Marion Britton - EVP and CFO Brian Hedges - President and CEO John Reid - EVP and COO

Sami Abboud - Scotiabank Brett Levy - Jefferies Justin Wu - GMP Securities Frederic Bastien - Raymond James

Good morning, ladies and gentlemen, and welcome to the Russel Metals, Inc. 2014 Year End and Fourth 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.

Good morning, everybody. As normal, I will turn you to Page 3 of the conference package and I will read the cautionary statement forward-looking information. 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 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, 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 to the date of this call, and except, as required by law, we do not assume any obligation to update our forward-looking statements. So if you would turn now to Page 5 of the package, speaks to the market conditions that we saw. Q4 and the year, our service center tons were up 5% over 2013. The results for our metal service centers were consistently higher than the MSCI numbers which are published by many of our analysts. World steel market remains out of balance at this point in time, supply versus demand resulting in price pressure for our products. Oil price and rig counts are down from year-end and prior year. There has been many announced capital spending reductions and competition pressure will reduce margins in this segment also. Economic uncertainty will impact demand in all segments in 2015. So as you can tell, we are not expecting any certainty in any of our statements that we make, which I said earlier. Turning onto Page 6 of the document, highlighting some of the results. We did have a very strong quarter. 2014 also was one of our best years on record. The results for the quarter were $0.50 EPS and that compares to $0.37 for the Q4 of ’13 and $0.54 for Q3 of 2014. You’ll note that there was a couple of items that did impact the fourth quarter. The one item was we took an impairment charge on TBTL. It was 9.9 pre-tax, 7.3 after-tax which resulted in a charge of 12% of EPS for the fourth quarter and for the year. The Apex contingent consideration continues to move around as we revalue it each quarter. The income source in the quarter from that was $7.7 million and it’s not tax effected. And so that resulted in $0.13 of income in the quarter. And on a year-to-date basis, the fair market value resulted in income of $2.4 million or $0.04 of EPS. The results for Apex were very strong throughout this year and in Q4, so our numbers that we had put up in the third quarter would result in payments in March. The reason for the income in the fourth quarter is to look forward to ’15 to ’17 period based on current oil pricing and the fair value of the estimated earnings after that [ph]. So year-to-date or for the year, our EPS was $2.01, reported EPS, and the adjusted is $2.09. Free cash flow basis, we recorded $125 million or $2.04 which, as we commented before, typically our free cash flow is close to our net earnings. Return on equity, as I mentioned, we had a strong year and we did have return on equity of 13%. The end of the quarter, we had cash net of borrowings of $29 million. There will be some use of cash in the first quarter for payment of bonuses and taxes. But then we anticipate to throw off [ph] cash from working capital in the second quarter based on the fact that energy revenues will come down and hopefully inventories and then collection of receivables, which means we should go more cash positive in the second quarter of 2015. On Page 7, you’ll see our sheet where we summarize the five-year results giving the various metrics. One of the numbers mentioned there is the revenue, $3.9 billion, for the year and that would be a new record for us on revenue. Flipping forward to Page 9, mentioned a couple of items on this page. I’ve just mentioned briefly that we will have a flow [ph] for income tax and bonuses, the $14.1 million income tax payable. So that’s the estimate of what the taxes will be paid in the quarter for prior year tax installments. Then also you’ll note that our pension and benefits liability went up slightly and that has to do with the interest rates going down that are used for the liability, so no significant changes there. Moving forward to Page 13. In the year-ends, we always put a summary of our quarters. You’ll note that our third and our fourth quarter we had revenue of $1 billion for that period. The strong results of both energy and steel distributors was what resulted in our high level of revenues in those two quarters. On Page 15, you see the gross margins and then the segment operating profit as a percent of revenues. As I mentioned before, we had a strong year of total gross margin of 18.2% driven by energy and steel products numbers being up over the prior year and then resulting in 5.9% operating profit as a percent of revenues. And when we get that further on, well, I’ll just summarize the numbers for the quarter in a little bit more detail there. On Page 16, you can see the tons for the year and the selling price. I mentioned the shipments were up 5% but selling price was also up 7% compared to 2013. The one thing, though, that you would notice, our gross margins weren’t actually up due to competitive pressure and the fact that our inventories came up quickly with the selling prices. On Page 19, we have inserted a chart which tries to explain the movements in the fair value of the contingent considerations, so the imputed interest and then the change in the fair value that went through in that period. Turning to Page 21, I just wanted to highlight our inventory numbers. You’ll note that December 2013, we were at $766 million, now we’re at $931 million. The increase is mainly in our steel distributors, a little bit in our metal service centers, has more to do with pricing than tons. Steel distributors has a fair amount of inventory that will get sold in the first half of 2015. Also, you’ll note that we were able to have turns in our energy segment of 3.7, a little down from September but we did have strong turns in that segment in the quarter. Turning forward to one of the numbers on our - flip the page. By the looks of it, we do have the CapEx numbers in there and it was $48 million for the quarter. We had indicated that we would be up. There was $13 million spent on a rented building we’re working on in Edmonton. And we did buy another building in Grande Prairie. In the year end, we have added some processing equipment. We are still giving guidance around $40 million for our CapEx for next year or 2015. Page 27, you’ll see a summary of the fourth quarter results. The fourth quarter revenues for both energy and steel distributors were up consistent with the year being up, 25% and 77%, so very strong over 2013. You’ll note also the very strong increase in earnings in those two segments. One thing you’ll note is the metal service center margin did come up slightly. And as I mentioned earlier, even though selling prices were up, we did see increase in inventory which caused us some margin pressure. Down below, we indicate the selling price increased 10% higher than the fourth quarter of 2013. So our fourth quarter segment operating profit as a percent of revenue was 5.3% which is still pretty strong. Those are my comments. I’ll turn it back to the operator and we’ll take questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Sami Abboud, Scotiabank. Sami, please go ahead.

Hi, good morning, guys. Sami for Anthony Zicha. My first question is on the energy segment. The rig counts have declined significantly since the beginning of the year. What is the impact that you are seeing on operations so far within Apex, your existing energy business and the metal service centers?

That’s a pretty broad question but I’ll try to go at it. In the United States, the impact on our operations has been probably the most severe because the cutbacks there have been in areas where our customer base is [indiscernible] of fracking down in the various fields down there. Those operations have come off and they’re going to be down - or at least, I would say, significantly on the year. In Alberta, our customer base is predominantly gas and they have not had the decline in rigs that the rest of the industry has in Alberta. So our customer base had done better than the rest of the areas. The only concern is there’s going to be margin pressure because, obviously, other distributors who have lost their drilling base are going to be attacking the same customer base that we’ve been serving. So there will be pressure on that. But at the present time, our numbers will hold up pretty well for the first quarter. We’re not sure what’s going to happen after break up. But certainly our numbers have been okay. And Apex is pretty much the same. They’ve had a pretty strong start to the year. But they do have reduced visibility on anything after break up. The service centers have been impacted, actually probably more than the drilling guys, as customer start to slow down their purchases, and so some of the manufacturing base that’s supplying energy patch is cutting back pretty drastically.

That was helpful. Thanks. North American flat roll [ph] coal prices are down about 20% year-over-year. And although it’s not as steep as 2008, 2009, could we see any inventory write-downs and are you seeing the late purchasing from customers and out of suspicion [ph] maybe further declines in pricing?

No. Most of our customer base, Sami, were more transactional, so not on the transactional [ph] base and return on inventory in that flat roll. Well enough that we’re not seeing anybody down [ph] at this time. The prices continue to drift. But that’s not something that we’re concerned about in Q1.

Okay. And as a follow-up to that, maybe you can provide an outlook on the demand in the metal service centers by different regions?

Okay. Obviously Western Canada is going to be impacted by the drop and all and the CapEx pullback. Eastern Canada is seeing some pickup due to construction. The U.S. is actually - demand is holding up fairly well. All three sectors are being impacted. And so we’re seeing a flood of imports. It increased inventories, so we’re seeing margin pressures because of that from the service centers [ph].

I appreciate the color, guys. Thanks a lot.

Thank you. Your next question is from Brett Levy, Jefferies. Brett, please go ahead.

Hey, can you guys talk about kind of what you’re thinking about M&A-wise and sort of geography and product area?

You’ve been listening to us for a long time. It doesn’t matter what I say, we go do something else. But we’re still looking into the United States. We’re focused on service centers. There may be some opportunities because of the downturn in the states for some of the smaller field service stores under the Apex-Remington umbrella. There may be some opportunities there to make some purchases at numbers that make sense. So that’s probably going to happen. The consolidation continues in the energy distribution in the United States. And what’s that going to do, I’m not sure. But I would think there might be some opportunities in the stores and then the service centers in the states.

All right. Thanks very much, guys.

Thank you. Your next question is from Justin Wu, GMP Securities. Justin, please go ahead.

Thank you. My first question is on the top line growth which was pretty remarkable given that pricing was relatively benign in 2014 versus ’13. And I know you guys kind of given kind of the different segments and steel distributors I understand will move around quite a bit. But on the energy side, up 25% year-over-year, how much did Apex did contribute in terms of the growth? Was it higher than the average for the group or lower?

Well, the one thing was that we did a small acquisition in late 2013. So that added about 10% to their revenues. But I would say, I don’t have a good number. Maybe they added 5% or another 10%. I don’t think it much higher than that. So there was the one time increase from that.

So the rest of it basically was the drilling in the line pipe. And because of the fracking going on, the rate counts were in pretty shape last year until the fourth quarter. And so a lot of that was our operations that we owned before Apex.

Okay, okay. Okay, thank you. Second question is on the working capital position. Your inventory specifically at year-end was higher, and a little surprising given what’s been happening on the pricing side. So I’m assuming tons were up. Maybe if you can provide some color on the inventories position.

Yes, Justin, the service centers were a little higher, turned slow just a little bit. They were much lower than the MSES [ph] statistics. I think a lot of people were caught by surprise in the fourth quarter as we saw in the immediate drop in the call back. But again, we seem to be in good position going forward. So we think that will correct itself in Q1.

Okay. So that sounds maybe some timing of deliveries and things like that. You mentioned something about the steel distributor’s inventory. Marion, can you repeat what you said?

Well, their inventory was 155 this year compared to 74 last year. And remember, throughout the year, we had brought in many imports due to the difference in pricing in U.S. and Canadian dollar. So that amount, we would anticipate to come down somewhat in the first half of 2015.

Okay. So that inventory is fully allocated to specific customers, correct?

Mainly. Not necessarily fully, but mainly allocated for specific customers.

And maybe if you could just comment on the costing within your inventory given prices have really declined in accelerating rate, if you will, in the last two months. And I guess you mentioned, you’re not expecting inventory loss. But if you can just give us a sense of how you feel about your inventory costing relative to transaction prices out there. And hey, you had mentioned about the spread.

I mean, we’ve had $100 drop in collateral in the past. And what it does is it usually causes your margins to come off. This isn’t 2009 where the commodity dropped $600 at weeks. So we’ll have margin pressure in this quarter because some of our competitors have a lot of inventory. So that’s going to get everybody in the declining market. And it’s going to be a race to the bottom. The positive thing about our inventory is we do turn it [ph] better than the industry. And we’ll be at the bottom before anybody else will be. And then the margins will come back up. But I think we’ve got at least a quarter, maybe a quarter-and-a-half of reduced margins before we come back up again. But I would expect by the second quarter, we’ll see that it will start to come up even if prices stay where they are.

Okay. Okay, it’s helpful. Thank you very much.

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

Good morning. There’s been the odd shutdown, but we have not seen any major production response from the mills yet to support the prices. Do you think that can be avoided? Or is it just a matter of time before mills cut some more?

Okay, let me come at it from the first side and then I’ll give to John on the other. The pipe mills are shutting down at a really rapid rate. And so the converters are probably half shut down already. I would think we’re getting close to that. So that’s on a pipe side, that’s what’s happening. There’s been a lot of imports coming into Houston which is triggering that. I’ll let John talk about the flat roll.

Okay. Just to add on to the pipe, we’re also seeing some of the CapEx projects go on hold as well for the mills that were coming in the North America. On the flat roll side, Frederic, they are cutting production dramatically. So with that, we’re seeing people go down to one shift, one cast or lead times have continued to shrink. I think they will be able to waive through the wave of imports that are coming at us. So I’m hopeful that we don’t see any mill shutdowns. But again, they’re down right now, I’d say, dramatically primarily in the energy producing areas which would be the southern half of the U.S. The northern half stayed pretty consistent based on the automotive demand there.

Okay. And what seems to be hurting your metal services center margin, obviously, the imports. That seems to be quite positive in terms of outlook for your steel distributors business. I was wondering if your outlook has changed for this division. I think you were expecting the first half to be modestly lower than the second half of last year. But has that changed?

On the service center side, the pressure is coming - I mean right now, we’re at the six month half our inventory tons in the industry as of this morning. And so you’re going to continue to see people spinning out the inventory of the margin compression to generate cash. So that’s the biggest concern for the service center going in. Plus, there’s some reduction in demand based on oil and gas.

But the demand has been pretty strong. And then that isn’t the issue on this. It’s really a supply side problem right now at imports. So the service center demands have held up. And although, they’ll get impacted a little bit, say in Alberta by the energy, I think some of the numbers we’re seeing in the states are probably going to hold up pretty well.

Okay. So what we saw from the industry in the metal service center data came out a couple of days ago and U.S. was off 3%, Canada was off 10%. I mean is this unusual of January? Or is this something that we typically see in the beginning of the year?

It’s a little unusual for January. Typically, we’ll come out of the gate a little faster. But I think it’s an overhang from December where we get the imports that came in just the start was so big.

Okay. What about the stronger U.S. dollars? It’s obviously a magnet for imports in the U.S. But how is it impacting your Canadian business?

Well, it’s actually cushioned a lot of the changes that could have happened in the oil and gas because, obviously, in terms of Canadian dollars, the price hasn’t been as dramatically impacted as it has for the U.S. producers and U.S. dollars. We’re not seeing a lot of flow through on Ontario and manufacturing base yet. That will come. I don’t think it’s been there long enough yet for that to have caused any major changes in the way people look at their CapEx in Ontario. If that’s still there in this time next year, then we might see some impact.

Okay. Thanks. I’ll turn it over.

Thank you. There are no further questions at this time. Please proceed.

Okay. Thank you, everybody, for participating in the call. And we’ll talk to you next quarter. Have a good day.

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