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

Michael Tupholme - TD Securities Tyler Kenyon - KeyBanc Brett Levy - Seelaus Anoop Prihar - GMP Securities Frederic Bastien - Raymond James

Good morning, ladies and gentlemen, and welcome to the 2017 Fourth Quarter and Year-End Results Conference Call for Russel Metals. 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. Today's presentation will be followed by a question-and-answer period. [Operator Instructions]. I'll now turn the meeting over to Ms. Marion Britton. Please go ahead, Ms. Britton.

Good morning, everyone. I'll start by reading the standard cautionary statement 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 future capital expenditures, our outlook, the availability of our future financing, and our ability to pay dividends. Forward-looking statements relate to 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 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'll just mention to everybody that we did yesterday as well as putting out this document and our press release for the quarter; we filed our Financial Statements and our Annual Information Form. So if you're looking for those they would be on SEDAR or on our website. You can now turn to Page 5 of the slide deck. We had a strong quarter. We ended up with $0.45 earnings of $28 million. So comparable to the $0.37 last year, although within that $0.37 last year, there was $0.27 related to a sales of property and this was in Q4 and then obviously in the annual numbers and we did repatriate some money back to Canada which was $0.03, so net $0.24 that is not repeated in 2017. So extremely strong quarter compared to last year, consistently strong in relation to what we've been able to do in the first three quarters of this year and the strength was driven by all three segments, with particularly strong energy numbers and we'll get into that in a bit more detail when we get to the next slide. So the -- similarly the year EPS is $2.00. We show $1.02 but to be really comparative you have to take the $0.24 of that number. Strong free cash flow $2.92 per share compared to $1.25 last year. Extremely strong return on equity numbers, RONA 18.7% really in top of our target range to get to a bigger number is always better, but 15% we think is a good result. U.S. tax reform had a very minimal impact on our results. We actually ended up with a minor income related to net timing differences. So we actually had a net timing liability that we will end up paying at a lower rate when we take that back in the future years. The impact of the changes in the U.S. tax rates will be positive going forward. We anticipate that based on state other permanent differences or combined operations, our rate will be 2% or 3% lower than our Canadian statutory rate, but once we combine everything considering permanent differences in that I'm estimating 27% combined all-in rates and obviously this factor will move around according depending on where our strong earnings are from each year. Also, we did declare our dividend of $0.33 in the quarter. Moving forward to Slide 6, metal service center shipments in Q4 were 13% higher than Q4 2016. This number the 13% excludes color. So our revenue actually which included three months of Color Steels, our acquisition in September, so the variant number is higher than that. Our shipments in January continue to be up year-over-year. Steel mill prices started to rise, in our sense were late in the year, pricing actually started to impact in January a little bit, but will have a further impact in our new few months, February, March of the year. So we will see at least a half a quarter of rising steel prices in Q1 2018. Year-over-year, the rig count at this point U.S. is up and Canada seems to be running flat where it was at Q1 2017. Energy products improved demand continues in our operations even though the -- we're stronger in Canada and running flat, we are seeing some increased demand in our specific operations in this sector. In addition, we did extend our bank facility to September 2021, it was previously going to expire in September 2019, and we did upsize it $50 million to $450 million. Moving forward to Page 7, I want to point out a few numbers on this chart, if you start at the top and look at the deferred revenue, you will notice that the second highest there in comparison to the other years that we have on the five years. If you go down to the EBITDA as a percent of revenue, you'll notice that we produced 6.3% of revenue compared to 14% or other closest year of 5.6% and we were able to fully reduce $2 of EPS on a much lower revenue stream which is something that we wish to note. One of the things also going down to the balance sheet, you know that, notice that inventory tons are up compared to prior year. There's both -- sorry inventory values are up in both tons and pricing increases in there. There is a slight overhang of energy inventories that we anticipated shipping before year-end but they have started to move into Q1. So would expect that that's going to come down before Spring breakup and you'll see those numbers later on. Another item, I'll mention if you just note down we have $30 million of net liabilities for taxes approximately $20 million that will get paid this month, Canadian taxes that you're allowed to wait for last year, year-end to pay related to last year. At this point, I would like to flip to the end of the deck on Page 26, so I can just speak to the quarterly numbers, and then I'll quick go back, and quickly highlight some of the yearly numbers related to our earnings. So if you on Page 26 you'll note all of our segments were up 24% to 32% in revenues, so combined 26% for the quarter. Going down to the segment operating profit, you'll see that gain on sale of properties that's showing part of the operating profit, if you were to exclude that, you would have $17.1 million for the quarter compared to the $46.9 million. So almost 2.5 times stronger this year, and also, if you were to exclude that as at the line of segment operating profit as a percent of revenues you would note that last years would be 2.6% and this year our combined number is 5.7%. Two of the items, I will also mention on here is the gross margin. You'll note that the metal service centers and distributors are slightly below where we were last year. The selling price is up and if you look down below same-store for service center we're saying 9% higher than fourth quarter 2016, although there we weren't able to capture the rising steel prices that started late in the quarter. Last year, it started earlier on and that's particularly relevant when we get to the annual numbers and I'll speak to that when we flip backwards to the annual numbers which are on Page 15. So for the year, we were up 28% for our combined revenues, with obviously energy up 44% so the strongest improvement year-over-year in our operations, as many of you would know driven by the fact that oil and gas prices did come up a bit and more stable at this point than they were a year ago. Once again, you'll notice the point 7.7% is in here, so that would have been 91.3%, so we more than doubled our year annual EBIT excluding the gain on sale of properties. And I wanted to next look at the gross margins, that's down below, metal service centers was about 1% lower than they were last year and one of the reasons for that is that late in 2015, prices started to shoot up and we were able to capture more of the increase and there was a higher movement up at that time than we have seen in this year. The total operations gross margin as a percent of revenues at 20.1% driven stronger by the energy strong numbers. Okay, just take you back a few pages to Page 10; I'll speak to a little bit to our working capital changes and use of cash in the quarter. You'll note that we had $43.3 million use of cash for inventory. I spoke earlier little bit about overhang of inventory at year-end that we don't anticipated the problem, shipments are happening in this quarter, so that we did end up with the use of cash in the quarter which I expected to be a little closer to neutral. Looking at the annual numbers, you will notice that we used $68.4 million for cash for operating activities. Strong cash from operations of $216 million, but we did need to increase inventories and AR due to higher revenues and slightly offset by AP, as you can see. So we, in our working capital, non-cash working capital $251 million use of cash. Also on this page, I just wanted to draw your attention to the CapEx at the end of the year, we did spend higher than our normal in the fourth quarter $13.5 million and the $35.7 million for the year. We did add some more value-added equipment and we chose to purchase a property at our Williams Bahcall operation that we were previously renting in was up for sale and the net impact is going to actually reduce our expenses due to the fact we purchased it, but increased our capital expenditures. We'll now go to Slide 17. So for the year, I'm talking metal service centers, our tons were up 6%, our selling price was up 11%. Flipping forward to the energy sector, I pretty much covered lot of this on the first slide the 44% increase in the revenue in the energy sector, a big portion of this was driven by increased revenue at our OCTG operations and Apex mainly driven by our Canadian operations is what I'm saying. Flipping forward now to Page 19, just as I mentioned we had increased our revenue and earnings at our Apex operation, we did have our final payment to set-up for our Apex Distribution earn-out contingent consideration from the acquisition five years ago. So we were making a payment of $3.3 million in Q1. Turning to Page 21. 21, has our inventory by segment, you can see which segments are up in relation to inventory values, and then where we align with inventory turns. The turns are aren't as strong at the end of 2017 as they had been throughout the year, our energy products turns, and I think that somewhat address that, but obviously, selling prices up in both steel distributors and metal service center our average cost of inventory is up which accounts for some portion of the increased dollar value and in addition we had some additional funds. Those are my comments. I'm going to turn it over for questions.

Thank you. [Operator Instructions]. And your first question is from Michael Tupholme from TD Securities. Michael, please go ahead.

Thanks, good morning. Very strong year-over-year same-store sales growth in service centers, up 13%. In the outlook it sounds like you're suggesting you've seen a further step-up in growth in Q1 and I'm taking that EMENA a sequential improvement relative to Q4. So I'm just wondering is the expectation that we should see year-over-year same-store volume growth in service centers in the first quarter be even stronger than that 13%?

I think it's just a modest growth based on what we’re seeing out there right now.

I would probably model at least half, not less than half or half of that.

So, sorry year-over-year growth in Q1, you think is going to be half what you saw in the fourth quarter?

Yes or maybe that amount, yes, about half.

And so why is it coming down then is the comp that much tougher in the first quarter of 2017?

No. Again we're seeing modest improvement; we continue to see margin asset compression from the competition. But we're not seeing a runway train on it as well and so we just began I think that's something is going to be tough to replicate. But we will continue to see modest improvement in Q1.

But we were up Q1 also 2016, I mean 2017 over 2016 and we're not going to see the same increase as we had back then. I think our annual increase ended up to be 6% is just where the tons fell later in the year.

Right. But I guess if I go, the big step-up came in Q3 when we saw you do volume growth for about 10% year-over-year in service centers, so if I go back to Q1, Q1 2017 it was only up 2% on the volume side, so it doesn't look to me like the comp gets much more difficult and if demand continues to be modestly improved, I'm just struggling to see how in the year-over-year change on same-store sales comes down from what you just did in the fourth quarter?

Michael, some of the increase in Q4 was driven by additional activity in Alberta and as you can see our energy continue to do well in Q4. We don't see that additional activity in Alberta increasing that much and we did see activity throughout the year. So I think that what the big jump that we got out of Alberta is going to be muted as we get through 2018.

Okay, that helps. And then in terms of the -- in terms of pricing, which you talked to Marion, prices have obviously been very strong, since the latter part of 2017, how do we think about margins and gross margins in the service center segments in view of the strength in prices?

I think they'll go up slightly in Q1 and assuming they continue to move up as we go through the month, I mean at this point in time my people on the purchasing side are saying that they're going to be coming in through tough Q1 unless something else changes them, we'll see a gradual increase in gross margin in Q1, and a little bit more in Q2.

So Q2 assuming prices continue to enjoy the kind of momentum we've seen, Q2 could be a further from Q1 or just kind of equally strong?

And that the reason why I say that is that we're gradually getting some of the average price, but it takes a lot longer for the average price to move up in our inventory and where we will both increase our selling price because the amount of increase in the actual dollar of the product has gone up significantly if everything were appalled by Q2.

Okay, okay, it makes sense. And then, in energy products, the top-line was up 24% year-over-year, so pretty strong still, but you do it, I guess two questions on that, I mean first of all can you is there any way to kind of break that down in terms of how much of that was volume driven versus price? And then, secondly, you mentioned that the rig count in Canada recently has flattened out on a year-over-year basis. So how should we think about energy products as a segment from a top-line perspective in 2018, is their growth opportunity or growth potential there or is that more of a flattish type of outlook?

I think at this point we believe there is some growth opportunity, but obviously going to be driven by the price of oil and gas and the ability to move it around with one pipe. So at this point, we're only anticipating a modest increase but hoping for better.

Okay. And sorry just in terms of the -- I know you don’t sort of give it the breakdown the way you do in the service centers side but any kind of commentary around how much of that growth you saw in the fourth quarter was volume versus price?

Pretty much all volume, there will be some price increase as prices are up year-over-year. But you have to remember Apex doesn't get the same price increase that our OCTG operations get because the product isn't volatile, the price on the product isn't volatile and so that would be driven by volume.

Okay.

The biggest change we're seeing out there, Michael, right now is the line pipe in the U.S. and we anticipate having a good year there. There are lots of projects out there that are running pretty strong.

Okay, that's helpful.

That will impact not in Q1 but later in the year.

Okay. And then just sticking with energy products, on the gross margin side, in the fourth quarter 21.3%, I was looking back I think that's actually the best quarterly gross margin we’ve seen in that segment since 2008, so I guess what would have been the drivers to that strength was that Apex or is there something else that play and I mean is that kind of a number or something in and around there sustainable?

So it is a mix related item. And we did continue to have product that was in demand, so on the OCTG side we were able to get a little bit of a premium. We anticipate that will come closer to our norm and I’m not really sure what our norm is these days but come down as we go into 2018. So it will depend a lot on demand and mix. So we have a stronger mix of OCTG or line pipe which are both lower margins it will drawdown naturally will have high revenues but lower margins. So it’s a bit of a mix thing.

Okay, all right. I'll get back in the queue. Thank you.

Thank you. Your next question is from Tyler Kenyon from KeyBanc. Tyler, please go ahead.

Appreciate just some of the color on the year-over-year comparisons for the business in the first quarter here. But wondering if you could comment just on what you’ve seen kind of year-to-date in the volumes kind of relative to normal seasonality, is it trending more or less in line with what you would typically see quarter-to-date or are you seeing perhaps a little bit more pronounced strength versus what you would typically see seasonally or is it perhaps tracking little bit below fourth quarter?

You're speaking specific to service centers or energy or about?

Service centers and energy, please.

Okay. On the service center side, we're seeing pretty much the historical norms, again we're getting the increase in the lift, we're seeing some increase again but U.S. maybe just a little stronger than Canada on that but there is not a huge differential there. On the energy side, as we said, we're seeing a strong land pipe business in the U.S. OCTG is improved on both the Apex side of the business is very busy. Although Canada seems to have plateaued as we mentioned last quarter, it's at a healthy level for us. So we feel good about where we are in the Canadian side on the energy, the U.S. energy does continue to move up, but again it seems to be getting close to a plateau level there with the increases are slowing down the rig count.

Yes, we’re not down but we’re not anticipating huge upside there at this point in energy.

Got it. Okay, appreciate that. And the inventory build-up just on the energy side that you mentioned at the end of the year, was there anything in particular that was driving that? Was it a weather-related issue or perhaps lack of availability in terms of transporting the product?

Primarily two things. One was timing of the material coming into us especially in Canada, the import materials the time it came in early before we actually started to ship out in timing with the customer. And then we had a couple the projects get pushed back and they weren't delayed definitely they were just pushed back for 30 days.

Okay. And then just last question from me, just on costs are you seeing any operating expense or freight pressure that might be manifesting in a way that's -- that's perhaps a little bit stronger than what you might see typically this time of year?

Cost if you look at the service center side, I know there is a lot of issues out there with trucking right now. We typically run a large majority of our own trucking, so we control that in-house, so we're not seeing a big cost there, we do have some upside carriers that will do it primarily for overflow service center side. So we’re seeing some of that but it’s been manageable to this point. On the energy side, there increased costs, that's a pass-through for us, as part of the project that we've been.

Thank you. Thanks for taking my questions.

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

Hey guys. In terms of the Section 232K, if and when that sort of progresses or where it goes, how do you see that affecting you in both the U.S. and Canada?

The 232 to some degree, has had a lot of the intended impact just with the threat of it the last year roughly. So we've seen some of the increase there but we don’t see any negative to it. We think there is something that’s going to be done, so we see it could be a potential impact of increasing the prices but again we don’t see it going backwards in anyway. So we think there will be something that will be out. Again have no idea exactly where he's going with it. But again, we think there will be something asset limited. If you look at the imports, they’re not down dramatically compared to previous years and so the impact or the thread of it has put us in a fairly stable pricing environment for 2017 as they gradually increase.

And in terms of like a Canadian response, do you think there will be any or you think Canada just kind of lets this go through and little bit of benefits and the curses of it?

Yes, we'll have. Canada is going to have to react to it in some way but we don't -- we're not sure and NAFTA will come into play on that. A lot of our customers again were not doing cross-border there will be some impact there. But right now it’s just something we’ll have to react to it, but we have no idea what the outcome is going to be.

And you multiply it?

Canadian pricing is driven -- yes the Canadian pricing is usually driven by the U.S. pricing, and so the pricing should find it's balance across the border there.

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

Good morning. Just firstly the 44% year-over-year increase in your energy revenue, I’m curious to ask did Canada and the U.S. contribute equally to that growth or was there one geographic area that was pushing it more than the other?

It was predominantly Canada. There was growth in our all of our U.S. operations but much smaller than the amount that we got in Canada.

So it’s primarily driven by the Canadian thing.

We're also just bigger in Canada too, so it tends to skew it when they have the bigger percent, but definitely all our operations were up but definitely skewed to Canada.

Okay. And then it doesn’t sound like you’re seeing much in the terms of customer activity in Q1 trying to take advantage of moving in advance of a mid-April 232 Ruling, is that a fair statement?

On the service center side we may be seeing a little bit of a pull ahead, it's creating more artificial demand out there extending mill lead times, there may be a little bit but I think they get -- a lot of people got burned last year during the middle of the year in anticipation of July. So I think more people are playing it close to the vest now, just really ordering, as they need.

Okay. So maybe a little bit and nothing material?

Nothing is material right now.

Okay. And then, just lastly, when I look at your five-year table on Page 7, I mean we did $241 million of EBITDA this year, the five-year high is about $250 million, if we assume some modest growth it’s not unreasonable to assume that 2018 will be pushing our five-year highway to around $250 million of EBITDA. I guess what I’m wondering is capacity utilization wise, capacity utilization wise on the existing platform what is your ability do you think to drive EBITDA materially higher on the existing footprint or you at a point now where we need to start material growth initiatives?

We won’t have any capacity issues at that. We should be able to handle it going forward. There may be a facility or two that get to capacity but overall across both countries we should be planning to continue to grow.

And just a reminder that a lot of our energy volumes in the OCTG and Line pipe is through third-party yards not our own facilities and we have very good relationship with lots of yards that we can get.

And keep in mind the value-added will also be part of that growth and so it will work in the existing facilities but that will be part of that growth, it’s new.

Thank you. And your next question is from Frederic Bastien from Raymond James. Frederic, please go ahead.

Good morning guys. Like to get back and touch on the gross margins at energy products, you did 19.5% in 2017 which is a 400 basis point improvement year-over-year, where do you think you can settle this year, do we see you going back maybe halfway or maybe I would suspect that these margins of 19.5% maybe not sustainable?

So there was a considerable pressure on the margins in 2016 because there really wasn't the same demand that we have now. So depending on mix and I have to keep commenting on that because if we do take some large orders, U.S. line pipe and other things that we would hopefully might get this year, that they're always at lower margins because of the dollar values and will drive it. But I would say go in the middle of those two numbers for now.

Okay. That’s what I had in mind. And also just wanted to I guess two, three years ago your dividend was quite topical, you're now in a position where you're paying less than 80% of your EPS and dividend, what’s your thought there as the overall philosophy around the dividend change, could you walk us through that please?

Hi Frederic, it’s Brian. We’re paying out a number over the cycle and so this is the first time we’ve been in excess of what we’re paying out in the couple of years, so that’s a little premature to come to a conclusion there. I mean I think we may have a nice pickup just on the tax side in the States that might give you a little bit of a bump. It’s too premature right now to even think about it, we haven’t earned over the cycle yet the 150 and I think that’s what we need to prove out.

Thank you. Your next question is a follow-up from Michael Tupholme from TD Securities. Michael, please go ahead.

Thanks. Just want to go back to something you mentioned Marion about steel prices and the momentum we've seen. If I think you had suggested in speaking to some of your team members, the -- there is an expectation internally that we could see prices continue to rise into the second quarter? Is that what you had suggested?

John may be wants to address that. But that's what my purchasing people are telling me that the mill increases even though they're announced, they actually don’t get into shipments until a month or two later because whatever is already booked is shipped at the old price and we’re now into increases that will be coming in, in April. John, if you have any?

Yes, we're trying to model again if you look at the back end of 2016 there was a rapid increase from October forward, we didn’t see the run-up as fast and as timely, you’re going to see a similar run-up we think in price and it will continue into Q2, but if you look at the turns for the industry, it’s going to take two to three months to get into the cycle. So we think it will continue to go up well into Q2 right now, the mills have a pricing advantage right now in the marketplace due to respected supply. So we think they will continue to push the increases.

Okay. Very nice, wanted to clarify that, that's helpful, thank you. And then I don’t think it’s been discussed in any of the Q&A so far but on the steel distributors in that segment, strong quarter from a revenue perspective, I think was the best quarter of any single quarter in 2018 that you did in the fourth quarter there, how do we think about that business, sorry the best quarter of any quarter in 2017, pardon me, how do we think about that business in 2018 I guess both from a top-line perspective but also from an EBIT margin perspective where I think the margins there have come down a little bit over time?

I think they will follow lines trends for the service centers, so we might see some modest demand environments with both revenue probably come off just a little bit in 2018 for them. There was some opportunity due to the 232 and things that happened midyear where they were able to take advantage of some of those opportunities. So overall, I would say flat to maybe slightly down for them for the year.

Okay. And that’s on the top-line right John?

Yes, top-line. From margins, margin side probably similar they will remain to be pressured there. Now as the 232 goes forward they could change everything. But all things considered when the market is where it is today, I think they will probably be similar may be up slightly on the margin.

Thank you. And at this time, there are no further questions.

Okay, thank you everyone for attending and we'll talk to you next quarter.

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