by about 1% and caused about a 40 basis point.
The impact on our overall EBITDA margins in the quarter. This is as expected with our focus being to enhance the margins of the acquired business.
Acquired Business.
Our Q3 results were impacted by a few other items of note Samuel acquisition as they've talked about a couple of times already it did have a contribution and in about half of a quarter, where we owned the business as it contributed a little over $2 million to our EBITDA, but we did encounter a similar amount of nonrecurring costs related to the closing.
The mark to market on our stock based comp was a $5 million expense versus an $8 million recovery in Q2, so that was a $13 million negative, but a noncash swing.
From a cash flow perspective in Q3, we generated $107 million from working capital. Some of that was a $57 million increase in accounts payable of which most related to the rebuild of the accounts payable that was left behind as part of the Samuel transaction structure. We also had a decrease in inventory on a C.
Same store basis on service centers and steel distributors.
CIT earlier, we closed the Samuel transaction, which on the cash flow statement as reflected a $223 million, but this excludes the impact of the accounts payable that we left behind when we take into account that rebuild of the accounts payable to September 30th the invested capital related to the Samuel deal comes down to.
$167 million.
Share buybacks were active with one 2 million shares or 2% of our shares outstanding for a total of $46 million.
Energy picks up and that's going to go into the energy market to make every pipe and so obviously with the election that we just so thats a big energy will pick up in the United States very quickly.
So we will see more pipe being made which will create demand for that it should have taken under.
Placements out there.
Mike: Okay. That's super helpful and I guess, Mike do you want to maybe build a little bit on the energy.
Mike: End market and how should we be thinking maybe black in 2025, I guess thats contingent on top of UTI pricing a lot of these things.
Speaker Change: Curious I guess sort of sentiment wise, we should expect growth in 2025.
Alright.
Speaker Change: On the energy side, just under the Trump administration. He is going to push the drilling that he is going to push to being energy independent.
What we're seeing from some of the data centers and others. They are using more clean energy that we can make right now so we've got a real shortage right now of energy as a whole will be a clean energy or.
Speaker Change: Traditional energy.
Mike: In the U S right now sort of any changes that you're seeing on the horizon, I guess sort of status quo in terms of how you disrupt the market in the past.
King.
Yeah.
We see some really interesting opportunities and.
Mike: We're very active right now and looking at situations multiple situations and so one of the things as we kind of.
Mike: Did the Samuel acquisition.
Mike: Big focus with getting it done getting it over the finish line integration and while that effort is taking place. It's allowed us to also take a pause but look at other situations that could be complementary.
Mike: There's a lot of lifting attached to the samuels transaction by definition because of how it's integrated into our existing businesses.
Mike: But we are very actively looking at other acquisition opportunities and that would be kind of.
Mike: Small to mid sized type tuck ins.
Mike: <unk> Standalone businesses that are comparable merit complementary to what we have and we just see really some interesting opportunities that probably werent necessarily there a while ago I think valuations are making more sense to us the quality of the opportunities are probably a little bit better than we saw a while ago. So we're fairly optimistic.
There'll be some interesting situations that will evolve on the M&A side.
Speaker Change: Okay. That's great. Thanks, so much.
Max: Thanks Max.
Okay.
And then if you have any questions. Please Chris.
Mike: Although the number one on your Touchtone phone.
Speaker Change: We have another question from Michael Knott phone grip TD Calvin.
Yeah.
Speaker Change: Question relates to the service centers.
Speaker Change: The segment just wondering if you can help us think a little bit about the gross margin percentage.
Speaker Change: That we should be thinking about for the fourth quarter and then as we move out of the fourth quarter into the beginning of next year.
Speaker Change: Particularly in the fourth quarter I guess, just given the moving pieces here with respect to not only steel market dynamics, but also full quarter's inclusion with Samuel.
Speaker Change: Yes, So let me deal with the very near term.
Speaker Change: And so I guess as a starting point there is a lot of noise in Q3 because of the St.
Speaker Change: Because of the Samuel acquisition and the different margin profile that he has it has versus our other businesses in the service center side of it. So if I kind of separate that out for the equation. What we saw as we kind of came through Q3 is as we got towards the end of Q3.
Speaker Change: September and then into October into October margins have kind of stabilized and so the pace of recovery, it's hard to ascertain I wouldn't assume that there is a ton of recovery in Q4, it's really a springboard more into 2025. So I don't suspect we're going to see a significant change in margins between.
Speaker Change: Q3, and Q4 the biggest on a same store basis equivalent the biggest issue is going to be the seasonal dynamic that typically impacts things on Q4, which is more volume related than margin related and that's just the normal dynamic and if you look at our history over the last however, many years Q4 is always down from Q3 because of the loss of operating days.
Speaker Change: And that's separate and apart from margin, but margin is pretty much stabilized towards the end of Q3 for us it into October.
Speaker Change: Okay perfect. So does that cover off though when you say things have stabilized I think if I understood correctly, you were talking about sort of the underlying base business does that include whatever impact Samuel it's going to have on the fourth quarter to think about sort of stable quarter over quarter or does that does that change the picture relative to what you just.
Subscribed.
Speaker Change: At the margin it changed it by a little bit but at the end of the day. What we tried to do is break out separate samuels numbers. So you have some visibility on that and break out our same store numbers. So we have some separate visibility on that.
Speaker Change: So some of my comments were really on an apples to apples basis same store and then samuels as an add on piece to that Q3 was kind of a push it shouldnt be a push in Q4, because we did only have a half of a quarter of contribution and we did have some onetime costs, but in the big scheme of things they weren't all that material.
Speaker Change: When you put it altogether, but we did put that disclosure out there, but my comment Mike was more on the same store equivalent basis of margins Q3 versus Q4.
Speaker Change: Okay got it thank you.
Speaker Change: Can you maybe also I think I think you touched on it briefly in the.
Speaker Change: The prepared remarks, but just as far as sort of integration.
Speaker Change: Priorities through the end of the year and as you get into next year with respect to the Samuel Service Center acquisition.
Speaker Change: Yeah, Thanks, Mike Yeah, Marty touched on it but again, it's going to be inventory and we'll look at inventories where the drops duplications, we've got an opportunity to free up working capital that would be redundant. So we're well well underway on that now, but there is some more opportunity to do that through fourth quarter and into early first quarter.
Speaker Change: So that we get our turns in line with our normal terms, what we see at Russell improved operating efficiencies will be out there as we move towards our ERP and that's going to lead to some operational synergies over time, but we've got to get converted to our ERP system for the Santos folks who are on the same system. We're seeing the same things and then we will look at the opportunities to maximize.
Speaker Change: Equipment that we have to make sure we're running at full capacity.
Speaker Change: <unk> already started.
Speaker Change: <unk> is there we will look at the facilities footprint rationalization.
Speaker Change: Okay and can you remind just sorry on the ERP and systems side when would be the expected time for cutting over fully on to your own systems, and I guess moving off whatever transition services arrangements might exist.
Yes.
Speaker Change: We're targeting mid next year sometime.
We've got.
Speaker Change: Extended contract with same rules on that but we are targeting sometime mid next year.
Speaker Change: Perfect and then just one last one.
Speaker Change: We're clearly used to.
Speaker Change: I'm trying to keep an eye on.
Speaker Change: On steel markets, but with respect to non ferrous I wonder if you could provide a bit of an update there in terms of what youre seeing in the markets that are irrelevant and potentially more.
Speaker Change: Meaningful to you going forward here, given given the increased activity in that area.
Speaker Change: Nonferrous much like we did carbon products. So we're going in and trying to say we want to do some medium to small type orders. So we're not tied to one big industry. So we're not tied exclusively to aerospace. So we're again we're.
Speaker Change: We're not tied exclusively to a tank builders. So we have a very diverse customer base. So far that we weren't able to accomplish which again is our model that helps us turn our inventory better what we're seeing is the pricing seems to have stabilized in nonferrous and lakes aluminum is actually coming up a little bit on pricing a little earlier.
Speaker Change: And we're seeing the carbon and so we think we're in a good return on our inventory at very similar turns do we do in carbon.
Speaker Change: There are some longer lead times on a handful of products and extrusion that are not made in North America, but it's been.
Speaker Change: Very slow systematic approach to try to maintain what's made us successful in the carbon side of the business.
Speaker Change: Alright, I appreciate the detail I'll get back in the queue.
Speaker Change: Great. Thanks, Mike.
Speaker Change: Next question will be coming from Ian Gillies from iPhone.
Ian Gillies: Good morning, everyone.
Ann.
Ann: When you originally did the CML acquisition you had a chart in the deck that showed the invested capital and Samuel potentially falling to $125 million at some point if things went right.
Ann: But given what we've seen in the quarter and some of the commentary you made on the call, but I'm wondering if that could get a bit better than perhaps even what you thought at the time of acquisition.
Speaker Change: Well, let me start with so at the time of acquisition. It was $2 25 were below $1 70 already and so the things that John was just referring to some on the working capital side, a little bit could be could come when we integrate the systems. The next biggest pieces through potential real estate monetization, but with the rationalization that.
Speaker Change: John was talking about so that'll take a little bit of time to unfold as we think about the ideal footprint and where locations and how many locations in each market. So it's not unreasonable to think that we can't reduce.
Speaker Change: <unk> capital from the current level of 167% or something less than.
Speaker Change: The next leg of it is going to be a little bit of working capital and it's going to be the most meaningful part of that will be related to some potential monetization of real estate and we're at the early stage of thinking through those moving pieces.
Speaker Change: Understood that's helpful.
Speaker Change: Maybe following on Mike's questions.
Speaker Change: The revenue per ton for Samuel look reasonably strong in the quarter.
Speaker Change: Obviously, you have some work to do there on the cost structure, but on a gross margin per ton basis.
Speaker Change: Is there any reason to think why Samuel Couldnt get to the same sort of percentages that that Russell has or is there something structurally different in that business.
Speaker Change: So there's a couple of things there they have a large non ferrous presence in western Canada.
Speaker Change: And so that's going to set things up just a little bit different.
Speaker Change: The cost and the margin basis, and then they do a lot in flat rolled processing, which is a lower margin business.
Speaker Change: So their cost structure, although we do some of those things at Russell larger nonferrous.
Andrew.
Andrew: The flat roll process for both of US has a lower gross margin business, we're seeing and sort of ultimately being a little lower EBITDA margin business. So their structure is a little different when you blend them together than what we look like across Russell as a whole, but it should should be similar overall, but again it may not be identical.
Andrew: And I think that's in part why when we talk about the gap between our margins and their margins coming out of the gate. We acknowledged that there was a difference we acknowledged it was the opportunity and if we get 50 cents of the dollar that's a huge win if we get more than $50 towards.
Speaker Change: Bridging that margin gap, that's even more substantial so for our planning purposes. We think we can bridge the gap, whether we get all the way there. We don't have that full road map, yet, but we know we can achieve a reasonable amount of that gap.
Speaker Change: Understood and then maybe last one on capital allocation.
Speaker Change: Obviously last time, we did one of these calls I don't think Samuel was closed.
Speaker Change: With the CIB, you've been quite active in the bands of how you're thinking about using that have now shifted up.
Speaker Change: How aggressive you'll be giving you a a new assets in there and theoretically higher intrinsic value.
Speaker Change: Hum.
Speaker Change: Our.
Speaker Change: Our philosophy remains the same the exact details around that get tweaked from time to time and they have been tweaked over the past couple of years as well so our philosophy remains being opportunistic on the NCI the exact parameters, where we do stuff.
Speaker Change: It will change and it has changed from time to time as we I think as you rightfully pointed out as we revisit our view of intrinsic value.
Sure.
Speaker Change: Okay. Thanks, very much I appreciate that kind of call back over.
Ian: Thanks Ian.
Speaker Change: Okay.
Okay.
We have another question from Michael <unk> from.
Speaker Change: From television housing.
Speaker Change: Thank you for taking the follow up.
Speaker Change: On steel distributors.
Speaker Change: There was some discussion about the arrival of the previously delayed shipments in that.
Speaker Change: In that segment in the third quarter.
Speaker Change: Wondering if when we look at the results for steel distributors like are these representative of run rate type type levels or was the arrival of those shipments that that in any way sort of distort things here just trying to get a sense for if this is.
Speaker Change: This is kind of a good representative quarter or not.
Speaker Change: It was it was a little bit different in terms of a quarter and if you can undertake this quarter to put in the context of Q2 and Q1 for for that matter.
Okay.
Speaker Change: That those logistic issues started to clear up tail end of Q2 and continued into Q3. So part of what we saw in Q3 was a bit of a bulge out of.
Speaker Change: Our Canadian business, but the contrast was also our U S business.
Speaker Change: Which tends to be more transactional and doesn't have that same offshore dynamic.
Speaker Change: It didn't have the benefits so between the two of them Q3 was a really good quarter, but it did benefit from the surge of those logistics so.
Speaker Change: Our Canadian business, probably comes off a little bit as we go into Q4 and Q1, there is a seasonal element there, but the flip side of which is our U S business, probably picks up a tad.
Speaker Change: Okay.
Speaker Change: Helpful. Thank you and then.
Speaker Change: You provided some pretty good detail in terms of your thoughts around acquisition potential, but I guess.
Speaker Change: Just trying to get a sense is the is the messaging here that there are more opportunities in your sort of more active.
Speaker Change: <unk>.
Speaker Change: And then we've seen in the past given I guess, given the environment or is this just sort of.
Speaker Change: Consistent with the way, you've always approached acquisitions and youll be opportunistic and we'll take a look at things but.
Speaker Change: Maybe disciplined.
Mike: A little bit of all the above Mike.
Speaker Change: So some of it is our our approach is has remained the same so we haven't changed.
Speaker Change: We continue to look Opportunistically our criteria. Our criteria are things that are important to us are remain the same I.
Speaker Change: I think what's changed is the stuff that we are seeing is a little bit more interesting and aligned with what makes sense for us. So we're more optimistic today than we might have been a while ago and so again.
Speaker Change: What has changed we haven't changed but the opportunities appear to have changed.
Speaker Change: Perfect and I'm, sorry, I apologize if you addressed this but does the fact that you recently closed Samuel on theirs.
Speaker Change: Certain things that need to be done and focused on there does that in any way.
Speaker Change: Yes.
Speaker Change: Great situation, where for the foreseeable future you are less likely to be active on the M&A front or is it not really relevant.
Speaker Change: No.