An anonymous director reports

RUSSEL METALS ANNOUNCES 2023 FIRST QUARTER RESULTS

Russel Metals Inc. has released its financial results for three months ended March 31, 2023.

• Revenues of $1.2-billion and EBITDA (earnings before interest, taxes, depreciation and amortization) of $116-million;
• Sequential increase in revenues, EBITDA, margins and EPS (earnings per share);
• Strong capital structure with liquidity of $792-million;
• Dividend increase to 40 cents per share.

The company's basic earnings per share of $1.19 for the quarter ended March 31, 2023, was lower than the $1.56 per share recorded in the first quarter of 2022 but higher than the 93 cents reported in the fourth quarter of 2022. Revenues of $1,187-million were lower than the $1,339-million experienced in the first quarter of 2022 and higher than the $1,100-million in the fourth quarter of 2022. The company's gross margins were 21.9 per cent for the first quarter of 2023, higher than the 21.7 per cent in the same quarter of 2022 and the 19.8 per cent in the fourth quarter of 2022.

The company's EBITDA in the 2023 first quarter was $116-million compared with $153-million in the 2022 first quarter and $97-million in the 2022 fourth quarter. The company's 2023 first quarter EBITDA was negatively impacted by a non-cash charge of $4-million related to the mark-to-market on share-based compensation and was positively impacted by a $3-million decrease in the company's inventory reserves due to more favourable steel prices.

On a consolidated basis, the company generated higher revenues, EBITDA and net income in the 2023 first quarter than in the 2022 fourth quarter, due to a pick up in demand and margins. At the same time that the company generated improved and balanced operating results, it remained disciplined on working capital management, which resulted in a strong annualized return on invested capital of 27 per cent in the 2023 first quarter.

The company's 2023 first quarter results reflected a sequential improvement across its businesses, as each of its metals service centres, energy field stores and steel distributors segments generated improved operating profits for the 2023 first quarter as compared with the 2022 fourth quarter. The company's metals service centres generated 2023 first quarter revenues of $807-million, a gross margin of 20 per cent and operating profit of $58-million, which were all improvements versus the 2022 fourth quarter. In particular, the company realized a 16-per-cent improvement in tons shipped that reflected the seasonal rebound from the 2022 fourth quarter. The company's energy field stores generated 2023 first quarter revenues of $252-million, a gross margin of 27 per cent and operating profit of $29-million, which reflected the positive impact from pent-up demand for capital spending in the energy sector. The company's steel distributors generated 2023 first quarter revenues of $127-million, a gross margin of 22 per cent and operating profit of $18-million. The revenues declined on a quarter-over-quarter basis, but the segment realized much higher quarterly margins due to the favourable market conditions, which translated into an improvement in operating profit.

Market conditions

The steel price increases that were experienced in late 2022 continued throughout the 2023 first quarter as a result of modest inventory in the supply chain and an improvement in industrial-based demand from the company's customers in a range of sectors including manufacturing, fabrication, agriculture, ship building, non-residential construction, energy and alternative energy. The company's energy field stores benefited from increased energy sector activity with average Canadian rig counts of 212 in the first quarter of 2023 compared with 190 in the 2022 first quarter and 197 in the 2022 fourth quarter. Average United States rig counts were 762 in the first quarter of 2023 compared with 629 in the 2022 first quarter and 775 in the 2022 fourth quarter.

Capital investment growth initiatives

In the 2023 first quarter, the company invested $14-million for capital expenditures, as the company focused spending on its facilities modernization initiative and value-added processing equipment projects. As part of the company's facilities modernization initiative, it recently approved an expansion at its Little Rock, Ark., location and advanced its Saskatoon, Sask., modernization project. During the 2023 first quarter, the company advanced a series of value-added processing projects in both Canada and the U.S., with several of those projects expected to come on line in the coming quarters.

Over the course of the past quarter, the company evaluated a number of potential acquisitions, and the company continues to explore opportunities to grow its business in ways that would be financially attractive and operationally complementary with its existing business segments.

Returning capital to shareholders

The company has adopted a flexible approach to returning excess capital to shareholders through: (i) its continuing dividend; and (ii) share buybacks.

In the 2023 first quarter, the company paid dividends of $24-million or 38 cents per share. Over the five-year period of 2018 to 2022, the company generated cumulative earnings per share of $17.96 and paid total dividends of $7.60 per share, which equated to a payout ratio of 42 per cent. As a result of the company's strong earnings profile, reduced cash flow volatility and strong capital structure, the company has declared an increase in its quarterly dividend to 40 cents per share, payable on June 15, 2023, to shareholders of record at the close of business on May 30, 2023. This represents a 5-per-cent increase from the prior dividend and equates to an annualized dividend of $1.60 per share. Going forward, the company plans to periodically review its dividend level for potential future modifications, by taking into account the prevailing market conditions, as well as its earnings profile, capital structure and alternative uses of capital.

In August, 2022, the company initiated a normal course issuer bid to purchase for cancellation up to 3.2 million of its common shares over 12 months, representing 5 per cent of its issued and outstanding shares. To date, the company purchased and cancelled 1.0 million shares and have availability for an additional 2.2 million shares.

Liquidity and capital structure

During the 2023 first quarter, the company generated $67-million of cash from operating activities and ended the quarter with total available liquidity of $792-million.

Outlook

The favourable demand trends and steel price increases that were experienced late in the 2023 first quarter are being maintained into the 2023 second quarter. These dynamics are expected to benefit the company's metals service centres and steel distributor segments over the near term. For energy field stores, the second quarter is traditionally slower due to spring breakup in Canada, but the company expects a continuation of improving demand trends on a seasonally adjusted basis.

Investor conference call

The company will be holding an investor conference call on Tuesday, May 9, 2023, at 9 a.m. ET to review its 2023 first quarter results. The dial-in telephone numbers for the call are 416-764-8688 (Toronto and international callers) and 1-888-390-0546 (U.S. and Canada). Please dial in 10 minutes prior to the call to ensure that you get a line.

A replay of the call will be available at 416-764-8677 (Toronto and international callers) and 1-888-390-0541 (U.S. and Canada) until midnight, Tuesday, May 23, 2023. You will be required to enter pass code 315919 followed by the pound key to access the call.

About Russel Metals Inc.

Russel Metals is one of the largest metals distribution companies in North America. It carries on business in three segments: metals service centres, energy field stores and steel distributors. Its network of metals service centres carries an extensive line of metal products in a wide range of sizes, shapes and specifications, including carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel, aluminum, and other non-ferrous specialty metals. Its energy field stores carry a specialized product line focused on the needs of energy industry customers. Its steel distributors operations act as master distributors selling steel in large volumes to other steel service centres and large equipment manufacturers mainly on an "as is" basis.

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