John Reid – President and Chief Operating Officer Marion Britton – Executive Vice President and Chief Financial Officer

Brett Levy – Seelaus & Company Michael Tupholme – TD Securities Phil Gibbs – KeyBanc Capital Markets

Good morning, ladies and gentlemen, and welcome to the 2018 First Quarter Results Conference Call for Russel Metals. Today will be hosted by 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 now would like to turn the call over to Ms. Marion Britton. Please go ahead.

Good morning, everyone. Hopefully, you’ve been able to get the slide deck and I’m going to start by reading the 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. If you will turn forward to Page 6 – Page 5 sorry, on the slide deck. I’m going to speak to the first quarter results. We had a very strong first quarter, it was $0.62 EPS earnings of $38 million, it’s our highest quarter that we’ve had since 2018. In our comparable last year was $0.48. Free cash flow is at $0.97 per share, which is also very high. It’s driven off of the earnings. Return on equity 19% is the strongest over the last five years, which shows on our five year chart. Net cash was $20 million at the end of the quarter, also note that in the quarter, we did issue $150 million or 6% senior notes, thus we were able to reduce – we increase our net cash, because of reduction in bank indebtedness to – because of the issuance of the $150 million. We declared our dividend of $0.38 per share yesterday, and we also – I want to note that after the subsequent event after the quarter that we previously announced on April 16, we completed the acquisition of DuBose Steel for $29 million. Turning to Slide 6. Demand and steel prices are up in all three segments, which is what drove the positive increase in revenues and in earning EBIT and EPS. Metal service centers average selling prices is up 8% as you know steel prices have been rising mainly due to 232, but there has been the increased demand across certain segments. Metal service centers tons were up 7% compared to Q1 2017. In addition our revenues in that segment were increased 3% due to our acquisition of Color Steels that was completed last September and there will be no comparable 2017 numbers for that. Rig count is up in the U.S. and it’s been basically flat in Canada. We’re currently in Canada spring breakup and we do anticipate that based on seasonality, it may be extended slightly. Energy products segment revenues increased 13% from Q1 2017. We had positive results in oil field stores and line pipe after increased sales in both of those operations in the area of our OCTG, our sales were basically flat year-over-year. Turning to Slide 7, point out the EBIT as a percent of revenue, 6.5% highest on the chart and our EBITDA as a percent of revenue of 7.4%. The working capital is currently in the metals operations, $996 million, which is running similar levels to 2014 is driven our revenue, if you annualize that we believe is going to be higher than our 2014 number. On that page also you will note that total interest bearing debt $422.6 million increase during this quarter based on working capital increases when we look at the cash flow shortly. Also throwing down to the bottom of that other information section, return on capital employed 18%, the return on equity, which I previously mentioned at 19% both very strong for our industry. Turning forward to the cash flow, which is on Page 10 of the slide deck. Cash from operations was $71 million. We did utilize cash in the quarter of $49.8 million for working capital needs. You could see that accounts receivable increased almost to $100 million that has to do with significant increase in revenue in the – near the end of the quarter of February and March compared to the November, December period and increased revenue is up obviously year-over-year also. Inventories have increased in the quarter and that has been offset by significant increased accounts payable and accrued liabilities. The income taxes line you will note that we did have payments of $31.2 million, approximately $22 million of that related to installment in Canada for our 2017 payment. So, it is prior than our – prior first quarter as our earnings since 2017 were significantly higher than 2016. The other line that I will note on here is the purchase of property, plant and equipment of $10.9 higher than our 2017 number, and if you were to look at our commentary that comes later in the deck, you will notice that we anticipate spending more during this year in relation to value added processing equipment. So we would expect our capital expenditure to be approximately $10 million higher than our depreciation that runs around $28 million. Turning forward to Slide 14. This is the slide with all the metrics by segment and year-over-year comparisons for the quarter. As I mentioned before, all of our operations contributed to higher revenues and higher EBIT. the metal service centers quoted the numbers previously selling price and tons up mentioned that in the steel distributors area, the – there was also steel price increases that drove the 21% increase in revenues as well as higher tons in Canada shipped. Going down to the gross margin as a percent of revenue 22.1% this quarter compared to 22.4% in first quarter of 2017. Both quarters had rising steel prices, the one thing to note is that the selling price per ton is a lot higher in this quarter compared to 2017, which is what drives the increase of 33% in our operating process and our metal service centers. So the higher price brings more to the bottom line. Energy segment we were – margins were up to 19.3% in the quarter, the reason of the increase mainly is mix, as I mentioned earlier that our Apex or valves and fittings operation field stores, which is our Apex type operations had a higher result and improved results over the OCTG operations of the same quarter last year. So their higher gross margin would drive the gross margin higher in this quarter. There has also been some increase in selling price in the OCTG area, still the similar type comparable to Q1 2017 although steel selling prices were higher than they were in the 2017 Q1. As very strong segment operating profit as a percent of revenue, I will go through them line-by-line, but you will know also at the total operations of 6.5%, which was on the other slide. The other area I’ll just comment on is on Page 20, the inventory. You’ll note that our inventory is up based on all the previous quarters, driven by both additional tons, because demand is up and driven by steel prices. For metal service centers, our tons are up, approximately 7% higher than Q1 2017. In addition, we will have inventory related to Color Steels in that number, that wasn’t there – was there at year ended September, but not Q1 2017. And note the turns are similar to March 31st 2017. Our energy product inventory is up significantly and turns have declined in that area. Lead times have extended for some of the product and we have fairly strong activity going on in the line pipe area and in the valves area. So we’ve been required to increase our inventory. We are watching the inventory levels in that area to ensure they’re not getting too high. Those are my comments. I’m going to turn it back to the operator to ask for questions.

Thank you. [Operator Instructions] And your first question will be from Brett Levy at Seelaus & Company. Please go ahead.

Hey, Marion. Can you talk a little bit about what your strategy is with respect to inventory and how that relates to the various trade cases. Where do you see them going and how will you position yourself based on kind of where you see things going from this point forward?

Hey, Brett. This is John. In regards to inventory, we’ve obviously pulled a little bit of ahead in anticipation of the 232 as well as extended lead times at the mill manufacturers. So it’s reflective in our turns being a 4.2, but again, we’ve pulled ahead maybe half a turn to a turn as always again, we will maintain our turns during the inventory – during the cycles, because we feel that’s way to mitigate against risks. So we’re not going to take any long positions or any long stretches there in light of what’s going on with all the tariffs or the potential quotas. We’ll watch closely to see what’s happening on June 1st, we feel like there will probably be quotas. So we’re seeing that with South Korea, now Argentina, Brazil have also apparently agreed to those along with Australia. So we’ll continue to watch those closely, but we feel like we’re positioned either way whether it’s tariffs or if it’s quotas that we’re positioned on the way to take advantage of that market.

And then in terms of M&As, this is a kind of traditional question. You guys have made some I think very additive tuck-ins in the last little bit here. Are you looking for anything bigger? is there a particular geography or a product category that seems a little bit more interesting to you as you obviously take advantage of and by the way congratulations on very good quarter?

Thank you for the congratulations. I mean we’ve said for five years we want to grow the U.S. footprint in service centers. Thank goodness, we finally did something in the U.S. in service centers after four years I think in Canada, but that’s definitely our target market, where we see the growth just based on geography and footprint opportunities for us. We are soon very active market there as well as the same active M&A opportunities in the field store businesses in both U.S. and Canada right now.

Thanks very much guys. Great quarter.

Thank you.

Thank you. next question will be from Michael Tupholme at TD. Please go ahead.

Thanks. Good morning. Want to go back to I think one of the points you made Marion, I just want to clarify, you’ve been talking about the working capital and how it’s similar to 2014 and did I hear correctly that you suggested that although working capital levels are similar you expect revenues this year to be higher than they were in 2014?

Assuming that we have continued high steel prices, we have done an acquisition in this quarter. I anticipate that we will comment in higher than the 2014 number.

Okay. And when you say continued high steel prices, I mean I guess you had in the outlook commentary of the MD&A, there was a suggestion that you do expect steel prices to possibly level off here in the second quarter, any thoughts on the second half of the year in terms of – do you think we kind of sort of trade sideways or is there a part that we could see actually some change upward down in the second half?

For second quarter, we think again we’re going to see stable prices where they are. We think we maybe plateauing a little bit a given a fairly narrow bandwidth with on pricing. Demand seems to be stable increasing slightly in the U.S. with Canada being very stable. So again, borrowing any unforeseen changes in demand or unforeseen changes with the $232, which those appear to happen daily, but borrowing anything there, we think we’re in a fairly stable operating environment going as far as the second half of the year throughout, I don’t see anything driving it down at this point.

I hope.

Yeah. We think it would be fairly stable.

Got it. Okay, that’s helpful. thanks, John. Back on the 232, you had indicated I think that obviously, there’s a sort of a lot of things, a lot of moving pieces here and things change frequently as you mentioned. But I mean, you had indicated you think possibly after June 1st, we have this Canadian exemption until June 1st, but after that point maybe looking at the possibility of quotas in Canada. But you started in – maybe just elaborate and add a lot of your thoughts there. But secondly, you had indicated that you sort of see under either scenario whether there are quotas or chairs that Russel has well positioned to take advantage. Can you just sort of expand on that I mean to the extend that there are quotas or tariffs that you come into effect that affect Canada, what might that mean as far as pricing, and how does that relate this would take advantage of the situation?

I think part of the extension is obvious there in the middle of the NAFTA negotiations those appear to be making traction. So I think that we extended to 30 days, it seems to be the preference to move forward quotas obviously to increase the productivity of the U.S. steel mills to go, the target go kind of seems to be around 80% there and slightly under that 75%, 76% capacity today. Without adding the additional tariff, but adding the quota that should keep manufacturing more competitive as well in the U.S. when you flip the Canadian side if we go on to the quota, obviously the Canadian government needs to be prepared to react this into – start yesterday with some of that dialogue. So we don’t become the dumping ground in Canada for those products. But again where we are positioned with word and with our import opportunities as we see those going in – if the U.S. goes into the quota system, we think there’ll be more opportunities to import various products into Canada. Again as long as the Canadian government moves fairly quickly to avoid being a target for dumping for other countries, and I think we’ll be in a very good position based on our natural trade lines and flows that are already out there in the value chain.

So, it is very complex, but that would – to the extent that we do have quotas come into effect in Canada, I mean I understand the U.S. business should be a beneficiary for yourselves, but as far as the Canadian operations, am I hearing correctly that you would see possibly some upside on the steel distributors part of your business, would that possibly be offset by some downside I guess on the service centers side, if we had quotas here in Canada?

I don’t think so. Again, I think a lot of the Canadian environment that this there for the manufacturing can still move really under the current NAFTA agreement versus some significant changes there that we’re not aware of. Again, as we bring, continue to bring – beams are obviously not made here, heavy plates not made here in Canada. So those become more available, again I think we’ll continue to use that through Wirth and through metal service centers. There is the opportunity if Canada doesn’t move quickly at the government level that the pricing could disconnect from the historical pricing with the U.S. market. But I don’t see that at this time, it looks like Canada is moving very quickly to ensure that this doesn’t happen.

Okay, that’s helpful. Thank you. Just with respect to the strength of margins in the energy product segments, Marion, I think, if you mentioned there are a couple factors there, I think pricing has helped, but also you’ve talked about the mix is that favorable mix in terms of what it’s doing for the margins, is that something you expect to continue on really through the balance of the year given what you see in terms of line pipe activity and demand for the 2000 fittings.

For sure we’ll see it Q2, because the OCTG is down. We do have some larger line pipe orders that would not be as high gross margin, and which will come through stronger in Q3. So the mix will continue to be a factor in that quarter, can’t really see as the Q4, but I suspect it is somewhat where the activity levels are going is going to be a factor all year.

Okay. On the corporate costs, they’re a little bit elevated in the first quarter, I think maybe variable comp manufacturer, but should we – how should we think about the corporate costs over the remainder of the year?

You don’t need to quite analyze that some of the accounting requires that RSUs related to retiring individuals need to be accounted over the period to the retirement and everybody would know who I’m talking about at this point. So they are quite they’re going to be stronger in the first half of the year than they are going to be in the second half of the year or higher, I should probably say not strong or higher, but don’t quite analyze it unless. The good thing could happen that our stock price does go up and our stock price will drive up, the RSU, DSUs that are on our statement. So, this caveat that at the end with stock price could impact that stock-based comp.

Okay, okay. Thanks very much. I’ll get back in the queue.

Okay. Thank you.

Thank you. [Operator Instructions] And your next question will be from Phil Gibbs at KeyBanc Capital Markets. Please go ahead.

Hey, good morning. Thanks for taking my question. I have my question here is just on the energy side of the equation. How do you see the rest of the year playing out between call it downhole applications and line pipe applications, and then maybe talk about whether or not there’s a difference between what you’re seeing in the U.S. and in Canada right now.

The line pipe is very busy in the United States right now, we’re seeing a lot of large projects, we’re participating in some of those, which would be reactive in the third and fourth quarter for us. OCTG remains very busy especially in the Permian Basin in the U.S. obviously we’re any breakup in Canada right now. So, things are slowing down for the normal seasonal breakup. We should come back out of that late in Q2, early Q3. We’re seeing a backlog in Canada that is very solid for the OCTG and line pipe is not as robust as the U.S., but it’s healthy in Canada.

Okay, thanks John. And I know clearly freight has been an issue in the U.S. and can you tell us if you’re seeing that in the Canadian markets as well and then maybe talk about how that the freight issues could be impacting sort of the cross border flows right now?

The inbound logistics again we are seeing some of the pressure from that. But it’s not impacting our business dramatically, again with the timing in the inventory turns we should have time to recover. Anything that we’re sending out we think we control our own trucking, so we do very little – where we actually third party truck out, we have our own trucks. It will be leased or own trucks that we manage and maintain on our service center divisions. Our energy divisions and steel distribution have seen some pressure on the outbound trucks. So, I think it would be normal for the industry right now which you’re referring to it. So I think overall, we’re not seeing this is a big impact for us at this time.

Okay. Last one from me is just, how to think about gross margins for the second quarter, pricing is up to the leveling out in Q2, but I would think still up something and we know costs are inbound steel is going higher, should we think about the gross margins in the second quarter or starting to level out as well or could there be further upside? Thanks.

So in relation to comparison to Q1, we saw the largest increase in gross margins in the March month, so it wasn’t predominant over the whole quarter. So, we anticipate that service centers at 22.1% could be as high as say, 24% or 24% and something in the next quarter, and then after that, it will flatten out or come down in Q3 depending on where steel prices go. So we didn’t have a full quarter of ramp up of higher prices, but as you know, once we work through our inventory it will flatten out.

Thanks very much.

Thank you.

Thank you. Next question is a follow-up from Michael at TD. Please go ahead.

Thank you. Just maybe to pick up on that last question there, when you think about the service center gross margins, putting aside the impact that pricing is going to have, which is obviously very important for the second quarter, but given the continued expansion of your value added capabilities. Do you think there has been some sort of a permanent improvement in the gross margins in service centers relative to average historical levels, and if so, what is sort of a more normalized level for the business at present?

I think right now there’s definitely improvement as we’ve started this process. Again as we go across there’s – we got a long way to go as we continue to add value added processing. So we’ve talked about we’re in the 28% or 30% of our volume, has been processed if you exclude our cut-to-length volume. As we continue to add to that that should stabilize that process in margin, you see some upside, obviously, in operating costs from the timing, but at this point, it would be hard to quantify the exact number, but as we’re still in the infant stages of this growth. But I think we will see this continue to grow as we continue to have the process in there. We’re having good success with those machines being full almost immediately.

Okay. And then in terms of the tons growth you’ve seen in service centers, 7% same-store growth in the first quarter year-of-year, I think Marion; you’ve said color steels would have added another 300 basis points to that. I guess starting in Q2; we’ll also have DuBose acquisition there. So when you put that in there as well, what would we be thinking about your in terms of year-over-year tonnage growth, not just on a same-store basis, but with the benefit of all those acquisitions or both of them?

So the comment on color was it was 3% of revenues. So there would be a combination of selling price and tons in there. I don’t have a good number on that unfortunately, I haven’t tracked a ton and maybe we can get some color on that when we give our Q2 reporting on what they’re actually adding in relation to ton. Color is seasonal, because they do service the construction industry, so their tons and their addition will be much stronger in Q2 and obviously, we will have the both for almost the whole quarter in Q2. So, I’ll just stop there and say that we’ll get the more color about what they’re doing to the tons when we do our Q2 reporting.

Okay. And then just, just on working capital, if steel prices level off as you expect they may have. How should we be thinking about changes in non-cash working capital going forward? Maybe there’s still some investment in the second quarter given that prices were still rising through part of the second quarter, but as we get into the back half, how do we think about changes non-cash working capital in the period?

I expect that we’re going to have a similar increase in the second quarter, but not quite as high as we did first quarter, but I do anticipate some increases due to the activity levels that we’re anticipating in line pipe in that during the third quarter. So maybe, 50 or slightly more during those two quarters to have additional working capital need, it’s my estimate at this point in time.

Sorry that – that amount for each quarter that’s accumulative?

No. That’s accumulative number.

Okay.

Exclusive of any projects or anything going on, once we get a plateau, we’ll bring our turns back to normal levels, so that fits right now, but again, if you have additional projects that are outside the norm, they obviously have a need for working capital there.

Yes, and selling prices will flatten out, but during the quarter we will be receiving inventory. The quarter being Q2, that’s at a higher selling price. So our inventory and conceivably revenues will – sorry, AR driven by revenues will go up slightly too. So that’s why I do anticipate during the next two quarters, where we’re having a similar increase, similar like $50 million.

Okay. And then just lastly from me, how are you – I mean and you are still interested in acquisitions and you talked about that earlier, but more generally, how are you thinking about capital allocation right now, and I guess I’m thinking about the dividend, we’ve had obviously a very sharp run up in steel prices, but to the extent that you think plateau, but we can kind of hold in at somewhere in around these levels, demand is good based on the earnings you did in the first quarter I mean if you just annualize that. You’re well below that 80% level you historically talked about in terms paying out dividends relative to earnings over the course of the cycle. So, can you just speak to that the dividend I guess specifically in a more broadly capital application.

So we look at capital allocation across all of our operations on a regular basis such that who’s using what for inventory and revenue and where our activity is. To make sure that we have proper capital allocation in each of the units and financing for that, in relation to the dividend, we’ve made this comment before that we still haven’t really earned back what we paid out during the period that we were not making money 2015 to 2016. We’ll continue to monitor where we are, but we do need to have some improvement and we want to continue to look at acquisitions. So we need to manage our capital in relation to working capital need, acquisition, but support our dividend.

Okay. That’s great. Thanks. That’s helped me.

Thank you. [Operator Instructions] And currently, Ms. Britton, it appears that we have no other questions.

Thank you everyone for attending, and we’ll talk to you next quarter.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again thank you for attending. And at this time, we do ask you to please disconnect your lines. Have yourself a great day.