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

Sara O’Brien - RBC Bert Powell - BMO Capital Markets Frederic Bastien - Raymond James Michael Tupholme - TD Anthony Zicha - Scotia Bank Anoop Prihar - GMP Securities

Good morning, ladies and gentlemen, and welcome to the 2016 Third 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. 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 with the cautionary statement, which is on page three of the package that was the link we sent last night. 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. I’ll now reference you to page five of the deck that we sent out. And this is the highlights for the third quarter. Q3, our earnings were $16 million, EPS was $0.26 and that compares to our Q3 2015 of $13 million and EPS of $0.21 and in the Q2, we had EPS of $0.27. The change from Q3 2015 really related to higher operating profits in both our service center and steel distributor. And we’ll get into bit more detail on that. The nine months ended September 30, 2016, we had earnings of $40 million EPS of $55 million compared to nine months 2015 of $.077. We had positive free cash flow in the nine months ended September 2016 of $68 million or $1.10 per share, which is up from $0.93 per share in the prior comparative nine months. Q3 2016, we had an increase in non-working capital $15 million that was related mainly to inventory reductions, further reductions in inventory and we will get some more specific on that as we go through the deck. Net cash at the end of the quarter was $78 million, which is up from June and our debt to equity remains at 27%. In addition, we declared our $0.38 per share dividend. Turning to page six, market conditions. Metals service center tons were down 5% in Q3, on a year-to-date basis were down 3%. The steel prices declined in the quarter, although they seem to have bottomed out at this point in starting back up. Gross margin and dollars -- and gross margin percent and dollars were higher than Q3 2015. Energy product segment revenue declined 28% from Q3 2015. Even with a huge decline, our energy segment remains profitable. Steel Distributor segment revenues were down 30% due to planned less imports in Q3 -- compared to Q3 2015. Gross margin percent dollars were higher than Q3 2015. Turning over to the next page, page seven, you will note that our revenues are at $1.9 billion for the nine months to September 2016. You can see our run rate is down compared to our results for -- that are comparative on this page and it’s driven mainly by the energy segment and I have bit more information on that on the next page. The other line I wanted to point you to here is the net working capital in metals is now at $733 million, which is the lowest number on this page and is specifically planned in relation to revenue reductions, we reduced our working capital, which impacts interest costs favorably. Turning over the next page, page eight. We wanted to highlight the dollar numbers; as I mentioned earlier that the improvement from the same quarter in 2015 related to our operations, 27.6 in this Q3 versus 19 the previous Q3. You will also note that interest expenses is down significantly in the quarter and on a year-to-date basis. On a year-to-date, we are 43% lower than we were prior year. The one item prior year which is an income item is $5.5 million which related to the reduction in earn-out which was removed last year. Turning to page 10, just mention a couple items. There was a funding or pension plan of $8 million related to planned merger, which was in Ontario. We were able to merge a number of our plans. So, we have less of our plans which have been grandfathered since the early 1990s. So, these are commitments that we have of ongoing employees that will retire in the future. Inventories also was a positive contributor to our cash, $48 million reduction in the quarter or $68 million year-to-date. There was slight offset by revenues in the quarter, which was -- sorry accounts receivable in the quarter, which was driven by a slight improvement in revenues compared to Q2. Turning forward to page 14, which is the page where we break out all our segment information in our MD&A. You will note, as I spoke earlier about this significant decline in revenue in the energy sector, we were down from $300 million last year to $215 million. Our earnings, operating profits only dropped from $10.8 million to $6 million, which is we think positive. And it is -- the $6 million in the quarter is an improvement over $1 million from the Q2. We did have a bit of a seasonal pickup in this operation. Going down to the segment gross margins, you will note that service centers still had a strong gross margin at 22.2%. It is down from Q2, but I mean year-to-date, we’re at 21.9%, so favorable in the quarter. We do expect a bit of pressure on this, some declining prices that happened in Q3 which will impact Q4, although we are starting to see some of those turnaround sheets and hopefully plates will be in the short-term. Energy was at 15.5% compared to the year-to-date of 16.2%, still a strong number. We’re not concerned about our margins as much about the topline revenue there, more demand. Turning forward to page 16, just highlight the comment made in the first paragraph on the top of that page that we did have volume increases in British Columbia and Quebec. Those are the two operations that have been positive compared to Alberta, which has continued decreased activity. I suspect by Q4, our year-over-year comps are going to go down much more and hopefully we’ll start to see a bit more activity in that region as various companies are making announcements of things they want to get started on. And turning forward now to page 20, just comments on the capital expenditures, continue to be low $12 million year-to-date. We’re going to be well under $20 million for the year. And that’s driven by lack of demand and no need to expand at this point in time. Turning to the next page, page 21, just want to highlight some comments on inventories. Metal service centers have their inventories pretty much in line with the demand at this point in time. They are at around $250 million. The drop that was in the quarter was the energy products units that went from $302 million. But if you were to look back, you would see at this time last year our inventories were at $442 million. So, we have taken a significant amount of inventory out of our energy and our turns now are at 2.4 in the energy products, considering the low demand, not so best. We’re getting those more in line. Those are my comments on the quarter, and 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 comes from Sara O’Brien, RBC. Sara, please go ahead. Sara O’Brien: Hi, good morning. Can you comment a little on the steel pricing in the service centers and distribution, just in terms of what extent of the competitive landscape going into Q4; is there rational behavior or how you see that playing out?

So, going into Q4, as we started, it was again -- we saw a lot of pricing pressure we were coming off. You can see the flat rolled trend coming from July as the price fell. We started to see the market recover early compared to what has happened historically. Flat rolled has increased $30 a ton, which appears to be sticky; now they’ve recently announced another 30. We’ve seen tubing announce this week up 70, you see pate said just announced an up 50. So, we think there is a bottoming that’s coming, so we think the October definitely pricing pressure, early November we’re seeing the pressure, but we think that’s going to bottom early and start moving back up heading into Q1. Sara O’Brien: Okay. So, how are the other service centers responding to this kind of volatility right now?

Depends on what product growth; plate seems to be the one that’s misbehaving the most where we have over stocked inventories from some of our competitors. So they are still being very aggressive on pricing in the plate products. It’s in the most of the mills as well. But we -- the coal products, the other products are starting to turn them and people are starting to respond to it, in the last week or so. So, again, we think we’re hitting the V shape and we’ll start coming back quickly. Sara O’Brien: Okay. And is plate still around 75% of your distribution product?

The non-pipe would be more or like 50% of non-pipe -- non-energy. So if you take the non-pipe and valves and fittings, I would say it’s say above 50%. Sara O’Brien: Okay. And what’s remainder within service centers?

The structural and long products are very heavy, if you remember the price split that we have in the analyst package. Sara O’Brien: Okay. And then, just wondering about OCTG and it sounds like it’s still pretty weak environment. Are there any kind of early indications of some improvement other than seasonality into Q4 and what’s the plan, if things don’t improve vis-à-vis the dividend at this point?

I think that we are seeing some positives coming out of Alberta particularly. The couple of players in the oil sands and a couple of drilling companies that -- the costs have come down to the point where they’re going to reestablish some of their programs. So, they’ve been able to get the cost cutting and some of the players, some of the drillers in that have also announced that they see improvements because they’ve come down with their costs. So, I think it’s a stat of that. I don’t know that we’re going to see a lot of it build in the fourth quarter or first quarter. I think this drilling season probably it’s going to bit trend up a little bit, but it’s not going to be a recovery of any magnitude. But I do think there is a trend right now in energy patch that people are coming back to work. Sara O’Brien: Okay. And in terms of volumes, I guess that’s a positive. But in terms of the savings aspect from everyone in the chain, is there likely to be more pressure on the margin or can it get any lower than it’s been recently?

I don’t think the margin can get much lower. I think the pricing of the product is probably relatively stable. It’s pretty well hit the bottom. So I think the margins will improve. However, that doesn’t say a lot, because they’re not great right now. But I think there will be a margin improvement. I think there is enough gaps now in the product offerings of the competitors that there are products where the margins can get back to a more traditional number. There are still some areas obviously that are oversupplied. But the busier areas are now cleaned up and the pipe -- you’ve got to buy a new pipe and at the higher prices. Sara O’Brien: Okay. And lastly, the dreaded question, but in light of the election results, just wondered if there is maybe some kind of bright spot for energy in your U.S. market or how you view that playing out?

Well, I think the bright spot starts off with it, I think steel will be positively impacted by this result. Obviously D’amico [ph] is the minister in the states; that’s very positive. And I think steel will be impacted positively by that. They’ve said they’re going to support the energy pipeline. I believe that when I see it but that should be positive, but I do believe overall there will be a positive impact on the energy. Sara O’Brien: Okay, great. That’s it from me. Thanks.

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

Thanks and good morning, everybody. Just in the energy products business, are you seeing anything in terms of the Apex type businesses coming back or is this more on the OCTG type side in the energy business?

It’s both and it’s for different reasons. I think on the pipe side, you’re seeing just there is going to be a pickup in the drilling and are valves and fittings more in our Comco operation, we’re seeing -- there is some noises now that they are going to start spending heavier in some of the oil sands projects. On Apex, they’re starting to see a pickup as well. And I think a lot of that is actual pent-up repairs and maintenance from people that have cut back and they haven’t been doing enough repairs and maintenance on their existing infrastructure that is actually pumping today. And I think that’s starting to pick up as well and that’s happening with regardless of whether there is more wells drilled; it’s just the existing infrastructure.

So, Brian, it’s safe to say that the Q3 for sure is probably the bottom for that business. And next year if I look it at the total revenue for the business that that could have a pretty good pop or is this sort of even with some of the recovery in activity given how the year trended out, stronger and ended weaker that next year kind of looks flattish, notwithstanding some of this pent-up demand on fixing?

Yes, I think the trough was actually probably the second quarter of this year but recovering probably. I think there will be an improvement in next year and strong maybe I would use. I don’t know I would use the work significant pop but I think it will be stronger and I think it will be up.

Okay. And then, just on the inventory side, this is a pretty good cash generator from the working capital side of things in terms of inventory and the turns are up, largely on -- I guess more so on the energy side of things. Is there much left to liquidate, given where we are with turns? I mean overall, it’s kind of just over 3, is there much room for those turns to go higher from her?

Yes, there is still more room in the energy side. And we’re consistently going to take that down. And I think that’s not going to change. I think that given where we are today, there is still more improvement that we’re seeing already. And I can tell because the cash needs to come in. And I wish the cash flow would reverse because that means we’re recovering.

Okay. And just Marion, just on the cash flow statement, you drew $20 million on your facility, is that letter of credits, or just to try to understand why you would be...

No, no, that wouldn’t be actual borrowings. The thing that we have going at this point in time is we are cashed in the U.S. and we have borrowings in Canada. And so, we actually needed some cash in Canada during the quarter. That’s why it shows that even though we’re net cash positive.

Okay.

Go ahead.

Sorry, just one last one. I think Brian, you’ve said that dividend has really been predicated on your outlook for the energy business. Given your outlook today, I know you haven’t changed the dividend but what you see continues to be supportive of maintaining at the current levels?

Yes, it does.

Okay, perfect. Thank you.

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

Good morning. Guys, you’ve highlighted in the past that a gross margin of 20% to 21% is the range that one should expect from your service center business. Do you think that’s still appropriate range given your success is recently in growing your value-add processing activities?

I think it will creep up as we continue to grow in the value add and that’s something that we’re very focused on. Again, you’re going to get some cyclical environments that are there where the margin always bounces up and down. But I think on a flat land, you’re safe to increase that a little bit, Frederic.

And are we talking one percentage point or I mean this is something that could go in the 20% to 25% range?

It’s one to two; you’re probably safe somewhere in that range.

Okay. Can you give us an update on how I guess that target is progressing? I recall vaguely you saying in the past that you wanted to throw off about 50% of your business from those types of activities?

Initially when we started, we were below 30; we crossed that threshold now. We’re in the low 30s. Again, the target is within three to five years to have our process in above 50%. We do not include coal process in there because that’s a natural process, we have to do. So, we’re continuing to make nice progress to grow there. Some of our locations has already reached 50% threshold plus.

Okay. And just turning to steel distributors, how much visibility you have right now in volumes heading into 2017?

Volumes, again, on the demand side seems to be pretty flat going in. The price increases unfortunately remain driven by the input cost on the supply side. So, again, we don’t see a whole lot of volume change, other than the seasonality coming out of it, Thanksgiving and Christmas holidays in the U.S.

Okay. And then, just like margins have been bouncing around on a quarterly basis, should we expect that to normalize a bit or should we still expect some volatility there?

Yes. I think it’s going to normalize a bit down maybe, if prices start to go up, we will keep a bit stronger. But feeling coming into I’d say a month ago was that we would be going down. So with the fact that we are seeing some turn earlier this month in November, I would think that’s more going to impact next year than it is this year?

It’s hard to call though, because if you look at this year in the 10 months, we’ve already had two troughs and a peak and that gets to happen every three or four years. Now, we are having it happen twice in one year. So that’s what causes the volatility. So, the question is what’s going to happen and maybe the change of government is going to give us a bit of a more prolonged uptick, but that’s what’s causing that variability.

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

Thanks, good morning. Marion, can you just give a little bit more detail around the inventory write-downs in the quarter, where those occurred? I presume energy, but not sure if that was also affected other areas.

Yes, we have been -- our program where we are reviewing our energy and looking at the aging on it and we did write down approximately $4 million in the energy segment related to making sure that the product we were was appropriate for sale.

Okay. So, all of it or almost all of it in energy?

Yes.

And it is in the numbers you’re seeing.

Yes, it’s already -- I mean it’s not been backed out, but when you read the notes, you’ll find that in the inventory number.

Right. And yes, and in that note, it doesn’t look like there has been any change in terms of reversals of prior -- prior write-downs on it, relative to where we were last quarter, but there was no -- that is correct, there was nothing on the right upside, I guess in the third quarter?

Yes, it was immaterial.

Can you -- just in terms of metal service centers tons down 5% year-over-year, I know in the past, several quarters you’ve talked about the demand environment and things being somewhat challenging in certain areas. Can you just give us a bit of an update there, possibly question for John, whether you’ve seen any changes at all positively or negatively in any of the end markets and how you think about that the demand environment as you go into 2017?

It’s remaining; we’re still seeing construction. It’s kind of flat lining right now. It’s an end market we’ve seen, obviously automotive has held is very strong; we don’t have direct input to automotive, we do some indirect business there. Really the ag, the mining, those are not -- certainly we are not seeing significant increases there. We feel like we’ve gained share according to healthy industry statistics in those throughout the year in both the U.S. and Canada. But again, we are not seeing any big changes in the end markets from this year.

Okay. In terms of energy, Brian, it sounded like you suggested that some of the inventory overhang that’s existed for some time, has started to be become work through. But can you, from an industry perspective, can you give a bit more color as to where we sit now? And I guess it’s product independent, it’s not maybe the same across the board, but any other color there would be helpful.

I think you summarized it pretty well. I mean there is now enough reduction of the overhang that there are gaps where there are products that don’t have overhang now. That tends to be in the fracing area and that’s the more active. So that’s the area that again -- that’s the area that comes back, there is going to be gaps and there are opportunities to get proper margins again, the traditional drilling and et cetera remains still obviously over inventory.

Okay. And then there was some mention in the MD&A about part of the margin benefits I guess you saw in certain areas were due to some additional cost containment measures. Anything else going on there going forward or are you largely done for now, just wondering where that sits?

On the service center side, we’ve been -- the cost containment, we have been able to implement over the last two years in the program with the barcode and scanning, the automation of the back office we’ve been able to -- again those are scalable. So, we’ve been able to maintain those costs as we come back up from the 2009 timeframe, so we’ve seen the back office improve. Obviously, financing has done a great job on the interest as we refinanced there. On the flipside, we are continuing to get margin improvement as we go further and further down the value added processing on the service centre side. So, we’re able to gain margin there and market share.

On the energy side, we’re seeing this last couple of quarters still have a lot of the cost of the rationalization. So, you haven’t seen the benefits from it. I think we’ve done most of the rationalizations but you haven’t seen the benefit yet because we’re still taking the severance costs and the inventory adjustment. So, I think that’s an area you will see a little bit of an improvement in the numbers, although the actual actions have already been taken.

Thank you. [Operator Instructions] Your next question comes from Anthony Zicha, Scotia Bank. Anthony, please go ahead.

Could you give us a big picture outlook in terms of color on offshore imports as they are impacting, like in light of Trump’s policies and perfectionism, do you expect that this will be an additional contribution to higher steel price in 2017?

It’s definitely improving. We’ve seen a lot of the trade suits that’s come through in North America, Canada as well as the U.S. Again, Trump, D’amico [ph] will be part of his cabinet and will be very aggressive on looking at trades. So, I think all of those are positive catalysts. And we’re getting closer to that number, 18% to 20% of import is what’s always been required to meet any shortfalls in North America. We’re getting closer to that number. We’ve got into the low 30s at one point on imports where we got out of balance. So I think that will continue be a positive going forward but it’s a little early to call up based on the election being last night.

Okay. And then, flipping over to Canada, are we seeing some positive momentum in terms of infrastructure spending, like, can you give us some insights in terms of your service center side for Ontario, Quebec maybe some color on Western Canada?

We’ve seen it in Eastern Canada, Quebec, Ontario; we’ve seen slight gains there on infrastructure spending. So, it’s been better and so we’ve seen some improvements in that area. Western Canada, again Alberta being more in a severe downturn, so we’re not seeing the impact there, we have seen some impacts in B.C.

Okay. Well, thank you very much.

Thank you. Your next question comes from Anoop Prihar from GMP Securities. Anoop, please go ahead.

Yes, good morning. Just wondering if you give us a bit of an update on what you’re seeing on the M&A side. I know you’ve talked in the past about wanting to broaden the U.S. footprint on the service centers. Has the mood or the pace there, has it changed materially over the last quarter?

I think the deal flow was pretty good last quarter and it’s continued that way. I think you’re going to see us do -- we’ve got a few small things underway, nothing large at this point. But there is still continued good deal flow and there is lots of things to look at.

Okay. And Marion, just for Q4, should we expect CapEx spending to be more or less in line with what you did in Q3?

Yes, I would think it’s about the same. It’s not definitely no increases going on; we don’t have any large projects on the Gulf mainly due to lack of demand in any area that we need to spend more money.

Thank you.

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

I’d like to thank everybody attending the call. We’ll talk to you next quarter.

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