Good morning, ladies and gentlemen, and welcome to the 2020 first quarter results conference call for Russel Metals. Today's call will be hosted by Ms. Marion Britton, 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. At that time, if you have a question, please press star one on your telephone keypad. I will now turn the meeting over to Ms. Marion Britton. Please go ahead, Ms. Britton.
Good morning, everyone. Thanks for joining us. I'll start off by reading the cautionary statement on page three of the deck that was sent out last night. Certain statements made on this conference call constitute forward-looking statements or information within the meaning of applicable securities laws, including statements as to our 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 fact 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 than those anticipated in such forward-looking statements.
Our actual results could differ materially from those anticipated in our forward-looking statements, including as a result of the risk factors described below in our MD&A and in our annual information form. While we believe that the expectations reflected in our forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct, and our forward-looking statements included in this call should not be unduly relied upon. These statements speak only as of the date of this call, and except as required by law, we do not assume any obligation to update our forward-looking statements. We're going to start off today's call with an update on COVID-19 and where we are, where situations there, and John Reid is going to give you that update.
Good morning. If you'll refer to page five on COVID-19 and our market update. I want to commend our operators, our employees, and our safety professionals as everyone's selfless and tireless efforts to effectively and efficiently address this pandemic as it has evolved. We initiated a safety committee very quickly and disseminated information to each of our operating units as they established and implemented the safety protocols expediently to address the evolving environment, ensuring the safety of the RMI family, our customers, and our suppliers. This group just did an absolute tremendous job being out in front of this, and they really need to be commended. We were deemed an essential service at all of our operations, and so we are operating and delivering product to our customers. Also, we delivered products to manufacturers of masks, of hospital beds, ventilators, hand sanitizers, mobile labs, various government projects, and other equipment.
We worked really closely and safely with our customers to assist them in being part of the solution in Canada and in the U.S. as we battle this situation. Due to the customer closures that were mandated or self-elected, obviously, this impacted demand for Russel across all of our divisions. We reduced our staff, we've reduced our inventory on our on-order positions. We initiated work-sharing programs, we've accessed other government initiatives that are available out there to assist both our employees and the company. Our model is working in relation to liquidity. Our business model continues to throw off cash as our working capital needs have declined. We are completing CapEx projects that are underway. We're maintaining our required maintenance projects, we have delayed some of our new projects. Our credit teams are working very closely with our customers, specifically in energy, as we navigate this environment.
The oil prices and the rig counts again are challenged and are impacting short-term demand on energy. Oil prices obviously collapsed, driven by the oversupply on the world market, coupled with the pandemic, continues to impact the energy business for Russel. Our construction division, however, recently secured a significant volume of work through the Trans Mountain project, both phase I and phase II that will last throughout the balance of 2020. Our decentralized model really allowed our managers to quickly implement safety protocols across all 146 locations while they simultaneously addressed the change in demand.
We moved over 500 people working remotely very early in this process, and I really want to recognize the outstanding work of Maureen Kelly and her IT team as they were able to have us up and running seamlessly within a matter of hours as the RMI family members were able to safely function from home offices. I also want to thank the RMI family members who continue to come in every day and service an essential service to our customers and our communities. Their supportive and expeditious adoption of the new safety protocols. It's really remarkable and the collective effort our customers every day during this time. I'll turn it back over to Marion.
Okay, I'm going to give a high level review of our Q1. Obviously, some of the factors are less significant in this environment that we're in, but I think they're important points that I'm going to cover off. We did end up with an earnings of CAD 0.17. There is some adjustments to that, and I'll point to that on a later page when we get to that page on the report. Our free cash flow, which is an important part of our model, was strong, CAD 26 million in Q1, CAD 0.41 per share for the quarter. We do anticipate as revenues come down throughout Q2, we will throw off additional free cash flow. Cash from working capital was CAD 36 million, and this is the area actually where we will throw off the cash, mainly from AR and reducing our inventories in relation to demand.
That represented CAD 0.58 per share in Q1, it will come down again in Q2. We did have a return on equity of 6% for the quarter. Our year last year was 8%, so even though it wasn't a great quarter, we did have a fairly strong return on equity, and we did declare our full dividend of CAD 0.38 per share yesterday. That's based on the fact that we do have the cash flow to support it at this point in time. On page seven, I'm not really going to highlight too many numbers, but you'll see our comparative, all the additional information there. I do want to skip forward to page 13 of the deck. On that page under overview of the last paragraph, you'll see our comments about adjustments that were needed to be put through our first quarter.
We decided we needed to add CAD 5 million to our OCTG and line pipe net realizable value of inventory. The demand for those products is very low at this point in time, and we felt there was an additional reserve required. The triggering event of the pandemic and the excess oil supply required us to do a review of all our long-lived assets. During that review, we realized that our U.S. line pipe operations right to use assets, which is the leases that we capitalized at January 1, 2019, were not supported by the ongoing operations, and we took an impairment loss of CAD 4 million. The reduction in share price did impact the stock-based comp by CAD 5 million, which was a positive to the numbers, but also an additional positive, which will be additional cash flow at some point later this year.
We were able to take advantage of the carryback of our 2019 tax losses we had in the U.S. to an earlier year and took an additional income tax reduction of CAD 3 million. Turning to page 14, this shows you the revenue change, which was by unit, and I'll speak to that as we get to the units. The one thing I wanted to highlight on this page was the metal service centers. Gross margin for the quarter at 21.3%, we were expecting it to come in that range, 21%-22%, which is a more normalized margin, but I don't know what normal is anymore. It is up from Q1 2019 and also from Q4 of 18.8%.
It appears that pricing has been moved around in our products but has been relatively stable through most of the first part of 2020, our margins are in a level that we would expect them to be at 21.3%. The energy products margin includes the CAD 5 million write down, they were relatively strong, driven by our oil field stores and Comco operations. Steel distributors had low revenues, their margins were comparable to first half of 2019 and other years. You'll also note that our operating profit as a percentage of revenue for metal service centers at 4% was strong based on the situation as the fact that the pandemic did impact the last part of March.
Moving forward to page 16 of the deck, just point out the reduction in revenue of 19% represents a reduction in tons shipped of 3%, which is much stronger than the MSCI numbers put out and our competitors. We're quite happy with that market share in pickup there. The average selling price was the area that represented most of the decline in the revenue. It was down 16% for the quarter, but it was 1% lower than the 2019 fourth quarter. Just to give you a little bit of color on last year, tariffs didn't come off till May 2019.
Product started to come down in price as we went through the year, and by the end of the year, had got to levels that we are at this point in time, and we were able to get our average inventory similarly down by the end of the year, our pricing on it. Turning forward to page 17. Revenue for our energy product segment was down 15%. If you look at it on a same-store basis, it's actually down 24%. We acquired City Pipe in October 1st of last year. The City Pipe being in the oil field stores area, that area has seen a modest decrease. The bigger decrease was in the area of the OCTG and drilling rig activity during Q1.
As I previously mentioned, we took a CAD 5 million additional reserve for OCTG and line pipe, which is the area that was most significantly down in Q1. There was no NRV adjustments for oil field stores, and typically we don't see NRVs there because it's more of a manufactured product and we don't anticipate ones in the future in that area. Turning to page 18. Steel distributors was down 49% in revenue. Most of that was demand, estimated at 42%. Also selling price was down 16%, similar to service centers, once again, driven mainly by high demand we had from the tariffs being in effect till May 2019. The first half of 2019, we had strong revenue demand in our steel distributor segment. Turning forward to page 20.
Just want to point out the CapEx comment, and we did spend more than our Q1 2019, but as John mentioned, we expect activity to be lesser as we complete projects that are on go at this point in time. Inventory numbers are at the bottom of that page. The CAD 320 value for metal service centers is up from year-end, but that's more FX driven. The tons are actually down. You'll note it's down significantly from March a year ago. Energy product is down slightly from the end of the year, obviously up from Q1 because of the addition of City into the numbers. They were added as of December 31st into our numbers. Steel distributors inventory is somewhat consistent with the end of the year. Some of that increase is actually FX there. They will be continuing to bring their inventories down in line with demand.
Those are the comments that I want to make about the quarter. I'm going to open it up for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. Questions are taken in the order received. Should you wish to decline from the polling process, please press star followed by two. If you are on a speakerphone, please lift the handset before pressing any keys. First question comes from Michael Doumet from Scotiabank. Please go ahead.
Hey, good morning, John, Marion.
Morning.
I assume demand for steel product and service centers began to decline mid-March, like you talked about, that accelerated through April. Could you give us a sense for those declines and what they were in terms of ton shipped in April, and if you've seen activity levels pick up from those low levels yet?
John.
Michael, thanks for the question. You're exactly right. We really saw at the back half of March that we saw the decline start in the service center and our distributor segment. It moved pretty rapidly as we moved into the current environment we're working in. We continued to see that fall in April as it wrapped up. Obviously, we had to adjust workforce for that. Really that was driven by the closures and the shutdowns that were being mandated by various provinces and states that were out there. The magnitude of the drop, to try to put it in percentages, we're down about 30% for April. Again, overall for our service centers.
Okay. This would be a week-to-week type question, but have you seen a pickup from the low point in April as activity sort of resumed in certain provinces?
Yeah, I'm sorry I didn't answer that in the first part of your question. Yes, we have, and the nice thing we're seeing now in our service centers, and it initially picked up in Canada first, and now we're seeing it in the U.S. as well in the recent days, where our billing is starting to be outpaced by our booking. Our bookings are higher. That's a very positive sign for us. We feel like that we've seen a bottoming, and as we have the restrictions on working lifted and people are starting to return to work, we think that obviously will be a positive impact for demand.
Thanks for the color . Just turning to the operating expenses, those were largely flat in your service centers and energy products year-over-year. Did the cost reduction efforts you talked about have much of an impact at all on Q1 results? Or is that mostly in Q2, and can you give us a sense of the magnitude?
In the service centers, in the energy field stores, as demand held fairly well going into March, and we really started to see the dive in late March, as we started to make those changes and adjustments that really are going to affect April more so. It was really the last of March that we started to make changes or give notices. We think that impact will, again, be recognized in April more fully.
Okay. Should they match activity levels somewhat?
I think so. The drop was so dramatic so quickly, we'll be chasing that for a little while. The layoffs continue to grow each week during April. We may get caught a little bit there as we're chasing that down, and making the adjustments so we can still continue to ship product effectively to customers, but it should match out over time there.
Okay, perfect. Well, thanks for the answers and good luck. I'll pass it on to somebody else.
Thanks, Mike.
Thank you. The next question comes from Frederic Bastien from Raymond James. Please go ahead.
Hey, good morning. Appreciate that the visibility is as clear as mud right now on the energy side. Any way you can provide us some goalposts that you can, I guess, point us towards for Q2 and potentially beyond?
From the Canadian side, Frederic, I never thought I would say this, but actually breakup's coming at a really good time. It's going to allow us that six to eight weeks during breakup to get some clarity on what is going on out there with the oil price and with the pandemic and the demand betterment. We'll get more clarity as we go along in Canada. Again, as you've seen as well, we've seen the capital projects be pulled back. We are hearing some positive signs from customers on both sides of the border of things starting to spend money and starting to spend capital, but it's very limited right now. Energy is really an unknown for us going forward as to what demand is going to do overall. I think we're hitting a low point.
I just don't know how long we're going to stay at this point.
Okay, thanks. Just to clarify an earlier answer you gave, you mentioned that billings were starting to be outpaced by bookings. Is that on the service center side only?
Yes, on the service center side they are. That's correct.
Okay, thanks.
Actually, bookings are outpacing billings, which means we will have future billings. Sorry, John, you kind of confused it a bit. I think that's what you're trying to say, where bookings are getting stronger, which will mean as throughout May and into June, we're going to have more billings.
Great. Okay, perfect. Then, Marion, maybe the next one for you. With respect to your liquidity, just shy of CAD 400 million right now. I'm sure you have a number of scenarios that you're looking at for this year, but if you assume one that's pretty dire, where do you think that liquidity ends up at the end of the year?
If it's a very dire situation, we're going to throw off all kinds of cash because the revenue will go down, move through receivables. Obviously, it'll be tougher to bring down the inventory if revenue declines quickly. I don't really see that being a factor, but I do expect that we could throw off CAD 50 million-CAD 100 million of cash over the next couple of quarters as we go through. The question will be is whether Q4 picks up, and then if it does, we'll start to use some capital to replace inventory.
Okay. What would be your best guess as to where you're going to end up the year in terms of liquidity?
I'm not very good at guess on where the revenue's going to get, so that makes it tough. Let's say CAD 100 million +.
Okay. Thanks.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star followed by one. The next question comes from Michael Tupholme from TD Securities. Please go ahead.
Thank you. Marion, can you talk about whether or not you've seen any collection issues anywhere in the business, I guess I'm particularly wondering about the energy side.
At this point, I am very happy with my credit team. The month of April ended with our collections as a percent, and that's how we look at of our previous AR being up slightly from where we end in March. They've been doing a great job dealing with customers. Certain areas, the collections were a little lighter, in particular, say Quebec, where we had certain businesses shut down, so I'm sure that was part of the challenges. Within energy, we've been continuing to collect from our customers. We're managing the situation very good at this point in time. Obviously, we have concerns as we go through this quarter, of what customers are going to be struggling for cash flow as they meet their payrolls and come back to work.
Okay. At this point, bad debt expense, has that changed at all, or do you expect that to change at all relative to what it's been running at?
Based on everything I know today, bad debt expense hasn't changed. It's obviously an area that is a higher risk. As we continue to sell through this quarter, we will be working closely with our customers to make sure we don't take a risk that we don't feel is appropriate.
Okay. I guess, two questions related to inventory, sort of different questions. First of all, on the provisions you took in the quarter, they were primarily concentrated in the energy products segment. In the table, it talks about CAD 6.6 million of inventory provisions. You call out CAD 5 million specifically in OCTG and line pipe. I think I heard you say earlier that there wasn't anything in oil field stores. So I'm just trying to understand what the delta between that CAD 5 million in OCTG line pipe and the CAD 6.6 million you talk about in note four, the additional CAD 1.6 million, where was that?
That would be our normal obsolescence reserve that we've taken. We don't normally call that out. We do have our inventory aging reserve that we take on a regular basis. It's anything over 18 months. We continue to include that, which is our normal reserve.
And then the-
That's why we didn't call it out. We only usually speak to the NRV.
Okay. The other question on inventory is just, can you comment on how you feel about the inventory position now and any areas where there is any concern, just about the level of inventories and whether or not that's going to come down as quickly as you'd like it to?
Within service centers, I have no concerns at all, and we did ask all of our units to consider their local branches before they start ordering anything through the cycle and really watch what they do order, because demand is uncertain for this quarter in particular, and we don't really know what Q3 will look like. Our biggest concern is energy. Our inventories are in fairly good shape, but they can always be better. If really there isn't drilling activity going on in Q2 and Q3, it's going to be tough to bring those inventories down. We may be carrying that inventory longer than on our books, like turns may get very low through those two quarters. I'm not that concerned in our oil field stores.
I think demand is down, there's nothing there that we need to have the inventory at the whatever 80 stores we have. It's kind of spread out, and it does maintain its value.
Okay. Just a question on steel prices. We have seen steel prices weaken since the early to middle of March. We've seen some recent announcements from mills of increases in prices. Just maybe a question for John. I know it's a very uncertain environment, obviously, but any commentary around the pricing outlook? Do you think the increases that have recently been announced, are those likely to be accepted, or any sense on that? Maybe if you can also talk about mill lead times.
The pricing right now as we look at it, I'll start with scrap. We're starting to see scrap come out right now as we look at next month, and it's showing an increase. I've heard everything from CAD 10 to CAD 30 right now, so it's a little preliminary, but it looks like scrap will go up, which will help solidify the increase announcements that have recently come up. I think, again, the low points, and as we fell in hot-rolled coil and in plate, I think we've hit low points. We're starting to come off of those slightly. The full increase has not been absorbed yet. Again, I think we're starting to see very positive momentum in those directions. We're coming off of a bottom. It'll be a slow climb back out as demand improves.
With the mill shutdowns that you mentioned, they're taking out enough capacity. We're not balanced to the demand level of where we are today with automotive being closed and with energy being so slow. It is helping solidify some of those increase opportunities that are out there.
Okay. That's helpful. Then just lastly, related to that, any commentary on what that means for OCTG and line pipe pricing? Obviously different dynamics in that market, given that it's not all just COVID-19 related, the demand weakness there, but what do you see happening with prices in that area?
Yeah. Typically or historically, they have lagged 60 days-90 days when you look at coil pricing and plate pricing, just for the time for it to work through the system to become a pipe or an OCTG or a line pipe. This latest dip, because of the downturn, with a lot of the mill closures in pipe, from the various pipe mills, I think they may actually miss the bottom. We may see it help stabilize the number. It has drifted further in April from where it was in March. We may not go all the way down to where flat roll was because again, they're just not producing right now.
Assuming their raw material, that they're not oversupplied in raw material, and most of it was in finished goods, which is what we're being told from most of the pipe mills, that they may actually solidify their pricing a little earlier than they have historically.
Great. That's helpful. Thanks for the time.
Thank you. At this time, there are no further questions. You may proceed.
Okay. Thank you, everybody attending. Everybody stay safe, and talk to you next quarter.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.