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

Good morning ladies and gentlemen and welcome to the 2026 Second Quarter Results for Russel Metals. Today's call will be hosted by Mr. Martin Galeski executive Vice President and Chief Financial Officer; and Mr. John Reid, President and Chief Executive Officer of Russel Metals Inc. Today's presentation will be followed by a question-and-answer period. [Operator Instructions] I'll now turn the meeting over to Mr. Martin Juravsky. Please go ahead, Mr. Juravsky. Thank you.

Great. Thank you, operator. Good morning, everyone. I plan on providing an overview of the Q2 2026 results. If you want to follow along, I'll be using slides that are on our website. You can just go to the Investor Relations section, and it's located in the Conference Call menu, or you can click on the link that is in the Investor Conference Call paragraph in our press release from yesterday. If you go to Page 3, you can read our cautionary statement on forward-looking information. To begin, I think that Q2 provides an indication of how the portfolio changes over the last few years has resulted in a meaningfully reconfigured business with the superior earnings generation profile. Since 2024, we deployed almost $700 million for acquisition and CapEx and sold $90 million of non-core assets. These changes were aimed at growing the business, enhancing our return on capital and improving our earnings profile over the cycle. The Q2 results illustrate a new frame of reference for our earnings power when our business portfolio was combined with a favorable market environment. If we look specifically at Q2, the market conditions were strong and broad-based. We had record shipment volumes in combination with pricing and margins that are at levels that haven't been seen for a few years. The improvement in market conditions began to be quite noticeable towards the end of Q1, and they continue that improving trend on a month-over-month basis through Q2. The margins and activity levels that we experienced at the end of Q2 have continued into the early part of Q3, notwithstanding that there is typically a seasonal pullback in volumes in and around the July, August holidays in both Canada and the U.S. So let's go to Page 5 for a little bit of a snapshot of the quarter. In Q2, we set another record for consolidated revenues and shipments from our Steel Service Center segment. This was the result of 3 things: one, progress on Klockner acquisition, a seasonal pickup in volume; and three, strength in most of the markets we serve. On the last point related to market conditions, we saw 130 basis point improvement in our overall gross margin for Q2 as compared to Q1. The Klockner business generated about $16 million of EBITDA in Q1, which was double what it generated in general in Q1. I think this illustrates how much upside there can be from the operation when good market conditions are combined with changes to operating practices. We entered into an agreement to sell our colored deals division in Ontario. This business generated about $7 million worth of revenue in 2025 and had a book value of around $35 million and we should recognize a small gain on sale when it closes in the second half of 2026. We also sold $4 million of real estate in Q2 on top of the belt property that we sold in Q1. These are further refinements to our portfolio as we are where we can optimize our capital deployment. In the case of Color Steels, it was stand-alone niche business unit for us in Ontario that had a focus on residential construction, which is not a priority for Russell. On the middle row of the diagram, our 2026 -- our Q2 2026 CapEx was $18 million. It was similar to Q1. We have recently approved a couple of modernization projects, so I expect that the CapEx to pick up in late 2026 and into 2027 as more of these types of projects are advanced. Capital deployment is around $1.9 billion. Our capital grew from $1.3 million at the end of 2023 to $1.6 billion at the end of 2024. And as I said, it's now standing around $1.9 billion. generate strong return on invested capital. Our return on invested capital was 24% annualized in the quarter and 23% annualized if we look year-to-date 2026. These ones are industry-leading when compared to publicly traded comparables for U.S. business. Our U.S. business currently represents about 54% of revenues and 61% of operating profits for Q2. The market conditions in the U.S. is currently stronger than in Canada, which has resulted in the higher relative profitability for our U.S. versus our Canadian operations. That being said, our Canadian business is making up some ground and we see a positive outlook on both sides of the border. On the last row of the diagram, returning capital to shareholders. We have always had a flexible approach on this sub piece. In Q2, we returned $24 million by dividends but not undertake share buybacks. However, since the NCIB was put in place back in 2022, we've acquired a total of 8.7 million shares at $38.13 for a total of $333 million, comparing our average buying price of $38.13 a prevailing market price, the cumulative NCIB FTD to date was done at an attractive discount to the prevailing market price. In the bottom right box of the page, maintaining a strong capital structure is critical as we do operate in a cyclical industry. As a result, our liquidity is strong, we have a lot of flexibility, bank [indiscernible] 30 million for both our term debt as well as our bank debt. If we go to market conditions on Page 6, some [indiscernible] were pretty strong right now. We saw carbon sheet and plate prices exhibit steady increases over the last 9 or so months, hot-rolled coil and plate prices in the U.S. were up in Q2 versus Q1 and are currently prevailing higher than the Q2 averages. Overall demand is good and supply chain inventories limited as shown on the 2 right-hand charts, while operating rates are tracking near 80%, which is a pretty healthy level. This suggests continued optimism. The bottom chart shows the recent pullback in aluminum prices as that market has come off from its record highs, but prices remain at near record levels. If we stand back and look at the prevailing environment and compare it to periods of the past, when metal prices were robust, such as one, perhaps more fundamental factors. In 2021, the market was driven by global supply chain disruptions, temporary government stimulus and a near 0 interest rate environment. It was by definition, short lift the recent movement in metal prices and margins seem to be underpinned by healthy and broad-based demand in combination with managed supply. On Page 7, you see a summary of our trend EBITDA. We've talked a lot in the past about changing our EBITDA profile to raise the cycle floor, raise the cycle ceiling and as a result, raise the cycle average. In addition, we have focused on reducing the volatility through the cycle. These charts present those elements, and it shows EBITDA on a trailing 12-month basis at the various points in time. The takeaways are the chart on the right, the 2023, 2026 period looks a lot better versus the left chart, which is the 2017 to 2019 period. Our average EBITDA is prevailing higher and the peak to trough are less volatile. Also on the record trailing 12-month trends continue to improve. Our LTM EBITDA is over $400 million and the improvement in LTM results should continue in Q3 as Q3 2026 should be better than Q3 2025. On Page 8, we have a view of our working capital trends on the bottom chart in comparison to EBITDA trends on the top. If I can focus you on the far right side of the bottom chart, in Q2, we used cash for working capital purposes due to a pickup in business activity. That being said, the $48 million for working capital was not very large when compared to up cycles in previous times. Our business changed and translate into less volatility, not just in earnings but also in working capital needs. On Page 9, we have a snapshot of historical results. And if we look across the various charts, starting with the top left, -- revenues were a quarterly record at $1.7 billion. EBITDA was up due to favorable conditions that I previously mentioned. We've also shown adjusted EBITDA in the far right chart. This chart excludes the mark-to-market on stock-based compensation and the Q1 gain on the Delta sale. This adjusted EBITDA chart makes it easier to do an apples-to-apples comparison when looking at short-term trends. The adjusted EBITDA of $154 million for Q2 is a big lift from the $93 million in Q1 as well as other recent quarters. The bottom left chart EPS was $1.43 in Q2, which was higher than Q1, even though Q1 benefited from the being of the belt of sale. The middle table shows the adjusted EPS for the most apples comparison and on an adjusted EPS basis, the Q2 earnings per share was $1.63 per share, which was about double the Q1 level. The bottom right chart shows our return on invested capital. This uses the results as they are without any adjustments, and our return on invested capital for 2026 has been strong, above our cycle target and industry-leading. On Page 10, we show the reconciliation of the adjusted unadjusted to the adjusted results. And as I said earlier, the adjustments are to put the quarterly results on a comparative basis that is more equivalent and easier to see the operational trends. And there's only 2 adjustments that we are making for purposes of comparability. One is the mark-to-market on stock-based comp, which in Q2 was $15 million pretax, $11 million after tax, which equated to $0.20 per share, and two, the Q1 gain on the Delta sale as it was a material item, it is nice to have it, but it is nonrecurring. On this page, the equivalent comparisons are in the gray area, and that highlights and illustrates the large step-up in our Q2 results from an adjusted EBITDA, adjusted net earnings and an adjusted EPS perspective. Going to more detailed financials on Page 11. From an income statement perspective, some of the items I've already discussed, but starting at the top, revenue 17% in Q1 and up 37% versus -- very good. The mark-to-market on stock-based comp was $50 million expense, as I mentioned earlier, in Q2 versus a $5 million expense in Q1, and we pulled those out of the adjusted results for purposes of easier comparison. Cash flow. I mentioned earlier, in Q2, we used $48 million of cash for working capital due to the increase in business activity. Share buybacks, cumulative share buyback since August 2022, but 14% of our shares outstanding was picked up for #333 million at an average cost of $38.13. There wasn't any meaningful activity in Q2. Our quarterly dividend was raised in June to $0.44 per share for the quarter, and we have just declared the same quarterly dividend of $0.44 per share that will be paid in September. Our CapEx of $18 million [indiscernible] positive impact on our OCI account, and our book value continues to grow and is up $1.47 from March 31 and is up about 10% from this time last year. On Page 12, we show our adjusted EBITDA and the variance analysis between Q1 and Q2. In looking at the service centers, the volumes were up 6% versus Q1, as I said earlier, just had another record. This translated to a $13 million EBITDA pickup the margins picked up by around 130 basis points or $70 per tonne, which equates to $37 million. Costs were up by $12 million due to higher delivery costs and incentive compensation that is tied to financial performance. Energy field stores were up $5 million, which is a continuation of their favorable recent trend. Steel distributors were up $10 million as they benefited from the favorable market conditions. And then the other bucket, corporate expenses were flat to down a little bit, and there was a seasonal pickup in our Thunder terminal operations. On Page 13, we have our segment and P&L information for service centers. I'll go through this in more detail on the next page. It was a very great improvement over Q1. Energy field stores, the revenues were up gross margin percentages were down a little bit due to product mix, but we're still very good. The operating profit in Q2 '26 was the highest quarterly level in earnouts. Distributors revenues, gross margins, EBITDA, EBIT were all up in Q2 versus Q1. -- on Page 14, have a deeper dive into the metrics for the service center business. The top right shipped. Q2 was a record quarter and was the first time that we have broken through the $500,000 tons per quarter level. The results were up 6% over Q1 and even if we exclude the Klockner contributions, same-store tonnage was up 6% and versus Q2 of 2025, which reflects the strong and favorable demand environment where we're operating. Price realizations per ton were up 9% versus Q1 and that translated into a nice margin pickup that is shown in the bottom right graph. Our gross margin per ton was $529 per ton which was a $71 per ton pickup versus Q1 and was the highest level since 2020. This is in spite of the lower margin profile from the former Clock branches. That being said, we are seeing the early stage of relative margin pickup from the Klockner batches with more relative upside on the comp. On Page 5 -- excuse me, 15 , we have illustrated our inventory turns Overall, our inventory turns improved to 4.4% in Q2 from -- excuse me, 4.4% in Q2 versus 4.2% in Q1 implores are tight as business activity is strong. Page 16, we have illustrated our inventory dollars. Total inventory was up about $100 million since March 31 and which was driven by higher cost per ton for the service centers, while total tonnage was relatively flat. . Page 17, update on our capital structure. Our liquidity is pretty good, very strong and gives us significant flexibility investment grade rated by both S&P and DBRS. And since the last quarter, our net debt was reduced by about $26 million. and our liquidity is over $500 million, which gives us plenty of dry powder when we find capital deployment opportunities that makes sense. We recently completed a normal course extension of our bank lines and have pushed them from 2020 to 2030. -- over the cycle, and that's been consistently achieved. On the facility modernization front, we have 2 new projects that were recently approved 1 in Western Canada and 1 is in the U.S. South at a Factor branch. They are each around $10 million each and have solid return profiles. These are both examples of opportunities that emerged either directly or indirectly from recent acquisitions. On the acquisition front, we have now for the last few years, and we continue to look at opportunities that could complement our existing businesses. On the right part of the page, we have shown our approach to returning capital to shareholders Here, we have a flexible approach that I mentioned earlier and have more details on the next page. Page 19, deeper dive on returning capital to shareholders, left chart. We have our longer-term dividend profile. -- and with the recent dividend increased to $0.44 back in June and the $0.44 per share that declared that will be paid out in September. -- dividend increase that was done in June represented the fourth and fourth year, 4 years and in total, represented a 16% cemitive increase since early 2023 dividend level. Bottom left chart, we show our NCIB activity since we put we view it as opportunistic. As I said earlier, [indiscernible] on NCIB since 2022 has been a 14% reduction in our share count average cost was $38 per share for a total of $333 million. On the top chart, the aggregation of dividends versus NCIB over the last few years show the cumulative impacts and is again worth noting on that chart that even though our dividend per share has increased by meaningful amounts, our total dividend outlay has remained at around $24 million per quarter as a result of the reduction in the share count which is shown on the bottom right-hand chart. So on closing, and on behalf of John and other members of the management team, I'd again like to really express our thanks everyone within the Russel Group for their contributions. This has really been a nice start to 2026, and we look forward to more opportunities on the come. Operator, that concludes my interim remarks, and you can now open the line for questions.

[Operator Instructions] Your first question comes from James McGarragle with RBC Capital Markets.

Congrats on the strong quarter there. So just on the margin guide, margins seem to be holding up early in the quarter, potentially some upside to your guidance. So can you just let us know what you're assuming in terms of pricing and volumes that are underlying that the impact decline in margin versus what you're seeing early in Q3?

Well, a couple of things. So when I was talking about some of the margin upside related to Klockner. Some of that will take time to unfold, and I think we need to separate that from just broader market conditions and how they are. So think of the Klockner pieces, we're making some gains and that's really beneficial given the market we're in. But some of the gains we're going to see in terms of margin improvement on a relative basis, that's going to take a little while to fully unfold and some of it relates to the CapEx, for example, that we just approved for one facility that relates to the Klockner business. So I separate that from the broader market conditions. The simple version is that kind of the margins that we are seeing for July are very similar to the margins that we were seeing in June and the June margins were better than our Q2 average.

Okay. I appreciate that color. And then on volumes, it seems like all the read-throughs we're hearing from the freight transports point sequential uptick in Q3. I know your U.S. business is a bigger piece of the pie now. So how should we be thinking about those 2 positive drivers versus the typical slowdown and seasonality when we think about modeling margins for Q3 -- or sorry, modeling volumes for Q3.

Yes, James, interestingly enough, and Marty alluded to it in his opening comments that the typical summer slowdown you see with people being up for school, the holidays in July and August, we just really haven't seen there's obviously the construction holiday that goes on in Quebec that was there in late July, but we just did not see much of a slowdown in demand at all. steel mills are running at 81% capacity right now. Keeping in mind that 85% is basically full capacity due to the cannibalistic nature of the steel mill. So we think demand will be very solid and robust through Q3 and into Q4, we're seeing extended lead times from the mill manufacturers that are out there. And across every segment that we have, we've seen an uptick. And just a quick follow-up before I turn the line over. On that 6% same-store volume growth in -- what percentage of that was share gain versus what percentage was just the overall

And just a quick follow-up before I turn the line over. On that 6% same-store volume growth in -- what percentage of that was share gain versus what percentage was just the overall strength in the service center market? And I'll turn the line over after that.

It's hard to -- it's a good question, James, that it's hard to break down that precisely, but it's a little bit of both for sure. There is momentum that we are seeing within our areas. And in strong markets, we can do variety of things pick up volume because demand is greater and also be targeted in picking up market share because we do have product. And one of the things that is -- I think it's fair to characterize in the market we're in right now because inventory supply chains are relatively light. Those with products do pretty well from a customer perspective, and we have good access to supply, given our scale. And so I think that has helped us both with the broader market as well as penetration and market share.

Next question comes from Frederic Bastien with Raymond James.

I just wanted to build on that last question and answer. Historically, guys, you've spoken about having relatively limited visibility into future market conditions, -- now listening to your commentary this morning, it sounds as though that visibly has improved. Is that a fair characterization? And if so, what's driving that increased compounds?

No, Fred, a great point and it is a fair characterization. And so when we're talking with our customers, we're seeing extended lead times that are going out now further than they typically have historically. So we're now -- historically, we were 30 to 45 days. We're now seeing that 90 to 120. We're also seeing mill lead times extend further than they have historically some going out well into next year. And so it's creating an environment of project planning where customers are coming to us to make sure they have product as Marty said earlier, product supply can be tight right now in the industry. We do have access to product compared to some others. And so that's helping us so people are securing their and making commitments with open-ended pricing right now.

Okay. Super helpful now. How does that translate into the competitive landscape? Obviously, it's probably evolved a lot from a year ago when prices weren't as healthy as they are today. Our -- are you seeing any meaningful changes in the behavior around bidding appetite for volume or the 1 that probably most people are interested in is acquisition activity.

Yes. So I think from a bidding perspective, I think the market has been extremely responsible on pricing right now due to the availability of product -- there are some holes that we're seeing in competitors' inventories that are out there. So it's given us natural advantages just to due to the fact that we have the product. And I think there will be some M&A activity probably in the back half of the year, early next year, where we'll continue looking at opportunities and just stay disciplined in our approach.

Next question comes from Michael Tupholme with TD Cowen. .

So it sounds like the demand environment is very robust really across most areas. But I wanted to kind of get your take, if you can sort of dig into that a little bit. I mean you did mention that the U.S., you're seeing a little bit -- you have been seeing a little bit stronger market conditions in the U.S. and Canada, but then mentioned that Canada is kind of been picking up lately. So maybe you could stand on that? And then just in terms of where that pickup in Canada has been coming from and from an end market perspective, again, not sure if this is just really strong across all end markets? Or if there are certain ones that are really driving this strength, but I'd be curious for any thoughts on that.

Yes. Thanks, Mike. And early on in the year, you're exactly right, the U.S. [indiscernible] picking up. The drivers that we're seeing on that is predominantly across all end markets in the U.S., and we've mentioned ag before it's been a laggard. It is starting to pick up. It's starting from Well, in both countries. Obviously, seeing the projects that are going on in the U.S. and in Canada, whether it's LNG, whether it has to do with data centers that are being built Western Canada is extremely busy right now for us on multiple projects that are either being pushed by the government or private industry. And so we're really starting to see all tides ride right now, which is a nice place for us to be in. When you look at demand, even the rig counts in both countries are up year-over-year. So again, it's very good for our energy business. It's very good for our service center business right now.

That's helpful. Just to follow on that, the comment there about data centers, not surprising to you that, that's one of the areas of strength. But are you able to provide a little bit of color on what that represents as a percentage or proportion of demand right now for Russell relative to where that would have been even 6 months ago. Just to provide some context, trying to understand sort of how material this is for you guys right now?

And it's a little difficult to quantify because we sell it through so many different avenues. And what I mean by that, we're doing racking that goes into data centers in some areas, some areas we're doing the structural components of the steel some we're providing into the electrical power grids or the LNG power grids that are going in. So it touches a lot of different areas with a lot of tentacles that go out. But I would say it's probably around 10% of an impact overall right now throughout our service centers and our energy field stores. .

Okay. That's helpful. Just in terms of the gross margins, so it sort of sounded like in the outlook commentary that you we're looking for Q3 margins to actually moderate a little bit in service centers. But then on the conference call, I'm not sure that, that's sort of exactly what I heard. So I mean the demand environment is strong, obviously, as you just talked about the -- I mean prices have -- we've not seen any indication that prices are rolling over. So is the right way to think about service centers margins for Q3 that there could be some further upside? Or how do we think about that?

Yes. Look, I would temper that a little bit, Mike. And part of it is what we've said in our narrative is we expect Q3 to be similar to the first half. Now -- we have visibility on July, and as John was talking about earlier, things look pretty good for August and September as well. But there is a point in time where product prices have gone up. And at some point, there is a catch-up on the costs that come into the system as well. So as long as prices keep moving, up, that's favorable for us in terms of the margin side of it. At some point, if prices start to go sideways, and maintain even at a high level, there is a little bit of catch-up related to the cost side of it because of the lag effect of inventory coming in. and then inventory, how it finds its way into our cost of goods sold. So the visibility I have right now kind of goes back to what we said in the narrative, which is margins should be somewhere in the zone of what we saw for Q3 of what we thought for the first half of this year, but we started Q3 in pretty good shape.

Okay. That makes sense. And then if I look at the improvement in service center gross margins Q2 versus Q1, obviously, there's the market dynamics that you've just talked about. Did the improvement -- was there some improvement there that came from Klockner and can we actually quantify that? Like if I look at 20.9% in the first quarter going to 22.2%. Legacy is there a percentage of that or a portion of that, that's Klockner that you can call out?

Yes. I mean the way to characterize it is there was -- because market conditions improved, Obviously, that was the biggest driver in Q2 versus Q1. But embedded within that clock or had a very meaningful difference in margins the rest of our U.S. service center business in January and February and March. But as we got into April and May and June, some of that relative margin differential started to shrink. There is still a noticeable margin difference between it and we're at the early stage of some of those improvements -- but I would say overall, though, that we're at the very early stage of having that margin improvement within the Klockner branches on a relative basis translate to the overall margin improvement that you see. So or set a shorter way, Mike, -- if you look at Q2 versus Q1, most of the improvement was the improvement in the broader market environment. A little bit of it was from the relative improvement in the margin profile at Klockner. It benefited from improving market conditions and benefited a little bit from relative margin improvements.

Your next question comes from Aryan Arora with BMO Capital Markets.

You guys touched on M&A earlier. Can you provide an update on the pipeline? Have seller expectations started to move higher given the positive sector fundamentals as of late?

Well, it's hard to talk about the market on the M&A side of it too broadly because we deal with one-offs. And we know the one-offs we deal with. And if we look back at the history of the last number of acquisitions that we've done, each 1 looked very, very different. So it's hard to really characterize vendor expectations broadly. All I know is we kind of stick to our knitting and stick to our criteria. And sometimes that lines up vendors and sometimes it doesn't. So we don't really get too hung up on thinking through what market conditions are broadly and what vendor expectations are because it's hard to quantify. We just look at the one-offs that we look at and if we can see alignment terrific. And if we can't, for whatever reason, sometimes vendor expectations and sometimes it's other reasons. -- in due diligence. That being said, and I kind of go back to when we look at our acquisition history and if you look at 2022 and 2023, where activity was really robust earnings were really robust. We didn't really do any acquisitions in those 2 years and we looked at a lot of acquisitions. We just didn't find anything that lined up with our criteria valuation or otherwise whereas we were more active in 2024 and 2025. It's hard to handicap what 2026 and 2027 is going to look like from a vendor expectation perspective.

Yes, that makes sense. And is really kind of diving deeper into capital allocation, given the balance sheet flexibility and limited kind of buyback [indiscernible] should we interpret the current capital allocation by leaning more towards reinvestment, maybe M&A versus repurchases into these valuation.

Look at those buckets independently because it's not a case of we have an allocation, and we have to figure out how to split it among different pieces of apply. We've got a lot of capital structure flexibility. So if there is a variety of things that make sense, we can pursue a variety of things. If fewer things make sense, we can pursue fewer things and maintain that capital structure flexibility and optionality. So we kind of look at those each independently, whether it's dividends, whether it's your buybacks, whether it's acquisitions, whether it's internal investments because we have a lot of flexibility to do whatever out of those things in the menu makes sense.