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

Anthony Zicha - Scotiabank Brett Levy - Loop Capital Sara O’Brien - RBC Frederic Bastien - Raymond James Michael Tupholme - TD Bert Powell - BMO

Good morning, ladies and gentlemen and welcome to Russel Metals Inc. 2016 First Quarter Results Conference Call. 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. [Operator Instructions] I will now turn the meeting over to Ms. Marion Britton. Please go ahead.

Good morning, everyone. I will start by reading the cautionary statement on Page 3 of the package that we have sent out. 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 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 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 do not assume any obligation to update our forward-looking statements. I would now ask you to turn to Page 5 of the slide deck. So on Page 5, we summarize the highlights from the first quarter. Our earnings were $8 million. EPS of $0.13 compared to $0.30 in the first quarter of 2015. We will get into later the details of this decline in earnings. Free cash flow was $0.35 per share for the first quarter compared to $0.48 last year. Return on equity of 4%. At the end of the quarter, we had net cash of $54 million, very similar to year end. Due to our restructuring of the convertible debentures, the redemption of them, our interest expense is down $5 million or 44% compared to Q1 2015. In addition, we declared our dividend of $0.38 per share. Flipping the page to Page 6, I will speak to the market conditions. Metals service centers tons were down 5% compared to Q1 2015. The biggest factor in the decline is the Western operations, in particular, the impact of Alberta on our service centers. As you know, oil and gas being down, it does impact activity around that area. Actually, our operations in Alberta held up much better first quarter last year. So year-over-year, they are down more and it will as we go out throughout the year will be less of a down. Steel prices began to increase in the quarter, approximately mid-February, we saw announcements from the mills, which impacted or helped us increase our prices or helped our margins. And I will say that, that was a positive impact for approximately half of the first quarter of 2016. The Energy Products segment had a revenue decline of 35% year-over-year and 9% from Q4 2015. Everybody who reads the paper knows what’s driving that. As time goes on and pricing is still an issue, more and more people are reviewing their capital spending or their drilling activity. In Canada, we are now into the second quarter where it’s always quieter, so rig counts are very low and we are unable to predict what’s going to happen as the season moves on. One of the things also impacting the first quarter was a fairly warm winter resulting in an early spring, so breakup started much earlier in March than would be anticipated. North American rig count, are at record lows which I sit and talk about Canadian, but U.S. similarly. Flipping the page to Page 7 kind of a couple of things. This is our busy chart with all of our history for the 5 years and quarter-over-quarter. Looking at the net working capital line under the balance sheet information, our net working capital in metals is down $310 million, approximately 30% from March of last year driven by unfortunately lower revenue resulting in lower accounts receivable and positive movement being reductions in inventory taking to right-size ourself. You will note also that our pension expense is up slightly and that has to do with some change in the discount rate. It is down from Q1, so up slightly from year end, but down from Q1 2015 as we did have some positive impact in our net assets in the plant. And moving down to the capitalization, the total debt is – or sorry, net debt of cash less bank debt is $64 million and then we have long-term debt, which is a 6% note to give $232 million of debt outstanding. If you compare that as a percent of our capitalization, you will see that it is running at 27%, which is not increased. It’s actually come down compared to historical numbers if you look across the chart. Turning forward to the cash flow on Page 10 just to highlight the cash from operating activities and the movement in working capital in the quarter, you will see that our accounts receivable was basically flat. We continue to work with our clients, particularly the energy sectors who provide them credit for their business, but at the same time, manage our risks and our accounts receivable. The biggest drop was our inventories, which as I mentioned is on the previous page, that we continued to work to rightsize our inventory within our current revenue level. And I will speak to that a little bit later when we get to the inventory page by segment. So, our cash from operating activities was $49 million in the quarter. Moving forward to page – sorry, in the MD&A which is on Page 14 of the slide deck. Just to highlight – well, there you can see the breakdown of the revenue by segment. Obviously, all segments were down in revenue. The bright spot is the gross margins, where the metals service center is up 20.7% for the quarter compared to 20%, Q1 ‘15, and in the 19s in Q4. I didn’t write the number down, but we are up from Q4 approximately 1.5%. The improvement in the selling price as well as the fact that our – we have brought them out in our cost of inventory in late in the fourth quarter, so service centers helped improve the margins and they came in, in that span of 20% to 21%, which would be a normalized margin in my mind. Energy products, we held in with our decent margin of 16.6% compared to last year. That has partly to do with some mix of the sales with more component in the oilfields area and less in the OCTG, which is the lower gross margin product. The one thing you will note is that the segment operating line, we only had 2.5% compared to 4% last year. We are working on the expenses, but with the lower revenues, it’s tough to get that line in up to the same level. Moving forward to Page 15, you will see the highlights there of the shipments. Under metals service centers, 5% down from first quarter last year, but 9% up from fourth quarter. A part of that is seasonally driven, but they were up on a per day basis. The average selling price is down and that’s because we are still coming back up to the same level as last year and that will go up as we expect throughout the year. The other item I would like to highlight on this page is the decline in operating expense. Year-over-year, they are down $4 million, 6%. We continue to work at that. And manpower in this operation has been decreased as well as some salary reductions that have been taken or temporary salary rollback. Turning forward to Page 17, I don’t think I will say too much about this, other than the operating expense line. Operating expenses in this segment are down $8 million or 19%. Manpower is down 22%. One of the things that you will note, as we go through the year, we get a lot of cuts late well, second half of ‘15, I will say. And so year-over-year, you are going to see the impact of lower expenses in this segment in particular. Turning to Page 18, interest expense which I mentioned, it’s down from $10 million to $5 million, due in part to lower debt outstanding, but also the lower interest costs now that we redeemed the 7.75% convertible debentures. On Page 19, just to highlight the capital expenditures, it’s been $3 million compared to $8 million last year first quarter, usually try and give a bit of a projection, our current projection is around $20 million for the year. We are continuing to spend money where it makes sense, but a number of our operations are watching that to help return to profitability and then to decide where they can best utilize the equipment. Turning forward to Page 20, the inventory number is down compared to last year to $678 million versus $967 million, that’s the total number. In the total number, that’s a combination of lower tons and pricing for each of the segments. The metal service center segment is down 27%, 16% is related to tons and 11% is – would be related to pricing based on that. So we have brought our tons down significantly as we were going through last year when we – the price was coming down, we always try and keep our inventories at lower levels, so we are not getting additional charges for that and they have been managed very well in this segment. You will see that we are still running at 4.6 turns, we were at 4.7 turns throughout the last half of last year. Energy, down $100 million, similarly we continue to take inventory out of this segment as the revenues come down and steel distributors revenues are down and inventory is rightsizing itself to the current volume there. Those are my comments on the quarter and we will open it up for questions.

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

Yes. Good morning. With reference to the steel service centers, you mentioned that the mills announced a 5% increase, can you give us a bit more insight, are the price sticking and give us a glance on volume trends in the second quarter?

Anthony, the increases are actually going up a little more than 5%, but there we have seen the range is going up another $30 to $40 a ton and that’s recently flat rolled, being a barometer for that went to 5.60 to 5.80 range, although demand fundamentals regarding volume is relatively unchanged at this point. So it’s more of a raw material/supply based increase at this time. And I think this is sustainable into Q3, it has legs sometime into Q3. And we will just see what the price of scrap goes and how the world economies were impacting.

Okay. And then could you comment on business activity, volumes, in terms of volumes for Quebec and Atlantic Canada and maybe some perspectives in the U.S. markets?

Eastern Canada, Ontario, Quebec, Atlantic has been really strong for us. It’s been above the standards for the industry and so we are seeing good volume there in both of the construction sector and the manufacturing sector. Western Canada is obviously very challenged right now with the oil and gas. The U.S. is running to about industry standards right now. Again, it’s largely unchanged on the volume that we have seen there. There has been a pick up in automotive. We are not involved in automotive. So it’s been offset by the drop in energy, but we think it’s basically flattened.

Okay. And on the expense front, is there anything more that you can squeeze out?

We are getting close to the bottom on it and we are rightsizing to where we need to be to run the company effectively. And so again with the increase on the service center and steel distributor side, we feel like we are in balance at this time. And we don’t see any further changes. There may be some more on the energy side that we can continue to do in some of our operations.

Okay. And one last question relating to the OCTG front, could you give us some color on the level of excess inventories in the industry and does it look like its troughing and what are the competitors doing, Marion had mentioned most probably rightsizing our inventories?

The OCTG, if you track the pipeline within some of the other industry ranks that are out there, it’s like we have had nine months inventory for the last four months, it hasn’t decreased this month, it went to 10 months inventory on OCTG in North America. So that’s remaining fairly stagnant. I guess the most telling factor is we have seen the substrate go up in hot-rolled. We have seen the increase that’s trying to pass along with some success in line pipe and in seamless areas, but we are not seeing it on the OCTG side. And so there is so much in the distributor pipeline that is remaining to depress those prices. I think we will probably this quarter and into the third quarter, we will continue to see that, but it will be very challenging on that side.

Okay. And the competitive landscape, like how are your competitors faring, has there been any consolidation and bankruptcies?

It’s both. We are seeing consolidation. We are seeing bankruptcies. We are seeing opportunities for acquisitions that are out there in the energy market.

On the competitive front, the two large public companies that we compete with both lost money from operations this quarter.

In the Energy segment.

In the Energy segment, yes, that’s the Energy segment, the two big public companies. So our energy numbers are hanging in better than our large competitors.

Okay. Thank you very much.

Thank you. Your next question comes from Brett Levy, Loop Capital. Brett, please go ahead.

Hi, it’s Loop Capital in Chicago. Hi guys. Hi Brian and Marion. Hi, John. Is there any area in which you are actually sort of building inventory at this point?

No, we don’t really build. We don’t build into across the board rising price. We are seeing a little bit of demand in some areas and as we have said across Canada and that and they would be buying according to their demand, but no we have never been a company that we build inventory.

We will study this going through our turns on managing net working capital grew out, unless we see something that’s really, really indicative. But we think the pricing just running away. So again, we think this has – we have some legs going forward into Q3, but I don’t know how long it’s sustainable.

And you mentioned that you see flat rolled potentially having another price increase going into the second and third quarters, does it feel like that’s kind of the highest point and things start to stabilize or move down from there and then how about sort of in some of the other products, beams and bar and pipe and that sort of things, are you – where are you seeing the pricing trends in sort of each of the main product areas?

On the flat roll yes, we think there is definitely some more room that’s going to build there from the 5.60 mark from what you said now. I don’t know how long it’s sustainable since scrap increases. So they are being pushed in as a supply side. It continues to be a raw materials, same thing for bars and beams that we will see those. The imports have subsided to some degree in Q1, but they are starting to open up again. We are still seeing some signs there that things are starting to move. We found new avenues in the supply chains, they may come from unusual sources into the U.S. We are starting to see some availability there, but overall right now, it seems to be fairly stable. But if we see a drop in scrap, we will see a change in the world economies where things started to slowdown in that level of demand.

Alright. And then I always ask this question sort of as the consolidation in this industry continues, is there a geography or a product area that is of particular interest to you, kind of given the current situations, the prices for properties available for you guys as you look at potential bolt-on acquisitions?

I think the answer is always the same. We would like to grow the service centers in the United States. Fairest ones we have looked at the size, the pricing is not something we are comfortable with. But the bolt-ons, I think are going to be – they are probably going to be more of those happening. I think the consolidation of the smaller companies into the larger ones will continue and we will see more of that probably in the next year or two.

And is there a particular product area where you can see more of that than other product areas?

Well, what we see is what we are interested in which is the general line, black steel.

Any plans to buyback loans?

The 6% loans, you mean that you are talking?

Yes.

Not at this point. They are not – they are pretty good interest rates, we don’t currently have any plans.

Okay, thanks very much guys.

Thank you. Your next question comes from Sara O’Brien, RBC. Sara, please go ahead. Sara O’Brien: Hi, good morning. Can you comment on the service centers? You talked about the mills increasing pricing on plate and coil, but what’s going on with the competitive environment with the pure service centers in terms of passing through the pricing increases?

It’s different by geography. And again based on where they are in the product mix, but in the coil products, loan products, we are seeing the increases we passed along and so it’s moving through, so you will continue to see holding gains in the service centers in those areas. Plate is just now starting to move forward and there has been a little bit of a lag and that we just had too much in the supply chain throughout North America and so that’s starting to rebalance now. So, I think in balance of Q2 and Q3 we will start to see those increases we passed through as well. Sara O’Brien: Okay, great. And then in terms of the balance sheet, I know that the borrowing base is what it takes availability, but if we look at your net debt to EBITDA, it’s about 3.2x. And given steel pricing is on the inflationary course, I would expect working capital will start to require or true up free cash flow? I am just wondering how that ratio plays into your appetite for acquisitions, do you look at it at all in terms of prohibitive or do you feel like that do none of your creditors even bother to look at net debt to EBITDA?

We don’t really look at that. We are more concerned about our debt equity and our current cash debt position and it will be what it is. We can’t really control the EBITDA number. We obviously would like it to be lower, but that’s what it is.

From the cash flow – I mean, every dollar sales cost us, we cut the fund to about $0.25 of working capital. So right now that we have got $65 million of cash and obviously we will fund a couple of $100 million increases and we will start having it in the bank line. I am not worried about that though, because as that number starts to go back up, the EBITDA goes back up as well. Sara O’Brien: Okay. And then similarly just on the dividend, if you can comment, obviously you are still intact and free cash flow is not a problem right now. But as you ramp back up and you are talking about steel pricing improving into – visibility into Q3, but beyond that, it’s staying stagnant at that point and energy has not recovered. I am just wondering how management looks at the dividend in that kind of a scenario?

We look at it every quarter. We look at our balance sheet. And we see this right now as more of return on capital, because at these levels, we don’t need the capital structure we have. In the end, if energy becomes continuous to be uncertain, we would have to look at things. But really, energy is going to drive the dividend more than the service centers or the trading operations. Sara O’Brien: Okay, that’s it for me. Thank you.

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

Okay, good morning. Guys, just a clarification. When you say that EBIT improved in each of the – each month since the beginning of the year, do you include April in that comment?

We didn’t. It didn’t improve in April in energy, because that’s when you get the downtick because of the breakup. So the other ones, I would say, you can include them.

Okay. And I was just curious, is pricing for pipe following the movement on scrap and plate or does the industry need to see a volume uptick before this can be realized?

We need to see the volume uptick. It’s – OCTG is not following just because of the oversupply currently in the supply chain. And so it’s just there is so much availability down there – out there in the market. On the line pipe, there are segments and there we are starting to see some of the increases in our opportunities. Some of that is because supply has been taken offline and some of it because has been managed better, free up the supply chain. So, that is starting to move along with the raw materials here.

And then along those lines, I mean is the pricing for your valves and fittings and testing stay intact despite the weakness in the energy sector?

It’s a more highly engineered product. So, it’s more labor intensive to make that product. So, it’s not as volatile. So, we will see it stay more intact throughout the cycle – price cycle.

The issue there is more volume, Frederic. As the rig count stays at these levels, eventually, there is a drop off even in the development [indiscernible].

It’s not the price.

In the demand.

Okay. And I am sorry if you have addressed this already, but in terms of inventory turns on the energy side, obviously, the market is still soft, but where would you want to be as you enter sort of a recovery position?

I really would like to be in that 3.5 range, 3, 3.5.

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

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

Thanks. Good morning. Within the metal service centers segment, a nice sequential uptick in gross margin in the quarter. And with the pricing improvements we have seen, how should we think about the margins there going forward, Marion?

I would say that we will get another increase in the next quarter, but it won’t be as large as the possible with the Q4 increase.

And would you expect that we would still be within that and you said 20% to 21% band that you have talked about?

Yes, we might break the 21%. We might break the 21%, but I would not go much higher.

Okay, perfect. And then I know you provided earlier some commentary around the end market demand outlook with respect to metals service centers by geography and some of the areas that are – some of the end markets, but we saw tons down I guess in the quarter. Can you just – from a natural number perspective, can you give us some sense, are you expecting to see sort of a turn in that area in Q2, Q3 or do you have any visibility on that from a year-over-year?

I will kind of answer it according to what I have said early on was that the Alberta region was down less in Q1 ‘15 over ‘14 versus down this quarter over ‘15 and that was because stuff that was going on continued. So year-over-year, it will have less of an impact, but on a per day demand, we don’t anticipate a big increase. We think it’s going to run about where it is.

You know the seasonality impacts that are in the service center historical, but I don’t see any demand slowing changes up.

Okay, that’s helpful. Thank you. And then just jumping over to steel distributors, a couple of questions, I mean very strong margins in that area in the quarter and I realize that higher steel prices were a driver there. But I guess firstly, was there anything beyond that of an unusual nature that would have helped the margins there? And then secondly, can you just talk about the outlook and how sustainable those margins are?

Well, the problem we always have in the trading is they are not sustainable once you run out of your inventory, because you got to buy new of them. They are not buying anything right now, so they are coming off of the prior buys. It will be much quieter. I think the margins will continue to be strong for the next quarter or two, but at the present time, the international pricing is not all that attractive, so we won’t be as active in the market.

So what we are talking…

Go ahead, Michael.

I just probably got another quarter of strength and then we will start to see it come off more in terms of dollar sales than necessarily margin.

Okay. And then just I guess just two other quick ones. Marion, can you give us any sense for your expectation for changes in non-cash working capital? I mean I know you talked a little bit about where you are at with inventories, but as we go forward here with pricing having improved in hot-rolled coil and plate, but energy is still being weak like where does all this shake out in terms of the non-cash working capital?

I think that we might have some small increases in the second quarter, but I think what we need in service center, will take out of the energy hopefully or steel distributors as we continue to sell off that inventory. So, I wouldn’t factor in too large of a number for the next quarter.

Okay. I will leave it there. Thank you.

Thank you. [Operator Instructions] Your next question comes from Bert Powell, BMO. Bert, please go ahead.

Yes. Thanks. Just a question in energy products, is it reasonable to assume that this quarter that Apex or Apex like businesses were profitable at the operating level, but the OCTG and line pipe businesses were not?

I would actually make the distinction little differently. Our Canadian operations, including those and our oil centered operations, were all profitable. Our U.S. operations were not and that includes everything in the space. So our...

Energy?

Our energy everybody was able to make a little bit of profit in Canada.

One of those things we have going for us in that area is that it’s a low-cost operation, we don’t have many facilities in that. I mean Apex does have some. But for us to make some profit is pretty reasonable, I mean we could get at least this margin.

Has apex helped margin notwithstanding that the revenue decline or it’s a margin depression?

Absolutely, no, it’s helping the margins.

Percent, the margin percent, yes.

But in isolation though, is it performing – is the margin holding in or is the margin under pressure there as well?

No. The margins are under slight pressure, of course everybody has, but it’s really the volume that’s the pressure as people just cut the budgets, I mean they are able to maintain your margins much better than the line pipe and OCTG.

Sure. John, I just want to go back to your comments on pricing, it seems a little bit – given this is a supply market and we have had 50% ramp basically in hot-rolled coil since the end of last year, it’s been parabolic, although probably back to historical averages, but is supply based, I am surprised that you are not – you won’t see notwithstanding the benefit for gross margins on the average of lower cost inventory that the customers are actually not squeezing you on price given – or won’t squeeze you on price given the dramatic increases and kind of a fairly flattish or weak demand in the end markets, so just help me understand how you are able to get all those prices reflected through to the customers?

If you go back to the previous – to the size of the margin, if you go back to the ‘07 timeframe, you saw both demand drive and price increase, so everything went through, so the margin was kind of wide open. This time historically, you would have seen a bigger margin increase I think, on holding gains, although we do turn that inventory better than the industry typically, so that limits us on the upside there. But this time, because it’s not demand driven, you are right, there is pressure coming from the end users, although some of the increase is being passed along, so it’s probably – we are not getting 100% of the increase that you really want to pass along historically, but we are getting the increase passed along specific to the time and margin level. So it’s allowing some expansion, but not as much as you would like in the time like this.

So if we get through whatever the bump is going to be for holding on average lower cost, so I guess FX may settle noisy, but you still expect that you are going to see the gross margins in the service center north of 20%?

I would think so in Q2 yes, they will continue to creep on.

They are always above – it should be above 20% as long as we are in a stable or a rising markets.

The reverse of course and the pressure increases.

Okay. And just in service center in terms of volume, thinking we got West challenged, East looks better, we are lapping some easier comps in the second half of the year, is that kind of the right way to think about that as Q2, we will see the end of it and kind of flatten out in volume in the second half of the year?

Year-over-year, probably. Year-over-year, I am not sure we are going up.

No, [indiscernible] all of your growth it goes zero, zero volume growth in the second half of the year?

Yes. I would…

If demand [indiscernible] it would be flat too.

Okay. And then I think, Brian touched on this briefly, but just is there any, given the spike in pricing, is there any impetus for imports to start creeping in a little bit, I am not sure if there is enough of a spread differential over the end markets the way they are, whether that’s going to be a factor or not?

Yes. The spike we have seen in North America is not going to be – it will open the door normally except for the same thing is happening everywhere else. The prices are increasing, so the spread has not increased by as much as the price increase, but they keep at it, there will be a big enough gap. But right now, there isn’t and that’s really because the European and the – all the various markets are increasing as well.

Okay. And John what gives you when you look out pass Q3, what are the – I know you talked about scrap, but is there anything that you see where you kind of go, guys to be careful on the buys here, the prices are bit week or when you read your two leads are you kind of saying, look we are probably going to be pretty stabilizing [indiscernible] of growth now is 5 close to 5.80?

That’s in that 5.60 to 5.80 range. As we look forward now, Q4 seasonality always comes into play. Scrap market comes into play. And then the demand on the world market now comes into play. So we watch all of those things, again we will maintain our turn level and stay working the risk on the long-term approach, but we don’t see any big gap just today, but that can change tomorrow.

Right. But you hold that – your 6% on steel price, right, so higher steel prices going to obviously go for you, right?

Yes.

The wildcard now is if the demand or when the demand picks up for energy, because that’s the piece that’s causing the volumes to be so bad in the industry, because automotive is doing very well, but that’s more than offset by the drop in the energy. So you have got a wildcard. When energy kicks, then demand could actually be the driver instead of supply, I just don’t know when that’s going to happen.

But there will be no response at that time as well, wouldn’t it, Brian, in terms of production coming up?

That’s right.

Okay. Thank you, guys.

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

Okay. I will thank everybody for joining us on the call. And we will talk to you next quarter.

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