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

Frederic Bastien - Raymond James Michael Tupholme - TD Securities Bert Powell - BMO Capital Markets Anthony Zicha - Scotiabank Brett Levy - Loop Capital Sara O'Brien - RBC Anoop Prihar - GMP Securities

Good morning, ladies and gentlemen, and welcome to the 2016 Second 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, Ms. Britton.

Good morning, everybody. I am going to start by reading the cautionary statements. 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 of 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 flip to page five of the slide deck that we sent out. So just to highlight our second quarter results, earnings were comparable to 2015 Q2, and same with EPS of $0.27 which is what we reported in Q2. We'll go into a little bit more detail as to how we got to the same further in. Six months is, for 2016, we're now at $0.39 EPS. Free cash flow six months ended was $46 million or $0.74, similar to June 30, 2015, or six months of 2Q 2015. Q2, we had an increase in non-cash working capital of $12 million, and at the end of the quarter, June 30, we had net cash of $70 million. We did declare our dividend of $0.38 per share. Turning the page to slide six, a few comments on market conditions. Metal Service Center tons in Q2 2016 compared to Q2 2015 were level, if the year-to-date is down 2%. I will now speak a little bit more to that when we get to the MD&A. Russel Metal shipments are stronger than the MSCI in both Canada and the U.S. Steel prices have leveled out at the end of the quarter or into the Q3, and in some cases we've seen declines in prices in Q3. Energy Products segment revenues declined 35% from Q2 '15, but they're now 52% down from Q2 2014. So we've come off significantly there as everybody knows the rig count information which impacts us significantly. Steel Distributors margin and profit improved despite lower demand. So on the -- just the highlight the positiveness of the quarter was driven by Metal Service Centers and to Steel Distributors strong margins and demand staying within those units fairly consistent year-over-year. Moving forward to slide seven, inventories are down since June of last year, and are down since year-end. And I'll explain that as we get to the slide on inventories. It's a bit of a lower in energy and service Center. Networking capital obviously is down based on the fact that inventories are down. And one number I'll point out also is the pension and benefits asset number has gone up to $33.6 million, it's related to the fact that long bond rates have gone from 4% to 3.25% since year-end, and that drives the liability. I expect at some point it'll more flip back. The one thing I will also mention is that we did get approval for some mergers we had put for our DB plans that have been grandfathered for a long time, but to merge [indiscernible] in the Ontario arena, and we do need to fund $8 million or we have already funded $8 million in the Q3 related to that. And also the other positive, our debt as a percent of capitalization stayed at 27%. Moving forward to slide 10, just pointing out there the change in non-cash working capital, which was mentioned at the beginning slide, $11.7 million, mainly driven by the fact that we've now started to have replaced some of the inventory in our high-churning [ph] service center, and AP was a source of cash. The other item there to comment on is the low capital expenditures. At this point, we do have some things going on, but no significant activity like we've had prior years with addition of buildings. Moving forward to slide 14, where we have the numbers by segment. You will see that Metal service centers is down 6%, year-over-year even though the demand was flat and that's related selling price and we have the numbers on the next page, when we get to that on that slide. The other number I would point out here is corporate expenses have gone up $1 million in the quarter and up to $11 million for the six months driven fully by change in our stock price, improved stock price resulted in additional stock-based compensation, otherwise corporate expenses are flat year-over-year. Metal service centers and steel distributors continue to have very strong gross margins. Metal service centers at 22.9 is very strong and that's up from 20.7 in Q1, when prices did start to increase slightly. The question I am sure, a lot of people are going to ask is where do we think that's going with the fact that prices have declined a little bit and with buying higher price inventory in Q2? We will see that come down, I would suspect somewhere between those two numbers, the 20.7 in Q1 and the 22.9 if I was modeling probably would go in the middle. Steel distributors similarly will come down a little bit as we go through the second half as we replace inventory in those units. Flipping to page 16, as I mentioned as I mentioned, I would comment a little bit on selling prices the -- and on actually first of all let me comment on -- the comment we made here about strong volume increase in Quebec region and then Ontario and the U.S. was relatively flat, that's what offset the decline that still is occurring in Alberta although year-over-year the decline is much less than it had been earlier in the year. Average selling price of the metal was 1% higher than the first quarter and fell to 6% below where it was in 2015 although, prices are increasing if you were to look at absolute price dollars, the prices are higher than they were in 2015 at this quarter. Flipping to page 17, we are -- I already commented on the fact that revenues in energy are down 35% driven very much by the Q2 seasonal low in Canada but also the very low rig count, we do expect the some improvement here based on that release, more activity in the second half or in Q3 and Q4 compared to Q2 but at this point in time, oil prices aren't supporting significant activity. Our operating expenses in this unit have come down 5 million in this segment or 15% we are doing everything -- our units are doing what they need to do to stay at least profitable and we believe that we can make the profit at this level. Flipping forward to page 19, I will just make a comment on the income taxes, so our income taxes were 33% compared to 25.8% for the quarter and similar number although year-to-date on the same period last year was a little bit higher. The reason for the high rate is the fact that we have debt in Canada and our net income is a little more skewed to the U.S. as a percent, as opposed to Canada and the low result from our Western Canada operations in Q2. I would expect that we are going to stay in the say 32% range for the year I don't see that swinging back this year to the lower rate. Turning to page 21, the energy product segment has brought down their inventory from year-end as price get theirs tons in line with revenue obviously very difficult in the Q2 by 1.7 when compared to last year, when we had 1.9. The area that we did have an increase is Metal service centers and it really wasn't tons it was price increases that's driven up the numbers particular from March and steel distributors have been buying just too at the level of revenue. The revenues were down compared to where we had been in 2015. So as I mentioned earlier, inventories have come down since year-end. Those are my comments. I am going to turn it back for questions.

Thank you. [Operator Instructions]

Can we begin the question?

Your first question is from Frederic Bastien of Raymond James. Please go ahead.

Hi, you are going to get a few big question, Brian, don't worry. Good morning. Guys, as you enter what is normally the seasonally, I guess, strongest period for energy products being heading into Q4 and Q1, how would you think right now with the visibility that you have that your results would compare relative to a year ago? Basically, you are still facing tough year-over-year comps, I believe, but how do you think results will fare?

I think year-over-year, they will be down. I think they will be up obviously from this quarter. And again, similarly with [indiscernible] area, it will be somewhere in the middle. I don't think that the pricing right now gives you any great hope that there is going be an unforeseen pick-up. There is going to be a pickup, and it will be pretty muted I think.

Okay, but you are comfortable I guess one of the comments Marion made was you are profitable at these levels, and is it fair to say that on a quarter-on-quarter basis, you might have hit the trough?

Yes.

Okay. Just building on that, I noticed that you had inventory write-downs of 4 million bucks in the quarter. I can't remember exactly what was the number in Q1, but that seems to be going down as well. Are you comfortable with your levels of inventory right now?

Yes, the Q1 number was about a million.

Okay.

We had some sales. In the Q2, where we chose to take some sales to customers and take loss on some products we were holding, and that sort of make us reassess a few other items that you carry on, similar type product. Hopefully, we can still sell that product a little bit better, but we'll see what activities out there.

Overall [technical difficulty] comfortable we are.

Okay. And just switching to metal service center, obviously, the sector is still doing, sort of -- but not fine [ph] all centers obviously, but you're continuing to outperform. Where do you expect demand to come from in the second half? And is that -- are you comfortable that you've got a fair amount of visibility in that particular side of the business?

We are seeing the third quarter, we're seeing demand soften a little more than the typical seasonal softening that we give our service centers in Q3, and we are starting to see pricing come off as well in various categories. So, we think we will end up somewhere probably between Q1 and Q2.

In terms of demand?

In terms of demand, yes.

Okay. Thanks. I'll turn it over.

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

Thanks. Good morning. Just back on the inventory impairments, and I guess also impairment reversals, I think Marion, you covered off the energy products impairment of 4 million, but I just wanted to understand what the picture looked like as far as the impairment reversals that occurred in the quarter, and what the amount was, and which segment those were in?

Yes, it was a 2 million reversal in the Steel Distributor segment related to product we wrote at the end of the year. I think we are getting to the -- close to the end of that product and like [indiscernible] took a write-down on it, we have drilled [ph] lot of it. So, I don't anticipate a similar number going forward, but we did have with the price increases in the quarter reversal of 2 million.

Okay, perfect. And then, I mean, if I think about that number and in spite of that even if you hadn't had that steel distributors, it would have been a very strong margin. That's a tough segment for us to model, or I think it is for most people. Can you just talk a little bit about the outlook there with respect to expected revenues in the back half and still distributors as well as how we should think about the margin, I think you indicated you expect it to come down, and that makes sense, but to what extent and what sort of a normalized level for that segment in terms of margin?

I think we will come off some in the quarter in the margin as we said, but the Duffin [ph] actions that have taken place with the hot rolled coil are going prop up at product little more in the third quarter. We feel like it will come off slightly, but probably not as much [indiscernible] action taken. So we will continue to see demand levels at either flat or down slightly in Q3.

Relative to Q2, you mean when you say demand down slightly?

Yes, relative to Q2.

Yes, we are watching our inventory buys in relation to everything else that's going on and demand at this point.

Okay, that's helpful, thank you. And I think you gave some good color in terms of how to think about the gross margin within metal service centers in the third quarter, I guess, as we look a little further out, I mean is it -- should we be -- it sort of depends on what happens with prices, but as we get through the third quarter, it sounds like you are still going to get a bit of benefit on the margin there in spite of what's happening with prices, but beyond that, should we be thinking about kind of your normal historical range of kind of 20, I think it's sort of 20.5 or 21?

Yes, I would agree with that comment, Michael. Unless we have a significant swing [ph], which isn't what we are thinking in pricing that is going down, or significantly we think it's going to bottom at some point too, we would be in that 20.5% to 21%.

Okay, that's all from me. I will turn it over. Thank you.

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

Yes, thanks, and good morning everybody. Just with respect to service centers and what happened with steel pricing in the quarter, you would have thought it would have been more of a benefit from pricing but know there is the processing side of the business. Can you just walk us through, or maybe it was competitive pressures, but even if we look at the effects, it's still, it seemed it should have been up, maybe just explain a little bit what's going on there?

Yes, I mean, selling prices are a mix of everything that's out there and it did vary by region, but there is still quite a bit of competitive pressure and we do find that some people are selling to get a certain inventory for cash needs. So we are not able to raise it as much as you might think.

If you look at it, we don't break it up by region but you know you can guess which regions. Some regions behave exactly like you expected, but obviously the West didn't.

It was that more in plaid?

Yes, plaid and structured.

Plaids, okay, okay. And then, you guys didn't call it out, but -- and I just wonder what the impact was in the quarter from the wild fires, just thinking you know, maybe about Comco [ph].

We haven't made a big -- we don't want to make a big deal about that. I mean, obviously it's going to be -- it impacted us slightly, but at the end of the day, I don't think it's a material number. There will be a pick-up now because the building that's going back into there, into that area it will actually probably help the service centers a little bit. But it's not a real big number.

Okay, just curious. And then pricing weakening, can you help us with what's driving that? We got the spread, the imports is high, I think New Court [ph] said on their conference call that duties were pushing prices up but I am not sure that you guys would agree with that. Maybe just a little bit of the behind the scenes dynamics that you see playing out that are driving steel pricing, it would be helpful for us I think.

It's really broken out product by product right now. Plaid has probably the weakest demand and so that you have seen plaid actually go below flat roll pricing now for the first time in 12–13 years. So that's the most challenge products that we see currently and again it's primarily based on weak demand. If you look at flat roll, you are exactly right; the straight on the world market is in excess of $300 a ton, which is a very high number. For the domestic mills for again if they go into the dumping so we say maintain discipline, stayed above that psychological number of $600 a ton, although we're starting -- that seems to be cracking now. They've held the number up very well. So, we are seeing demand come up little bit in those areas. I guess the longer term concern is how does that affect products downstream, fabricated steel products, products that are made elsewhere that spread out there, can they take advantage of that on the world market for those products? So, I think we've made a great first step with the freight teams that are out there, and they are making an impact. And I think that they just need to continue forward into other products.

But even with that spread, John, are imports starting to become a factor on pricing? Or, it's just with the duties and…

That's still a factor and they will re-route. They didn't get everybody. They will reroute, but I think the U.S. has simply mentioned it very clearly that they'll act quickly more so than they had historically.

Okay, [technical difficulty].

They will take action I believe.

Okay, perfect. Okay, thank you.

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

Yes, good morning. With reference to steel service centers, you mentioned that Quebec was quite strong. And if hadn't been so strong, what would have been the impact on volume? And can you give us a bit of color on the marketplace in Ontario?

I'll give you some color. I might not tell you what the volumes were in each of the provinces. But, Ontario, Quebec, and Maritimes were all good. Very strong compared to the West, and that's what carry our volume as well as the States. It's been pretty good. So, it's really western Canada that's giving us the problems.

And have you seen any flow stemming from infrastructure spending? And do you think that Alberta and Saskatchewan may have hit the bottom?

Go in reverse order. I think Alberta and Saskatchewan, I think we're hitting the bottom. We are bouncing along. So, we are starting to see improvement. In the West, although it's slight, infrastructure has been -- yes, we are seeing some impact. It could be material in the East coast as it continues forward.

Okay. Good. If we look at your OCTG business, where do you stand on optimizing the operations?

It's tough to optimize when you are not shipping anything.

Yes.

We've got them down to as small as they can be. One of the operations is down to a handful of people. And the other one is actually got some good orders. It's a little stronger in the OCTG in Canada. And our position is much better because we are part of the number player in the overall market. So, Canada is not as harshly impacted as the States is.

Okay. And last question. When we look at growth -- growth opportunities, what could we expect in the short term and let's say in the next two to three years?

Acquisitions are starting to bubble up. We'll continue to take a look. Ideally, we would like to grow them in the States. We've said that for the last four to five years, but we'll remain opportunistic on those. But service center is where predominantly I think we'll see that growth.

Okay. Thank you very much.

Thank you. Your next question is from Brett Levy from Loop Capital. Please go ahead.

Hey, guys. Lot of questions have been answered. Can you guys just talk a little bit about kind of the bar market? Something of other markets just in terms of what you are seeing here. And then is there any trade cases in Canada that might hold some potential upside for you guys? It feels like third quarter might be a peak. And I think we were actually more worried about the first quarter. And can you give any sense as to sort of whether or not we are at very high peak and sort of some sense by product I know plate is weak, but sort of reasons to be cheerful about the fourth quarter.

Christmas is in the fourth quarter.

That part I know.

The bar market is relatively flat. And so we are saying that these will be stable. Construction market continues to nudge forward. So, we're seeing that market begin to show some slight improvement. It's out there. Again, mining there, the traditional as we mentioned every quarter continue to struggle. And so we don't see any improvement in those for the near-term, I think cash numbers are pretty revealing. But as far as going forward for any typical seasonality that we just don't see any changes beyond that, maybe a little bit more downturn in the third quarter, but fourth quarter just too far for us to see right now.

We're helped by the fourth quarter in the energy because that is the fourth and first of the good quarters in energy. So we'll get an uptick whether the industry does there overall or no and I don't know.

And then, on the M&A side you've said that been after probably, the U.S. is a more likely in our geographic region. Is there a product category that, I mean obviously energy is extremely depressed right now is there a product category there is a particular interest you guys on the M&A side?

We look at it on a business-by-business case, there is opportunities, I think that -- flat role potentially not this but overall generally allow me it allows you to expand a footprint in the U.S. because we obviously get a lot of places to grow there.

And then, last one, lot of my questions already been asked; is there a possibility of the, sort of an expanded buyback of shares or even bonds for that matter, I mean the bonds are kind stuck it to our certain, I don't know if that's that attractive use for your $163 million of cash. But, is there chance that, there will be a greater either return capital through dividends or use of capital to buy-back shares at this point, given that you are rail according I'm not sure just thought as, to the fully appreciated the hard work you guys have done?

We're not in a hurry to buyback the shares, we're making shares we can protect the dividend as is it today, certainly I don't think I would want, they can increase to the board. So, I think maintain that dividend where it is until we have some better visibility on the energy is really our focus at this point. And we're not really inclined to buyback debt or equity at this point of time.

Brian, John, Marion, thanks very much.

Thanks, Brett.

Your next question is from Sara O'Brien from RBC. Please go ahead. Sara O'Brien: Hi, good morning. You commented you're wining some market share on the service centers, just wondered what you're doing differently to make that happen and is that tied into pricing at all?

We are continuing down the path again expanding the processing that we're doing. And the capital investments that we've made over the last two or three years we're continuing to grow those, we do value add process. And so we're continuing to win there in that we'll hope the margins again its part of an engineered product. So, it will help stabilize increase margins in the future. Sara O'Brien: Okay. And when you talk about CapEx investment how much should we expect for the year?

Worst, going to be definitely less than depreciation and we don't know the number of $20 million before and I have a feeling we're going to have a hard time get into $20 million. So, maybe it's going to be closer to $18 million to $17 million. Sara O'Brien: Okay. And then just going back to the pricing, it's definitely I am not quite sure on, plate was up kind, plate and coil were up 30% to 40% Q2 over Q1. Just wondering how that incremental improvement could only be 1%. Is there something I am missing other than the competitive nature in Western Canada?

Yes, it's mainly just the mix of the product and region-by-region when you consolidate it all.

When you say up 1% you're talking about all that, you - are you talking about sale price?

Average selling price. Sara O'Brien: Yes, average price near MD&A you said it was up 1%.

Yes, it's really mix.

That's a mix issue sell price.

And then some resale that -- this more tons not necessarily up as much as other region? Sara O'Brien: And how is that competitive dynamic changed if at all. I am just wondering if you can get a benefit of the increase pricing in Q3, as some inventories been kind to liquidate it out by your competitors?

It going to be just really a case-by-case basis, it's not going to be broad brush and so would, you're going to have competitors in the East and competitors in the West and what their positions are with the market will allow. Sara O'Brien: Okay.

I think, in the energy as well, the inventory although it's still got ways to go. They are starting to be holes show-up in the inventory on the ground, so there will be some opportunity for margin expansion, I believe in the energy over the next two quarters. Sara O'Brien: Okay, that's it for me. Thanks.

Thank you. Your next comes is from Anoop Prihar from GMP Securities. Please go ahead.

Hello good morning. Most of my questions have been answered, Marion, just one question relating to the write-down. I think the total write-down in the quarter was something around 5.5 and for the energy I am just curious as to what the balance related to?

No, I think the 5.5 is the year-to-date number, you may be mixed up the core for the quarter, yes, 5.5…

Okay.

I know that number is year-to-date, so…

Great, thank you.

Okay.

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

Thanks everybody for joining us on the call, and enjoy the hot weather we are experiencing. Thank you again.

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