Russel Metals Inc. (RUS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. And welcome to live teleconference of the 91st Annual General Meeting of Shareholders for Russel Metals. Today's annual general meeting will be led by Mr. Jim Dinning, Chair of the Board; and will include remarks from Mr. John Reid, President and Chief Executive Officer of Russel Metals. I will now turn the meeting over to Mr. Dinning. Please go ahead, Mr. Dinning.

Thank you, operator. And good morning, ladies and gentlemen, and welcome to our 91st Annual Meeting of Shareholders. Thanks to each of you for joining us by telephone today. As the operator said, my name is Jim Dinning. I serve as the Chair of the Board of Russel Metals, and I will Chair today's meeting. In these unusual times, we are, for the first time, holding our AGM practicing the ultimate in physical distancing. Welcome to what may be a new normal. So let me say a few words on the meeting format. Once we complete the formal items of business, we'll ask Russel CEO, John Reid, to speak on the current business environment and tell us how he and his colleagues are leading your company through these turbulent times. The notice calling the meeting was mailed to shareholders on March 25, along with our circular and our annual report. AST Trust Company of Canada have submitted their report and advises that a quorum is present, and this meeting is properly constituted to conduct business. The first item of business is the election of 9 directors who will serve until the close of the next AGM or until their successors have been elected. The circular contains the list of nominees recommended for election. I want to mention Barbara Jeremiah, who has decided to not stand for reelection this year. Barbara has served for 4 years, and I speak on behalf of our fellow directors and management when I say thank you, Barbara, for your wisdom, your sage advice and your thoughtful contribution to our deliberations these past 4 years. We wish you and John well. I now ask for a motion to nominate those listed in the circular to serve as directors.

I nominate the following 9 individuals to be elected as directors of the company for the ensuing year until their successors are elected or appointed: Alain S. Benedetti; John M. Clark; James F. Dinning; Brian R. Hedges; Alice D. Laberge; William M. O'Reilly; John G. Reid; Annie Thabet; and John R. Tulloch.

Thank you, Mr. Smith. May I have a second to the nomination?

I second the nomination.

Thank you, Victoria. Each of the nominees is willing to serve as a director, and each one qualifies to serve under the Canada Business Corporations Act and the company's bylaws. Nominations are now closed. May I please have a motion that the 9 persons nominated be elected as directors.

I move that each of Alain S. Benedetti; John M. Clark; James F. Dinning; Brian R. Hedges; Alice D. Laberge; William M. O'Reilly; John G. Reid; Annie Thabet; and John R. Tulloch, be elected as directors of the company to hold office for the ensuing year or until his or her successor is elected or appointed.

Thank you, [ Sherry ]. May I have a second to the motion?

I second the motion.

Thank you, Victoria. I would ask Ryan MacDermid, our Vice President of Risk Management and Legal, who is present and the person to advise on the motion based upon the proxies held and the scrutineer's report.

Motion approved.

Thank you, Ryan. On the election of directors, I declare that the persons nominated for election have been elected as directors of the company. The next item of business is the appointment of the company's auditors and authorization to fix their remuneration. Management's recommendation is to appoint Deloitte LLP as the company's auditors, and I would ask for a motion to that effect.

I move that the auditors, Deloitte LLP, be appointed auditors of the company for the current year and until the next annual meeting of shareholders of the company. And thus the directors be authorized to fix the remuneration.

I second the motion.

Thank you, both. I would ask Ryan to advise on the motion based on proxies held and the scrutineer's final report.

Motion approved.

Thank you, Ryan. I declare Deloitte LLP as auditors of the company for the current year and until the next annual meeting of the shareholders of the company. The next item of business is the shareholders' advisory resolution to accept the approach to executive compensation as disclosed in the company's circular. Directors and management recommend a vote in favor of this resolution. It's an advisory vote, and the Board will consider the results as we make decisions on Russel's compensation policies and practices. May I have a motion, please?

I move that the approach to executive compensation, as disclosed in the company's circular, be approved on an advisory basis.

I second the motion.

Thank you, both. I would ask Ryan to advise on the motion based on the proxies held and the scrutineer's report.

Motion approved.

Thank you, Ryan. I declare that the resolution regarding the advisory vote on executive compensation is passed. If any shareholder is interested in the vote count, the specific numbers, the results will be available on SEDAR. May I please have a motion to terminate the meeting?

I move that the meeting be terminated.

I second the motion.

Thank you, both. I now declare the meeting officially terminated. As we turn the floor over to our CEO, I want to commend John and his team across North America for their leadership of your company through this tsunami. They've responded with care and compassion on the health and safety side. And they have focused at the same time on what's right and what's good for Russel's business. This tsunami is by no means behind us yet, but my Board colleagues and I know that we are very fortunate to have John Reid at the helm in the midst of this storm. Over to you, Mr. CEO.

Thank you, Chairman Dinning. Thank you for the kind comments. And I also want to welcome everyone to the 91st Annual Meeting of Shareholders. And again, appreciate you coming in via conference call in these unusual times. This conference call is, obviously, required for us to operate safely in order to protect everyone in this environment. I would be remiss if I did not stop and thank all the employees, as collectively, this group has done a tremendous job navigating the challenges of both the pandemic and the energy markets. I'm grateful to all of our team as they have expeditiously executed to rapidly evolving safety protocols. With some working remotely as they selflessly put the welfare and safety of others in the forefront to protect the family members of Russel, our customers and our suppliers. I would also like to acknowledge the medical professional service workers and others who remained on the front lines during this pandemic. I want to commend our government officials for acting quickly in a decisive manner to support the people impacted by the pandemic as they immediately injected liquidity into the markets in effort to minimize the social impact. During this time, all Russel operations were deemed essential and remained operational to safely serve our customer base. We supported our customer base [ in sum ] but retooled to support much needed supplies, and Russel has been involved in supplying both materials and services to companies making hospital beds, mobile labs, rolling devices, hand sanitizers, brackets for plastic face shields and shields used in grocery stores and gas stations, critical government applications and numerous other applications, again as those customers work tirelessly to address the changing environment. Shifting to our big business segment of Russel. We finished 2019 with a solid year and a very balance sheet. We continue to improve our already strong liquidity position as we've ended Q1 of 2020. Our service centers improved our market shares. Our tonnage shipped in Q1 grew by 7% in Canada and 17% in the United States when compared to Q4 of '19. Both U.S. and Canada outpaced the industry. We continue to grow our value-added processing presence, as this was evidenced in our gross margin percentage improvement over Q1 of '19 and Q4 of 2020 in the markets that experienced falling prices. Service center industry, as a whole, is a mark on business, and the gross margin percentage on resale typically contracts during a declining price environment as the industry fights for market share. We will continue to advance the strategic initiative, looking for further opportunities to grow our value-added processing portion of our service center business in an effort to further separate Russel from our competitors. We began to see overall demand start to drop in the latter half of March, and the several portions of our customer base were forced to close due to the pandemic. We began making difficult decisions on overhead adjustments to coincide with the timing of the demand drop in late Q1 and continue to do so in Q2. And we've been able to use many of the government programs to assist our people and the company during this time, and we will continue to access these programs as they are available. The steel distribution segment. So our Canadian division came off a tremendous year in 2019 as we were able to fill a void in the supply chain created by the 232 trade tariffs, where we were able to import larger volumes of products into Canada, those products that were not produced in Canada that were sold on back-to-back or contractual arrangements, allowing us to lock in margin. This unique window has reversed course in 2020, and our sales have returned to levels that reflect the current market demand. And our distribution business is more transactional in nature in the United States, and we've been impacted by falling demand and prices throughout Q1 of 2020. Russel's energy business, which represents roughly 35% of our overall business, continued our strategic goal of growing field store business, which now represents over 60% of our overall energy segment. This segment serves the oil and gas business, although this business has more of a look and feel of our service centers segment. A large component of this business is tied to servicing maintenance work through the life of existing wells and has a value-added component, along with a more stable bandwidth of earnings when compared to our OCTG and Line Pipe segments. The OCTG and Line Pipe segment is closely tied to drilling in the number of active rigs, which have dramatically declined during 2020. Our Canadian operations are [ in ] breakup, and it can do some time as this 6- to 8-week annual industry shutdown will allow the market to digest the disruption of low oil prices and the pandemic. Our Comco division has recently been awarded a substantial project in both Phase 1 and Phase 2 of the Trans Mountain pipeline, which will be shipped throughout the balance of 2020. Russel acquired City Pipe, an energy field store business in the Permian Basin during Q4 of 2019. City was merged with our existing Apex Remington field stores operation during Q1 of 2020. And the 2 companies now operate under the brand name Elite Supply Partners. This gives us added energy field store coverage and presence throughout Texas, Oklahoma and North Dakota, along with our Canadian Apex divisions and Comco divisions that serve Alberta, DC, Manitoba, Ontario and Atlantic provinces within Canada. The RNI share price was not immune to the overall stock market retreat during Q1, but has started to rebound. As mentioned before, we continue to have strong liquidity on our balance sheet and the countercyclical nature of our business model continues to spin-off cash, which allowed us to sustain our company dividend in Q1. We are a distribution business with a value-added component and the generation of cash flow during down cycle separates us from the pure energy business, which are typically capital intensive. We recently have seen more pure energy play companies be forced to cut and suspend their dividends to conserve cash in an effort to improve liquidity. Russel is different, and that we are a distribution company where a smaller portion of our business does serve the energy customers. But our model, by comparison, is very light on CapEx, and we generate cash flows during the downturn in the market. We will continue the practice of reviewing our dividend throughout each quarter with our Board of Directors. As we enter Q2 of 2020, the market demand continues to be intensely impacted by the pandemic and low oil prices. Many provinces and states are beginning to look -- lift shelter-in-place orders and gradually return to work, creating increased demand for our products. Although Q2 will likely be our most challenging quarter, we, along with the rest of the world, are optimistic that society will start to return to a sense of normalcy, allowing people to return to work as the world moves towards economic recovery. In closing, I would like to thank our Board of Directors for their support during the unprecedented times and acknowledge their extra effort, time and engagement during this process. Finally, I want to thank you, shareholders, for your continued support of Russel, and please know your company is working diligently to navigate this challenging environment in order to emerge a stronger company for you. We appreciate you joining us today, and this concludes our call of our Annual Shareholder Meeting. Thank you for attending.

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