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

Justin Wu - GMP Securities Frederic Bastien - Raymond James Bert Powell - BMO Capital Markets

Good morning, ladies and gentlemen, and welcome to the Russel Metals, Inc. 2015 First 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.

Good morning, everyone. I will start by reading the normal cautionary statements on page 3. 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 [indiscernible], speaks to the market conditions. So generally the market conditions were negative on external factors on both pricing and steel pricing in the quarter. The steel pricing was more down than we anticipated heading into the quarter. Though service center did have relative to good demand and were only down 3% based on accounts compared to Q1 2014 and the areas of the [indiscernible] Western Canada with Alberta BC impacted. We did see some weather related issues in Atlantic Canada which we do believe most of that will get back in the next quarter. We once again consistently outperformed the MSCI numbers in both Canada and the U.S. in relation with pricing, there was pricing pressure due to its still in part industry, inventory levels of our competitors were also higher than problematic for them than we have and we noted that some people are trying to reduce their inventory levels for cash situations. In relation to the energy sector, as I mentioned oil pricing we found that well announced and then in the paper it seems every day announced capital spending by some of the large oil companies. There also was a competitive pressure in this quarter and we think it will be even larger due to excess inventories in the industry and people trying to pick up the active customers which we do have some that know are going to be active throughout Q2 so that will cost competitive pressure so that we retain the customers. Turning to slide 6, the earnings for the quarter were 19 million which resulted EPS of $0.30 compared to $0.47 reported in the Q1 2014. We’ll get bit more into that when we get into the MD&A. Some of the factors pre-cash flow was strong at $0.34 per share. Equity return on equity was 7% and for this quarter we had net borrowings as oppose to net cash and the factors, we do believe I’ll go into a little bit more as to why we had lower cash when we get to the cash flow but we believe that AR in inventory will come down in the next quarter which will have the throw off cash at that time due to decline in the energy sector mainly with spring break up and then also we expect to the distributors to reduce their inventory over the quarter. Turning to slide 7, one of the factors I just mentioned upfront foreign exchange did move significantly from same quarter last year and from year end. So it does have some impact on the numbers. So the income statement was translated for U.S. operations which represents approximately 30% at 124 versus 110 for last year and the balance sheet was basically the same for year-over-year but some year-end also our balance sheet movement was up from 116 to 124. So you’ll see some numbers, like the inventory movement Q1 to Q1 is up, but if you look at the year-end number it’s mainly FX that’s driving most of the increase there although there has been some movement in some of the individual segments. Another item that I’ll mention on this page is the pension and benefit aspect number and even though it’s not a huge obligation and since they are moving around enough a lot, that has to do with the interest rate that apply. It was came down at during the year, last year and went up again I would say in the discounted rate goes up and the interest rate is now lower that we’re discounting out so our obligation goes up again and so we other happen that is true OCI. So it doesn’t go through the income statements it’s just movement in the obligation. Flipping forward to page 10, I mentioned I would just speak briefly to the changes in the cash. We had cash flow from accounts receivable which is unusual in our first quarter and that was due to the reduction in energy volumes compared to Q4 and break up did start mid march as oppose to in April with sometimes happens in that sector. We have noticed that inventory did use utilize slight amongst cash from year-end and accounts payable is down due to slowdown in purchases and also we did pay our bonuses related to last year in the first quarter and just also highlighting two other payments in the first quarter that maybe not normal I guess I’ll say but maybe that’s not the right word the income taxes that we were able to delay till February up related to balance forward was about 16 million because our installment requirements allowed us to pay it in February and then secondly near to bottom area 17.5 payment of contingency consideration which is or ApEx earned out payments which are paid in March of each year. Turning forward to page 14 of the slide deck, which is where we summarize our segment information for in the MD&A. You’ll see that the revenues were up in metal service center 2% while in the energy segment they were down 14% and so the distributors should have higher revenues although they represent small portion of our total operation. To the gross margins which was down few line, metal service centers was at 20% although that was on 21.7% in first quarter 2014, 2014 we had rise in fuel prices as oppose to falling fuel prices which started in fall of 2014, you will note that 20% is up from the 19.2% reported for the segment in Q4. The energy product is down from Q1 2014, it’s a bit more of mix issue there than anything we’re aware of, it’s up from our 16.1% in Q4 and that number does live around in relation to mix and whether we sell more OCTG or fitting product. Steel distributor is slightly down and the amount of inventory in the service center sector will have impact on steel distribution margins during the quarter and will have it going forward. Looking forward to page 16, as I mentioned earlier on metal service center had lower tonnes, 3% in total and 2% lower than fourth quarter 2014, I mentioned also about the west and the Atlantic, the one thing also noted here is that the U.S. seller revenues in the U.S. are consistent year-over-year even though they are often in dollar values so entire thing consistent year-over-year in dollar value they are up because of the exchange. Quebec has been seen slight improvement as to the construction industry seem to settle down in that provinces getting back to work so that an area which we think will be consistent year-over-year. And we’ve also noted here that our operating expenses were consistent with first quarter 2014 even though they show up due to the U.S. dollar exchange there. The one thing is that our tonnes are not down so it’s more problematic to reduce the expenses we’ve been doing whether we can do it to the lower pricing but not as easy as you things tonnes level. Energy segments are commence on page 17, the revenues from our OCTG drilling operations in Canada, decreased 11% compared to first quarter 2014 and as we have said yearend we expect this quarter to be reasonably good for those operations and when spring break up happens it’s a question of what’s going to slow down and one activity will come back after spring breakup. The area that we did have the most significant decline was the U.S. operations and they seem to shut down sooner than the Canadian, I believe we did mention that on our Q4 call in February. Moving forward to page 19, as I normally highlight capital expenditures, our capital expenditures in the quarter were 8 million compared to depreciation expense of 7 million. We do expect this year to continue to run ahead of our depreciation expense as we’re adding a new building in Edmonton and we have some other project on the go that relate to equipment and expansion service center activity. So, our estimate is around 35 million for this year on CapEx. And turning to page 20, this highlights the movement in the inventory by segment, you’ll note that metal service center is, even though there is some exchange up in there is actually down in dollars from year end, energy is up slightly from yearend and steel distributors is up much more, steel distributors continued this week to product late in the year end into the first quarter where they slow down on or basically have no purchases as receiving some of their orders and that inventory level is expected to come down in the quarters going forward. So those are my comments, I’ll turn it over for questions.

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

Brian, can you please give us some color on how much excess inventory Russell is carrying and how quickly can you normalize inventory levels, given the inventory turns?

The service centers are fine. They will self correct this quarter, they are only up a little bit. Steel distributors has got too much in Houston and that’s a little bit slower to correct because of the excess product that is down on the state, particularly in the part of Houston, so that will start to correct in the second quarter but it will take two quarters to get that levels that reflects where we are. On the energy patch, there is a bigger problem there because there is a complete over supply particularly in the part of Houston than United States and it will cost the whole industry. We have a better position that we did last call around in ’09. But I think the market will have more determination but how well we can bring that down and we are going to chase, whatever business we can to get it moved but right now there is only 900 rigs drilling in the state 75 in Canada. So to the extent that recovers, we will be able to bring our inventory there.

And I am trying to understand this, if we look at Canadian rig counts are declined more than the U.S. rig counts, however you experienced more challenging results in your U.S. operations and Canada and furthermore you expect Canada to get worse post-spring break up. So can you provide some more color on why the operating environment is playing out this way?

Well, the state is down a lot more rigs in total and the customers we were dealing within the states were once that quickly brought their rig counts down. In Canada, we can’t to be more gas driven which is not down as much, I mean our customer base was pretty active during the fourth quarter. The spring break-up always drops the rig count everywhere. The question would be who comes out of the Canadian break up and certainly we believe our customer base is going to come out in better shape and some of other ones whereas in the states our customer base has been more hit. So this is specific to us.

Okay and last question, with reference to ApEx, is it perform to your expectations in the weakening operating environment?

Yes it has.

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

So my first question is on the industry inventory reduction kind of process and you guys eluded that, how far you think you were into that, that process on the metal service center side?

Justin, it is really is going to be more product specific. I think by the end of Q2 you will see flat growth that we are going to be fairly close there to bottoming out. Again, it depends on individual inventory levels are, comparatively but collectively I think we will see in Q2, there are some product that may linked to in 2Q. I think mid Q3 should be balanced out.

And how comfortable are you guys with your inventory costing, when you looking at the metal service center, inventory in dollars hasn’t changed a whole lot yet prices have declined more rapidly, so does that mean tones were up and inventory costs are up for, I mean how should we think about that?

More times we have exchange rates in there Justin for the U.S. operations, so the dollar, don’t look they are down as much as you might think this should be.

And in terms of your costing in the inventory relative to where the market is, how close do you think you are?

Specifically on service centers Justin?

Yes, service centers, right.

In service centers I think we are in good shape. There is individual item that we may have issues on and individual pockets, but overall we're in very good shape compared to the industry right now.

How about on the steel distributor side?

We're in pretty good shape there. I mean we do have our [indiscernible] inventories every quarter. So, we take it down. Anything's been written down that needed to be written down. And at the levels, as long as [indiscernible] flat is out here, the prices, we're fine.

You guys didn’t take any write downs on the inventory this quarter, did you?

Nothing significant.

And the anticipation is having to future that. That's the same.

A little bit of risk I think on energy. But that will be the only area.

And just in terms of the energy overall energy revenues are down 14%. You mentioned the Canadian side was down. Only 11, obviously the U.S. was down much more than that. Can you give us a sense what Apex did basis?

Apex Canada was down a lot less than the 11%, U.S. was off more than Canada. The Canadian operations helped pretty good first quarter, but they are not as confident for second quarter.

How about the Apex U.S. would have been down less than the 14% overall?

I don’t have an answer to that.

They're not a big number but they were down about that number.

I think, yes.

And I mean there is some talk I guess John may be you can help that with, there has been some talk about mills looking at price increases in a flat role side and may be the structural but I was wondering if you can comment on what your thoughts are on those price increases and if you see a potential for any kind of lift in pricing in the back half the year.

Fundamentally there has really not been any significant change in the market place right now. This latest move is establishing a floor at least it appears to be. We will Apex very closely over the next few months. And I think the another real question you got there Justin is how long do we bounce along the bottom and it's going to be driven by demand. So, I don't know if we got a back half lift or not but at this point going up and we're bouncing along at the bottom.

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

Thank you, good morning. Marion, your gross margins on the metal service center side held up better than I thought they would. As we look ahead do you think you can still maintain margins at 20% or should we get some -- should we see some pressure in Q2?

No, I believe that we will maintain those margins. I think we're now buying inventory at the lower cost because as you know we're average and so that will help us maintain those margins and hopefully as we buy more of the lower cost we'll see it come up slightly as we get into the latter half of the year.

Okay. Thanks, on the revenue side you're up 2% on the quarter, volume down 3. So obviously if I do the math pricing was up 5%, how much of that would have been FX driven?

It wasn’t driven FX to some extent because of -- we're able to hold it in Canada and then the U.S. comes in at a higher rates. But selling prices have not come off as much as they -- you might have thought at this point in time, I think we're not going exceed continued pressure there though with this lower steel pricing.

So there is a, only a few lag?

Lag I would [indiscernible]

You are also comparing it [indiscernible] both first quarter last year before the prices increased last year. So if you go back to the third and fourth quarter. We are off a little bit more.

Okay. And lastly for me, you do mention M&A sort of the ability for you to potentially pounce on acquisitions in this kind of tougher environment, anything more to add to that?

No, I would say we were seeing a bit more. I mean it don't look that great, to be honest. And we'll continue to look at them because we do believe that there should be opportunities with the lower pricing and our sound balance sheet.

Okay, and then I guess, I can conclude then that given the market your ability to gain market share is the main thing.

Yes, we believe so. We think so.

We think so.

Thank you. Your next question comes from Bert Powell, BMO Capital Markets. Bert, please go ahead.

Thanks. I just wanted to go back to Apex and think about that in the context of the spring break up. Do you think it will be relatively more immune to the trends that will follow the service center business or do you anticipate that that's going to have a decrease in activity as we go through into the summer?

It will be more immune than the other energy or even, Bert, the service centers that won't be completely immune. It's going to have a dive, it's going to drop off but that won't have the same kind of decline in the other operations do.

But do you think Brian it's going to be this typical seasonal drop-off or it just will drop off because of activity levels are down.

No, it does -- in the end these kind of activity levels will cost it to drop off. They are still having better baseline maintenance. But they do, do a lot of tie in from that. That overtime is just going to drop off.

So what would be -- what if you look at the Apex revenue and I know you don't break it out specifically but if you think about the annuity portion of it. Is it two-third of that revenue? Is it half the revenue?

I don't actually know.

Okay. And then just in the Steel distribution business in -- the U.S. had a very strong quarter, but the commentary seems to say that they -- that is expected to weaken going forward. Do you miss a sense of what kind of decline or weakness you would expect like when we start seeing year-over-year declines or just kind of modest declines, where we were in the first quarter.

Revenues in the steel distributors is opportunistic, so when the import spread is different is wider we will bring more product in. So, we will be moving product driven in the next couple of quarters but we will see it go back to some more levels, historical levels.

Okay. Thank you.

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

Alright, similarly I have follow up in terms of demand. And I guess I was listening to new corns and deal dynamics. They talked about this covering non-Res market, construction market in the U.S. So I was wondering if you can comment on what you're seeing in that regard, may be generally in terms of demand in various geographical markets.

In regards to non-Res, again the numbers are up for this year. They are modestly up, but they are up. It looks like the leading indicators that you go out and read on those. They are starting to taper off especially in the U.S. and the Eastern Canada we are continuing to see positive momentum with construction. So we think that will continue to move forward in non-Res. Alberta, it can be heavily related for the out Western Canada being more related to a resource basic and particularly oil and gas, it's going to continue to pull off in that area we think.

Do you see any other segments, heavy equipments or any other kind of markets that are either better or worse?

The rail cars continued to be solid, barge and really transportation related continues to be solid. Again, any natural resource based particularly in Canada continues to struggle, but we do see some military spending are continuing to struggle but that would mining aid, related or continuing to struggle but we do see some military starting to happen. In the U.S. would be very similar and so we're not seeing a whole lot of difference, we just think U.S. economy is not as heavily resource wide.

Okay great. That's it. Thank you.

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.

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