Brian Hedges - Chief Executive Officer John Reid - President and Chief Operating Officer Marion Britton - Executive Vice President and Chief Financial Officer

Michael Tupholme - TD Anthony Zicha - Scotiabank Cihan Tuncay - GMP Securities Phil Gibbs - KeyBanc Brett Levy - Seelaus & Company Frederic Bastien - Raymond James

Good morning, ladies and gentlemen and welcome to the 2017 Third Quarter Results Conference Call for Russel Metals. Today’s call will be hosted by Mr. Brian Hedges, Chief Executive Officer; Mr. John Reid, 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.

Good morning, everyone. I am going to start by reading the standard cautionary statement. Certain statements made on this conference call constitute forward-looking statements or information within the meaning of applicable securities laws, including statements as to our future capital expenditures, our outlook, the availability of our future financing and our ability to pay dividends. Forward-looking statements relate to future events or our future performance. All statements other than statements of historical facts 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 on this page 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 of the date of this call and except as required by law, we do not assume any obligation to update our forward-looking statements. Please flip to Slide 5 in the deck that we send out last night. Some third quarter highlights, a very good quarter for us. We had earnings of $34 million, EPS of $0.55. This is our best quarter that we have produced since Q3 2014 when we reported $0.54 of EPS. This compares to last year when we reported EPS of $0.26. And in Q2 of this year, we reported $0.52. On a year-to-date basis, we are at $1.55 in EPS, $96 million of earnings and that compares to 9 months last year of $0.65, so roughly in much better condition for the first 9 months of ‘17. Free cash flow, for the 9 months ended September 30, ‘17 is $151 million, $2.44 per share compared to the $1.11 that we reported for 9 months last year, very strong return on equity at 16%, and RONA of 18% return on our capital for that period. We declared our dividend of $0.38 yesterday. Also in the third quarter, we did do a small acquisition. The acquisition has estimated revenues of $45 million on an annual basis and the 1 month was reported in this quarter and it was immediately accretive. Turning to Slide 6, the market conditions, metals service centers demand for Q4 should be up year-over-year similar to what it was for Q3 and we will get into a little bit of that detail as we go farther into the depth. Steel mill prices expected to be relatively flat compared to the end of Q3 except for plate where we are seeing downward pressure. Pricing in the quarter had some downward pressure in Q3. Year-over-year rig count is up in both Canada and the U.S. and this has been very positive to our Q3 results and we do believe that it’s going to continue up year-over-year in Q4. Energy products improved demand year-over-year is continued as expected and that has to do with the fact we believe the rig count will stay up. Turning to Slide 7, couple of items here you will note. Our accounts receivable and inventory are up significantly compared to September 2016. This is driven by our higher revenues. So if you look at the top of the page, you will see that we are up $2.5 billion compared to $1.9 billion for the first 9 months of ‘16. If you are looking down at capitalization, you will note that with this use of working capital to support the higher revenue, we have now gone to a net debt position in our bank indebtedness line of $39 million with our total debt at $335 million, which is lower than we were back in ‘14, but still has come up since ‘16. Turning forward to Slide 14, I am going to go through some of the metrics in the quarter on the segments. The metal service centers revenues were up 19%. Energy, as we indicated earlier was a big driver for the quarter, up 56% in revenue and steel distributors were up 36%. So in the quarter, our revenues were up 33% compared to year-to-date of 28% for the company increased revenue. And moving down to the segment operating profit, you will note that energy 457% up over prior year, similar to the number that’s reported for the 9-month based on a much stronger 2017. Looking down at the gross margins line, there was pressure on the margins in both steel service centers and steel distributors, mainly driven by the fact that we were in a rising inventory environment previously and the average customer inventory came up in the quarter in selling price had pressure on downwards and we did flip on the margin line compared to previous quarters. The energy products line was the positive here at 21% margin, driven by two things, Apex having a strong quarter and secondly, we continue to have product that was in short supply in certain areas and we are able to maximize our profit on some of that products. We don’t think that, that margin will get repeated in the fourth quarter, that margin percent. And at segment operating profit line, we reported 6.8%, which is higher than the 6.5% year-to-date and obviously much higher than we reported in 2016. Moving forward to couple of items to note on Slide 16, which I mentioned – I would talk about the tons increased in the third quarter compared to the third quarter of 2016. Tons were up 10%, similarly we believe tons will remain up, although there will be some seasonal down in the fourth quarter compared to third quarter, but we do believe that our tons are going to year-over-year be up. Average selling price was 7% higher than the two same quarters in ‘16, but it did come up 2% from Q2 and that’s part of the reason why we have the margin pressure, but as I mentioned, the average inventory price did rise. Operating expenses as a percent of revenue were 15.2%, down from 17.2%. We continue to maximize cost efficiencies and remain a low cost service center. Moving forward to Slide 19, I will speak to the other finance expense in the quarter. We needed to set up $2 million of contingent consideration related to Apex Distribution, which brings our contingent consideration for the year to $3 million. Apex has had a very strong year and a particularly strong third quarter and will have a contingent consideration payout in following this year. The contingent consideration or the earn-out under that acquisition at November 30 of this year and our estimate at this point is $3 million although they continue to have good results. Turning forward to Slide 20, capital expenditures year-to-date, $22 million, which equals our depreciation, we can think that our capital expenditures for this year will approximate depreciation. At the bottom of that page, you will see our inventory by segment. You will note that we are up from the June’s numbers. And one of the things metals service centers would include our acquisition and those numbers, energy is in anticipation of higher revenues, steel distributors continue to have products that they will sell during the next 6 months. Turning the Page 21, at the top, we have the inventory turns. Two things of note, the 3.1 turns for the energy products segment, which is good, which repeated from our June numbers, obviously March being our best at 4.2. We continue to manage the inventory there to try and maximize our turns. The other two slipped slightly, but not much such that we had a 3.5 in total compared to our June numbers. So, even though inventory did go up slightly, the higher revenue helped with the turn. Those will be my comments. Will turn it over for questions?

Thank you. Your first question comes from Michael Tupholme from TD. Michael, please go ahead.

Thanks. Good morning. First of all, congratulations both Brian and John. I guess my first question relates to the energy products segment. A couple of questions, in the MD&A, you talked about some of the industry dynamics that helped in the quarter, so specifically, the reduction of excess inventory in the industry and product shortages in the market. Where do those dynamics sit right now?

Overall, Michael, I think the industry is getting back to their level point. So I don’t think we will see as many opportunities there. Pretty stocked well in the industry now. So, I think the opportunities for inventory on the ground should not – we won’t see those opportunities again. The hurricane also in the Houston market put inventory into a little bit of an oversupply situation.

Okay. And I guess the other part of the energy products, the strength of the performance, I guess, that you mentioned Marion was Apex. I think you suggested you could see some further strength there in the fourth quarter, but can you talk about that? And then I guess just higher level, with your comments John and then maybe like staying strong in the fourth quarter like how do we think about margins for the energy products segment going forward? I think your point was, don’t expect the Q3 number to be repeated, but any sort of goalpost or guidelines you can provide around Q4 would be helpful?

That’s right. I indicate they were going to get higher, but they are continuing strong, I guess, shall we say into the fourth quarter.

I think they will turn back towards normal.

So we are year-to-date is 19%, giving John some help on the numbers.

Yes. I think they will turn back more towards normal, Michael throughout the quarter, but again, they maybe above traditional, but again I think will turn back that way.

Okay. I guess I mean not to try to pin you down to a specific number, but we bounced around a fair bit. So I am not totally certain what normal is at this point. I mean, so if we look at the year-to-date number that’s obviously favorably impacted by the strong Q3, but is normal sort of what we saw in the first half of the year?

Yes, I would say that’s pretty normal. I know it’s harder than we had in 2016. At that point, we had a lot of pressure still on low demand and price concerns, obsolete inventory and that which we don’t have at this point in time. So that’s normal for say the next 6 months, because it moved around. It’s always there is downward pressure in pricing.

It becomes a mix issue too, Michael. So if we get a mix of higher margin items, we have got Apex items, either more line pipe and oil country items, which you are going to blend it together, the mix becomes challenge thing.

Great, okay. That’s helpful. Thank you. And then just sticking with energy, I realized it’s still a little bit early here, but can you talk at all about how you expect demands to look for energy products in 2018? I know gas prices Ecos is down quite a bit from where we were going into ‘17, but any early sense for what demand might look like?

Obviously, it’s going to follow the pricing. It looks like we made some slight uptick there, but again, its going to fall. The rig count is going to follow the pricing. So, I think we are at that plateau as we talked about last quarter, I think we may see some slight increase in Q1, beyond that it will be difficult to call.

Okay. And then I guess just jumping over to service centers, Marion, it sounds like the 10% growth in tons, if I understood correctly, you expect something similar for the fourth quarter?

Year-over-year, yes.

Okay. But I think you talked of it seasonally down a little bit quarter-over-quarter?

So, we get U.S. Thanksgiving and Christmas in the fourth quarter, so there is less working days. So, we always do some off a bit in tons. But if you look year-over-year yield, it will be somewhat consistent often.

Okay. And then just lastly steel distributors, really strong revenue growth, not growth, pardon me, but just revenues in the quarter. How should we think about that in the next few quarters? Is there still – can you maintain these kinds of levels or does that start to falloff?

I think the Q4 will see the seasonality quarter-over-quarter. Again, as Marion mentioned, it will be similar to the service centers there. Q1, I think there is an opportunity to see an increase.

Okay, great. That’s very helpful. Thank you.

Thank you. Your next question is from Anthony Zicha from Scotiabank. Anthony, please go ahead.

Yes, hi, good morning, John. With reference to Section 232, like what’s your best guess when it could be triggered and what would it mean for pricing for Canada and the U.S.? And also did we see some pent-up demand in Q3 and most probably spilling over to Q4 in anticipation of Section 232 being potentially triggered?

I think to your first part of the question on 232, obviously, there is the January deadline that’s out there, could it be extended or could it be moved into a different form of terra for some other type of relief. Right now, the indications are they are reviewing it, I don’t think it will – I don’t think we will know anything and it definitely should not impact the Q4 material and maybe December we will see some impact if we started gaining some clarity. I would guess the decision has arrived at the 11th hour and could even be postponed. As far as the pent-up demand, I think you may have seen that the 232 in the anticipation of the June-July announcement may have created some buying habits that went out where people took longer positions at both the end user and service center levels. So, that created the downward pressure in Q3, because the people have got a hit. I think we are going through that cycle now and the inventory levels are coming back into more of a normal pattern.

Okay. And with reference to M&A pipeline, what do you see in Canada and United States is there more potential activity or is it steady as usual?

There is a fair amount of activity out there right now. We are seeing a lot of product or a lot of companies for sale. We are taking a look to evolve, but there is certainly more activity right now than there has been in the small to medium size service centers.

And would that be related to the potential tax changes in the U.S., Brian?

I think it’s a combination. That’s obviously going to be a factor. But also I think there has been two downturns and we have come out of the cycle again. So people are getting back into positive earnings. They can get a fair – more easily adjust fall in price for their companies. I think it’s a combination of both.

Okay. Well, thank you very much.

Thank you. Your next question is from Cihan Tuncay from GMP Securities. Cihan, please go ahead.

Hi, team. Just want to say, it looks like my questions have already been answered, so thanks and my congratulations to both Brian and John.

Thank you.

Thank you.

And your next question is from Phil Gibbs from KeyBanc. Phil, please go ahead.

Good morning. Question on the plate market in North America, why do you think the pricing pressure there at least what we are seeing in the spot side has been so aggressive in the last, call it, 2 or 3 months?

I think there was the overlap that I mentioned earlier on the call in anticipation of the 232 back in the middle of the year in June, July. So I think it came over inventory. And I think demand for the products in the plate section have really slid in the third quarter, I think the infrastructure didn’t develop as anticipated, although ag is improving, we are seeing some improvement in that market as well. It’s not as strong as people thought it would be. So, I think you supply and demand it got out of balance in Q3. We are hopeful that this latest announcement has at least established a floor for the plate pricing. We wouldn’t be surprised again – they will follow scrap, so the way scrap goes, but I wouldn’t be surprised to see that they didn’t push for another increase before the end of the year.

Okay, that’s helpful. And I know you gave some color here on year-on volumes up about 10%, how do I think about you called 4Q demand versus 3Q demand, I know you pointed the seasonality, but are we looking for kind of in line seasonals? I guess that’s my first question. And then the sub question is how is October demand – or how did October demand shape up versus September?

I think the Q4 seasonality again I think we have a solid quarter there on both sides. But again, taking into account the seasonality, looking at as far as the October, we were solid there as well, so...

Similar to what we are comfortable with.

October similar to September is that what...

Yes.

That’s how I should think about it?

Yes, that maintained the levels there. Again, the U.S. Thanksgiving and the U.S. Christmas will impact this dramatically and obviously, Christmas is going to impact and we will lose 3 to 4 days of shipping typically.

Okay. Thanks very much.

Thank you. Next question is from Brett Levy from Seelaus & Company. Brett, please go ahead.

Hi, first off, Brian congratulations on your years of service. Also, congratulations John on the new role. Let’s say in terms of the volumes and the regulatory environment ahead of 232, is there something legislatively that Canada is doing in response to 232 to make sure that volumes are not sort of distracted from the U.S. or sort of diverted from the U.S. into Canada as we look forward the regulatory environment in the U.S.?

I think Canada has moved fairly aggressively when they taking that position on that and quickly. I think they will wait and see what happens with the 232, but I think I think they will move quickly not to become the dumping ground to the rest of the world. So again, there maybe a small period of time there where things are diverted for 30 days, but again, your guess is as good as ours on the 232 outcome.

And then there is historically been – it’s not as big recently, but in the past there has been a reasonably big trading side of your business. As the imports have been trying to adjusting themselves ahead of the ruling, has there been a trading opportunity for you guys? Do you see that potentially going away in the next quarter or two? Can you talk about kind of the import-related trading business in your outlook for that business as these rule changes come through?

I think on the Canadian side, it maybe a bigger opportunity that we see there may change the dynamics. A lot of products are not made in Canada, big bearings, heavy plates. So, we think that may actually become a better opportunity given our strong market position there. On the U.S. side, there will bee different opportunities once it’s defined clearly with the 232 of the trade suite. But again, our people that operate, they operate on a professional level moving ahead of the market, pre-selling a lot of materials. I think we will be fine in that position. But again, until we know the 232 actual ruling is it will be difficult to define at this stage.

And then this is a question I have asked on a number of calls, do you see the mini-mills making inroads in automotive over the next several years? Just based on the amount of HBI-related activity, it seems to be coming their way on the sourcing side. It seems like somebody has been pointing in the mini-mills direction and saying, take a shot at this again. And I am wondering what you guys are seeing in terms of your automotive customers and what they are willing to accept or not accept?

We don’t deal directly with automotive. We are going to be indirect. So, we will go through the MRO through the maintenance. So, we don’t do any exposed automotive through the slitting. Just on the general comment, I think overall that scenario for growth for the mini-mills with the new technology, the vacuum degas is what they can do with the HBI as you mentioned. I think they can now get to those grades and so it gives them an opportunity to gain market share from the integrators.

Alright. Thanks very much, guys.

Thank you. Your next question is from Frederic Bastien from Raymond James. Frederic, please go ahead.

Hi, good morning guys. I would like to get a bit more granular on the big margin improvement you are seeing on the energy side. The gains are big relative to last year, but also relative to the higher watermark we saw in 2014. Is there anyway for you to kind of breakdown how much – or approximately anyway how much of that is due to prices, just the fact that you have got a much better and much more disciplined inventory level and how much of that is just you guys offering, the business being better?

Hi, Frederic. I think there is a bunch of things there. The first and foremost is our mix right now is very strong towards the Apex business. So, that’s our best margins. So, that’s – if you had gone back to ‘14 and have the same mix ‘14s numbers would have been better too. In addition, John is going to actively at the inventory, but more importantly, at some of the operating costs there and I think that on the line pipe side and the oil country side, we are getting lower operating costs, and of course, the margins are improving as the volumes will come back up. But right now that is not growing as quickly as our service side of our business. So those are the three areas that are really contributing to the improvement. And right now, I would say with the exception of the bit of a blip last quarter because of the inventory shortages, these are all permanent changes that are going to be there, they are going to continue that in the future.

Okay, that’s great to hear. John, congratulations. Brian, I know you are not gone just yet, but we will miss you. Thanks.

Thank you. Your next question is a follow-up from Michael Tupholme from TD. Michael, please go ahead.

Thanks. Just wanted to ask about the service center margin outlook, given your comments on pricing for the fourth quarter relative to the third quarter, do you see – is your expectation we should see a little bit further margin pressure in service centers in Q4 versus Q3 or do you think what we saw in the third quarter sort of you can hold the line there?

I think we will be equal with third quarter in that range. I don’t see any further margin deterioration or pressure on us.

Okay, that’s great. Thanks. And then just lastly there has been a few questions about the demand in service centers and expectation for year-over-year improvement in the fourth quarter. So I think that’s clear. But just digging a little further into which – sort of which categories or which end markets are driving that demand? I think John you talked about infrastructure being a little – the demand not being quite strong there or in ag, but can you just kind of run through what is it that’s driving that strong 10% growth you saw in the third quarter?

Some of those we think maybe share gain that we have taken from the market, but also we have seen a pickup in the ag market which is significant for us in the plate division. As we go through, we have done some pickups across the standard to small OEMs that are out there to the original equipment manufacturers. They are starting to bounce back now where they have been fairly dormant for the last 2 years, so we are seeing some pickup in the small to medium customer base. Construction had a little bit of a lift. Again, it continues to inch forward. So overall, we think everything has just picked up slightly. We don’t see any main catalyst out there other than ag seems to be doing better than we anticipated.

And just from our year-over-year comp perspective, were the comps such that, that some of that strength could carry on into the first part of next year as well?

I wouldn’t think so.

Okay, thank you very much.

Thank you. And your next question is a follow-up from Cihan Tuncay. Cihan, please go ahead.

Hi, team. Just a really quick one from me. Some of your U.S. competitors have recently commented that it appears as though for service centers in the U.S. on a 1-year forward basis you are talking about having the best forward positive visibility that they have seen in a long time in multiple years. So I am just wondering are you seeing the same thing in terms of positive visibility for the Canadian business as well going into next year? Thank you.

Again, we are a highly transactional business. Our visibility – really we don’t see how it compares early first quarter. Right now, things look positive. Demand has been slightly up this year and pricing has been running down. So, if things continue in those areas, continue on modest increases, then I think it’s a healthy year for the service centers.

Thank you. [Operator Instructions]

Okay. I think we will thank everybody for joining the call and we will see you next quarter.

Ladies and gentlemen, this concludes today’s conference call. We thank you for participating and we ask that you please disconnect your lines. Thanks.