Marion E. Britton - EVP, CFO and Secretary John G. Reid - EVP and COO Brian R. Hedges - President and CEO

Sara O'Brien - RBC Capital Markets Anthony Zicha - Scotia Capital Michael Tupholme - TD Securities Bert Powell - BMO Capital Markets Brett Levy - CRC Capital Frederic Bastien - Raymond James Justin Wu - GMP Securities

Good morning, ladies and gentlemen, and welcome to the 2015 Second Quarter Results Conference Call. Today's call will be hosted by Mr. Brian Hedges, President and Chief Executive Officer; Mr. John Reid, Executive Vice President and Chief Operating Officer; and Ms. Marion Britton, Executive Vice President and Chief Financial Officer of Russel Metals, Inc. Today's presentation will be followed by a question-and-answer period. [Operator Instructions] I will now turn the meeting over to Ms. Marion Britton. Please go ahead, Ms. Britton. Marion E. Britton: Good morning, everyone. I'm going to start by reading the normal cautionary statements on Page 3. Certain statements made in this conference call constitute forward-looking statements or information within the meaning of applicable securities laws, including statements as to our outlook, future events or our future performance. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are necessarily based on estimates and assumptions that while considered reasonable by us, inherently involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Our actual results could differ materially from those anticipated in our forward-looking statements, including as a result of the risk factors described below in our MD&A and in our Annual Information Form. While we believe that the expectations reflected in our forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct, and our forward-looking statements included in this call should not be unduly relied upon. These statements speak only as to the date of this call, and except as required by law, we will not assume any obligation to update our forward-looking statements. So let's turn to Page 5 of the slide deck that we circulated last night, giving some color on current market conditions in the quarter that we just completed. Our Metal Service Centers tons were down 7% compared to Q2 of 2014 and they were down 5% year-to-date compared to 2014. So tons held reasonably well, the issue that was more causing our result was the margins within the Metal Service Centers was lower or declined in the quarter and that has to do with pressure on pricing. I mean we still had inventory coming in at lower price which helped average our inventory down but also excess inventory in the industry put pressure on pricing for us to remain competitive and sell product. Thirdly, rig counts are at record lows, which second quarter would normally be a low point for rig count, but they are due to oil pricing at record lows. Also in this segment, we see competitive pressure due to lack of demand in North America and excess inventories related to imports in the North American market. Turning to Page 6 highlighting our results, we still have earnings of C$16 million in the quarter, EPS of C$0.27, that compares to our second quarter last year of C$0.50 but also to our first quarter of this year C$0.30 per share. For the six months, we reported C$0.57 per share. Free cash flow was strong at C$0.60 for the six months ended June 30, 2015. Second quarter, we also had a change in non-cash working capital of C$53 million. I'll speak to that slightly more on the cash flow statement, and we did end up the quarter with a net cash positive of C$3 million for that cash net of borrowings. Return on equity for the quarter was 7% and we did declare our dividend of C$0.38 per share. Turning forward to Page 8, the one item that I will highlight is the other finance income/expense. We did take an adjustment, so took income related to the fair value on the earn-out on the Apex operations where we have earn-out. So C$1.6 million was the adjustment in the quarter, C$2 million has been our adjustment year-to-date. So basically the fair value adjustments have neutralized or made the interest expenses going through related to that go to zero. So year to date we have recorded zero related to both the fair value and interest expense on that. Turning forward to the cash flow statement on Page 10, as I mentioned I would highlight a couple of items on the changes in cash flow of C$53 million. Notice that we [grew our] [ph] cash from accounts receivable and inventories. There have been reductions in inventories and I'll speak to specifically the inventories later on when we look at the balances. Accounts receivable, mainly from the Energy segment where the revenues have come down significantly from first quarter. The accounts payable was utilized cash mainly because we reduced purchasing of inventory. That number we expect will be a generator of cash in the next quarter as we start to – our inventories are getting right-sized and we start to repurchase. You will notice that our year-to-date cash from non-cash working capital was C$18.9 million. Just to remind people comments we had made in the first quarter that there was income tax payments related to 2014 paid in the first quarter of approximately I think it was about the C$19 million that's there and we had bonus payments. So the number in the quarter is stronger than what the year to date number is due to those two items. Looking down at the property, plant and equipment line, we had capital expenditures in the quarter of C$10 million, year to date C$19 million. We are on track for somewhere between C$30 million to C$35 million as our capital expenditures in the year, so slightly higher than our depreciation was going to run around C$28 million to C$29 million for the year. You'll also notice on the line a couple of down purchase of business. We announced in the quarter that we had completed a small acquisition. The details on that acquisition are in Note 2 to our financial statements. The number of C$27.3 million might be slightly higher than some of the analysts expected, mainly because it's basically the AR and inventory that wasn't accounts payable that we took on related to that. So the inventory number in there is C$18 million of that. Turning forward to Page 14, so here I'm going to speak to the gross margins as a percent of revenues. You'll see the Metal Service Centers gross margin was 18.3% for the quarter and 19.2% year to date. I mentioned earlier the significant pressure from excess inventory but also as we average down our inventory we still have to sell off some of the higher priced inventory. We do anticipate that margins will improve for the latter half of the year. Energy Products, the margin for the quarter was actually slightly higher than the six months one and that is because of the mix of product in the quarter. We had less OCTG pipe which has a lower margin and more of our valves and fittings out of Comco and Apex. So that number we anticipate would be lower than our six-month number as we go through the remainder of the year and higher volumes from OCTG product, at least some higher volume should we say. Steel Distributors, the margin reasonably held up at 11% in the quarter but you'll notice that it's lower than the second quarter last year when prices were rising. Again this segment is under significant pressure due to excess inventories and they will also have similar volumes I expect in the next quarter but more margin pressure in this segment. Turning forward to Page 16, Metal Service Centers three months ended, as I mentioned earlier, the tons was 7%, comments there that low activity in Western Canada, obviously Alberta and BC and even Saskatchewan from the oil and ag industry up there is impacting our revenues. Eastern Canada is positive from Atlantic Coast through to Ontario, but they are not able to offset the declines in Western Canada. The U.S. was down slightly in the quarter. You'll note also in our operating expenses, we mentioned that we took a $2 million gain on excess land in Ontario. We were able to close that in the quarter, something that somebody was interested in purchasing as it wasn't being used by us. Turning to pages 17, Energy Products segment decreased 27%. The revenues from the oil drilling activity in Canada were down 32%. Oil drilling activity in the U.S. was down more than that, although it's a very small component of our operations in the Energy segment. The U.S. line price actually is seeing improved volume at this time. Turning forward to Page 19, one of the things that I wanted to highlight was the Alberta tax rate increase did have a small impact on our tax expense in the quarter. It was C$1 million related to our deferred tax liabilities because their operations are across Canada although we have significant operations in Alberta but it wasn't as large as you might anticipate. Turning forward to Page 21, I wanted to speak to inventory numbers. The inventory of C$924 million includes two items that make it less comparative to the items reported in the other quarters. First of all, there is in total C$44 million that relates to FX and then the C$17 million for the Apex Western acquisition. So let me just restate that, C$27 million relates to the FX and C$17 million related to the acquisition, so therefore C$44 million in total. If we were to back those two numbers out, the inventory would have been C$880 million to compare it to either year-end because that's where the FX gain has mainly been, but even in comparison to last June, it was a very similar FX. So that restated number is C$880 million. And of that C$17 million plus, C$27 million was in the Energy segment. So those are my comments. I'll turn it back to the operator and we'll answer questions.

[Operator Instructions] Your first question is from Sara O'Brien, RBC Capital Markets. Please go ahead. Sara O'Brien: Can you comment a little on Service Center pricing? I was a little surprised to see that pricing was only off 4% quarter over quarter and kind of flattish year-on-year when if you look at coil and plate, I thought the magnitude of price decline was far greater than that. John G. Reid: Sara, we did a good job getting our turns back in line and so we feel like we are one of the first to get to the bottom on the pricing. So we sustained it some along with the processing that we have been focusing on, so that the processing piece is not as impacted. It's a larger percentage of our business right now. Sara O'Brien: Okay, so your value-add is just stabilizing the pricing relative to the raw material basically? John G. Reid: Somewhat, and then the faster turns as we get to the bottom compared to our competitors. Sara O'Brien: Okay. And then I wonder, maybe Marion, what kind of measures can you take to right-size the overhead for a period that really we don't know how long it's going to last? Just wondering, relative to the last downturn, what do you see as sort of the next step to improve margin and maybe bring down the SG&A to a sustainable level at these volumes? Marion E. Britton: So we think that you'll see is that the tons haven't dropped off, and to be honest, people are mentioning that the line count is actually up. So because of hesitation on the economy, what we're finding is that our orders are more orders but smaller sized orders, so it is tough to take out those extra people, where last go around when demand dropped so significantly, it was pretty easy to remove people. As you know, our SG&A does right-size those a little bit because we are paid for performance and a significant amount of bonus – there won't be paid bonus we say this year because of significant decline, some operations will earn their bonus. We're looking at anything else we can do but we don't want to take drastic measures because we are making money and we want to continue to serve our customers. Sara O'Brien: Okay. And on the energy side, I'm just wondering can you kind of quantify what's happening with Apex in particular in terms of its part and service volumes and price into the oilsands, how is that differed from the rest of the Energy segment? Brian R. Hedges: Both Comco in the oilsands and Apex have fared better than the rest of it. The weakest area has been in the U.S. for OCTG. That is by far the weakest area. However, the important thing is Apex and Comco, both have maintained their margins, which is one of the reasons our margins didn't drop because they became a bigger percentage of our total. So they are both doing what we thought they would do when we bought them. They are both still getting good returns on their assets and doing well. The area that we are having the most difficulty with is OCTG in the United States. Sara O'Brien: Okay, and that's expected to continue at least for the foreseeable future? Brian R. Hedges: Yes. Sara O'Brien: Okay. And then there was a comment in the MD&A about free cash flow covering the dividend in this low cycle. I just wondered if you could expand on that. Is that coming because of the counter-cyclical cash flow, you feel that the dividend is completely untouchable at this point? Brian R. Hedges: I'll never use the word 'untouchable' because the Board gets to review it every quarter. The dividend is not an issue at this point for a multiple of reasons. One is, the cash flow does cover it as we down-size inventory and that will continue for this year. But in addition, our balance sheet is strong enough that say take a number of C$100 million of excess dividend payment, that isn't going to change our debt to equity ratio significantly. So we don't see it at risk, no. Marion E. Britton: Just to give you an idea, like the dividend payment this quarter is only approximately C$7 million higher than what we earned. Sara O'Brien: Okay. That's helpful. Thank you.

Your next question is from Anthony Zicha, Scotia Bank. Please go ahead.

Brian, could you give us a bit of color excluding the energy in Western Canada, how the rest of the business has been doing, maybe some color on Eastern Canada and the on the U.S.? Brian R. Hedges: John can talk about the Service Center, I'll just quickly talk about the non-Apex energy. Our line pipe operations in the States are doing okay. The larger diameter pipe is a pretty strong market right now. And in addition, both our OCTG and line pipe in Canada, although they are getting margin pressure, they are working with some gas drillers in Canada and oil producers that are very efficient and they are bringing their rig counts back up. And so although we've had to protect the business and so we had margin pressure, we've done a good job of keeping those customers. So I think those areas, although there will be margin pressure, will come back up a little bit in this next quarter, which is seasonal and that's going to happen anyway, but those have been pretty good. And I'll let John talk to the Service Centers. John G. Reid: On the Service Center side, Eastern Canada, the construction, government projects and the small to medium OEMs that serve those sectors have all been very positive for us. So we have seen an uptick in those areas. As far as the States go, construction is improving but it's not yet materialized to the level the big surge that everyone is anticipating, and so we're seeing improvement there, we've seen the drop-off in the ag side obviously in the States and in some of the barge building, but overall I mean Western Canada obviously is affected by just the natural resource drop across the board.

Okay. And my last question is, on the MD&A, you added commentary on potentially calling the converts after September 30. Is that fair to say that there is a high probability of calling those converts? Brian R. Hedges: Yes. Marion E. Britton: The stock price is well below the strike price and it may be the right thing to do to get it behind us.

Okay, thank you very much.

Your next question is from Michael Tupholme, TD Securities. Please go ahead.

You noted in your press release that your Metal Service Centers have corrected their inventory position, wondering if you can just provide a little bit of color on your thoughts on the overall industry's position as it relates to inventories. John G. Reid: I think we are still overstocked and it's going to take at least another quarter to get back in balance, maybe a little bit even into the fourth quarter. I think the industry as a whole is still overstocked. Again we've gotten there early and right-sized and we'll continue to stay that way.

Okay, perfect. And then as it relates to the U.S. Metal Service Centers operations, John, you mentioned that I think things were decent in the U.S. but the sources of weakness that resulted in the U.S. being down a little bit, was that just ag or was anything else going on there? John G. Reid: Ag, mining, barge building slowed down, and again, the construction has not materialized to what everyone had anticipated. So overall it's doing okay but it's not as robust as we thought it would be.

But looking forward you are still reasonably constructive? John G. Reid: Yes. I mean going forward it will maintain the levels there. The automotive is a little bit of a concern going forward, although we are not in it. We could have competitors bleed over in those that are traditional automotive competitors. It looks like it may be slowing somewhere in the fourth quarter.

Perfect. And then, Marion, I was wondering if you can be a little bit more specific around the sort of improvement you expect in the Metal Service Centers margins as we get in the back half? Marion E. Britton: That's tough to comment mainly because of the comment on the inventory. As we go, I guess we're hoping to get back into at least the 19% or the 18.3% we had in this quarter.

Okay, perfect. That's all for me. Thank you.

Your next question is from Bert Powell of BMO Capital Markets. Please go ahead.

Staying on the inventory theme, in the energy business, can you give a sense of what the mix looks like in the inventory and how you're thinking about the timing of bringing that down? It seems like this quarter you had much better progress on the Service Centers, and I know there were some acquisition and FX and whatnot, but still be interested to see how you are thinking about that inventory? Brian R. Hedges: The second quarter is always a tough quarter for energy because the rig count goes almost to zero in Canada which is where the majority of our business is. So it was tough to correct as much as, as fast as we wanted in the second quarter, just because basically, because the breakup energy shuts down. In this quarter we'll see that number come down much quicker as the rig counts have come back up already, at least a little bit, and those are customers of ours that are drilling. So we see that that will improve our positions. On the bigger picture in North America, there is still a lot of inventory in the South and Houston, lot of it imported. Most of the domestic mills are still shut down. They are running at 25% to 35% capacity. So they are running at very, very low rates. That will continue to be a problem and cause margin compression in the states, at least for the balance of this year.

You don't see the margin compression brewing in Canada on that front? Brian R. Hedges: Not as dramatically, no. Some is because our inventory is in better shape than the industry, so we're able to at least get some new inventory at lower prices. And of course we do have some areas that are not just straight pipe and those areas have helped us as well.

And just on Apex, your comments about margin holding in and that's how we're thinking about it as well, but I'm wondering how is the revenue at Apex has been relative to what's going on with activity levels? I assume it's come off but can you just give us a sense of the magnitude of any changes? Brian R. Hedges: It comes off and it's in that 25% to 30% range down year-over-year, which is what it did in 2009. So we're getting the same kind of sort of compression that we saw, that they saw, because we didn't own it then. So it comes off because obviously the rig count does impact their business because they support rig count activity as well. But the MRO is holding up as it did in the last downturn.

Okay. And just I know that there has been some prior disclosure on it and you don't break it out, but thinking about gross profit in that business in the 25% range, is still a reasonable way to think about it? Marion E. Britton: Gross margin, yes. Brian R. Hedges: You are in the ballpark.

Okay. Marion E. Britton: But it will have the higher expenses also which it looks more like a service center in the margin than the expense side.

Right, you've said that before, Marion. Thanks for that. And just in terms of the cost side of what you are working on given what's going on, we've always thought about Russel as highly variable and very kind of embedded in the business model is its ability to absorb the cycle, so we're just wondering what's the magnitude of what you can really do on the cost side given the shared flex in your model? Brian R. Hedges: If you're looking at all the pieces, I mean we do the traditional stuff and the service centers typically would go from, if it got soft, you lose a shift, you might go from three shifts to two or from two shifts to one, and that means you're laying off people. So we are doing that, we're looking at some work-share, four day work weeks, all through the Company. We've done some right-sizing in operations that we think have had dramatic declines and we don't see it coming back. And those are all the things that you always do and those are hard. You are basically reducing your headcount. On the bonus side, the swing say just from last year to this year could be anywhere from C$40 million to C$45 million of savings just in the variable comp. So if you remember back in 2008, the swing was from about almost C$80 million down to about C$10 million and we could easily come from where we were just to slightly over C$50 million this year and we could well be just over C$40 million this year, or just over C$10 million I mean this year in our comp. So that's the savings we get without having to lay-off people and that works in our energy operations, the pipe side where you have only got 10 people in some of those operations, and they are important for the future of the business, but their comp plans could come down by 60%, 70% as a percentage of their total comp. Service centers at Apex are a little stickier because they've got lots of locations.

Right. Okay, I just want to come back to the dividend and I know I guess it's the Board's decision, I'm just wondering if you could share with us a little bit the thought process there just in terms of you understand the cash generation in the business, but at some point the outlook is very challenged and the earnings look like it starts to go over, does dipping into that and not to keep the dividend, is that still something the Board is willing to do or do they have to have a pretty solid view on 2016 before they're going to make any decision around that? Brian R. Hedges: 2016 is not an issue. If you're asking me these questions at this point next year, I might give you a different answer, but 2016 is not going to be an issue.

Okay, good. Thank you.

Your next question is from Brett Levy, CRC Capital. Please go ahead.

Brian, John, Marion, can you talk a little bit in terms of the trade cases that you are seeing in the U.S. and just generally what you are seeing about imports and exports, are there any places that you actually want to start to build inventory in anticipation of something positive or do you think this is going to be a long process that could have mixed results? John G. Reid: Immediately in the short-term you may see a little bit of a surge as people try to beat the timeline for the cases that come in. More in the medium term we're going to maintain our position on inventory and take an approach that we want to build or maintain our turn volumes and probably it would be more opportunistic than we may be in an increasing market, just because we got to see what happens and the relative could take up to a year before these things are finalized to see where the market is going. Anything that brings supply and demand on a market, brings it back in balance to some degree is going to help. So we will watch that unfold. We will maintain our inventory position very carefully.

Okay, so carefully does not mean building anything. Do you see a case coming in either stainless which is not really a big product of yours or plate which is actually more a significant product of yours? John G. Reid: I think plate probably in the near future.

And yet in spite of that, there is no kind of inclination even in your trading business to kind of get a little bit more aggressive? It sounds like you are maintaining a conservative stance. John G. Reid: We are. I think even the top side is always limited in what you're going to see if the price go up in the short-term until these suits again paying out over time to see what they actually do to the supply-side. So we think we'll be in a narrow bandwidth at least for the rest of the year on pricing, both on the bottom side of the risk and on the top side. So we just don't see it as something we want to go out and take that position.

And last question sort of like a follow-up on a follow-up. Do you guys have lawyers looking at these cases, saying, you know what, based on currency build that's in the U.S. Congress, I mean do you have some guys who are at a high level doing some assessments and all of this stuff to determine independently what you think you want to do? Brian R. Hedges: No. And the reason is, basically we manage our inventory to look after the demand of our customers. We don't want to speculate forward on either up or down. We've always been that way, we've been a spot player. The geopolitics of this thing, if you look at the hikes last year, they were less in the exchange movement in most of the period in most of the countries, they just kept shipping. We don't want to be speculating on this. I don't think in the end it's going to have a material effect.

All right, that's good color in itself. Thanks guys.

Your next question is from Frederic Bastien, Raymond James. Please go ahead.

You gave a good explanation on the strength of your Energy Products margins in the quarter and I recognize it will be under pressure in the second half, but how do you reckon they will fare relative to the same period last year? Does that revenue mix more tilted towards Apex help? Brian R. Hedges: It should help but what you always get is you get the third quarter pickup because of seasonality but it won't be as strong as last year's, and so even though there is imbalance now and you think there would be a lot more gain from day OCTG, the way the market is right now, I think Apex will probably pick up a little bit as well in the next quarter. So our margins might not move all that much but we will have a little bit more volume for sure.

Okay, that's helpful. That is all I have. Thank you.

Your next question is from Justin Wu, GMP Securities. Please go ahead.

Just first a housekeeping item, the C$2 million, Marion, in terms of the excess land sale, is that an after-tax number or what is the after-tax number? Marion E. Britton: There was no tax because we had capital losses. It is an after-tax then.

Okay. You guys made a bunch of comments in terms of inventory in terms of the energy, we should anticipate a decline in inventory levels. You also mentioned that you may look to right-size the Metal Service Centers inventory just given you're go8ing to start purchasing again. So I'm just trying to reconcile on a net basis, we should still anticipate kind of Q3, Q4 inventory levels to decline on a consolidated basis, correct? Brian R. Hedges: Yes, that's correct, yes.

Okay. And also on Western Fiberglass, can you just give a sense of what the revenue and margin or EBIT or EBITDA profile of that business is? Marion E. Britton: EBITDA, I don't think we have put out. The sales number would be in the Note 2 to the statements. We would have disclosed that. I don't know the number off-hand, it's around 30 million.

Okay. And I mean would the margins be similar to other businesses? Marion E. Britton: Similar to Apex side business, yes.

Okay. And is this the type of business that you are looking to do more acquisitions in or growth through infields? I mean I'm just trying to understand how the growth profile looks. Brian R. Hedges: It's very much a niche business, and so on the energy side of that business we probably got into the niche we wanted to be in. We're not going to expand it a lot. We could certainly look at expanding it into non-energy applications and there are various players out there that do that. So that's a possibility. But it's a pretty small niche, it's a specialty product.

Okay. I guess just in terms of the U.S. OCTG business, I guess longer-term, it sounds like this business has become, it's obviously extremely volatile or very cyclical, and it sounds like it has become much more commoditized over the last number of years. So is there any plans to exit this business at some point or to rationalize it further? Just trying to get an understanding of how do you think about that business going forward. Brian R. Hedges: It's the area that gets the biggest pressures on it and it's an area that we are most concerned about. Right now the volume of business they are doing, they have almost rationalized themselves. They certainly have come from the 150 million they made to less than 30 million this year, just sort of a relative scope of what the magnitude of the decline is. So we're keeping an eye on it. We've got to get some business going again for sure.

Okay. And maybe if you can provide some comments on the line pipe business, both in Canada and in the U.S., how that's held up through this downturn? Brian R. Hedges: It hasn't really been impacted to the same extent at all, and so they are looking more like an Apex kind of operation as far as the drops they have had, and so the large diameter pipe in the States is still a strong market for us.

Okay, great. Thank you very much.

Thank you. There are no further questions at this time. You may proceed. Marion E. Britton: Thanks everybody for joining us on the call. We'll talk to you next quarter.

Thank you, ladies and gentlemen. This concludes today's conference call. We thank you for participating and we ask that you please disconnect your lines.