Good morning, ladies and gentlemen, welcome to the 2018 third quarter results conference call for Russel Metals. Today's call will be hosted by Mr. John Reid, President and CEO, as well as Ms. Marion Britton, Executive Vice President and Chief Financial 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 would like to turn the meeting over to Ms. Marion Britton. Please go ahead.
Good morning, everyone. We're going to start with the Page 3 of the slide deck that we sent out last night, the cautionary statement. 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 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. Our forward-looking statements included in this call shall not be unduly relied upon. These statements speak only as of the date of this call, except as required by law, we do not assume any obligation to update our forward-looking statements. If you would turn to Page 5 of the slide deck, I'll highlight some of our third quarter results. Obviously, we're very happy with our operations and the results that we achieved in two quarters now back-to-back. Highest quarterly EPS in a decade was reported this quarter.
Our EPS was CAD 1.10, double what we reported for the same quarter in 2017. For the nine months to September 30th, we now have earnings of CAD 173 million, EPS of CAD 2.79. Free cash flow, CAD 240 million for the nine-month period, or CAD 3.86 per share. Very strong return on equity, one more quarter for at 23%, and we declared our dividend of CAD 0.38 per share yesterday. Turning over to Page 6 , we'll speak to the market conditions as we see them at this point in time. Demand remains stable. Steel prices appear to have peaked in most products. Some products are a little down. Some plate continues to hold and maybe a little higher. Metal service centers average selling price was up 28% compared to Q3 2017, where metal service center tons was consistent Q3 2017, on a same store basis.
We did have increased tons related to the 2 acquisitions that were added in the period. Rig count is up in the U.S. and we're calling it flat in Canada because it seems to be bouncing up and down quarter or week-over-week. Energy product segment revenues increased 38% from Q3 2017. The main reason for the increase is U.S. line pipe projects. We had mentioned earlier that we had a number of line pipe projects on the go that would get completed in Q3 and Q4. They started earlier this year, for ordering, and they have added to this quarter significantly and will continue to add to the revenue in the fourth quarter. Also our oilfield stores had continued year-over-year higher revenue. Tariffs were imposed June 1st by the U.S. then July 1st by Canada. We were aware of this last quarter.
No change there, even with the settlement, or not settlement I shouldn't say, the speculation on the revised NAFTA agreement. Canadian safeguards were put in effective October 25th, they are based on a quota and tariffs above a quota system. They are in effect for 200 days and are going to be under review. Turning forward to Page 7, which shows our five-year results information. You'll see our revenue for the 9 months is just over CAD 3 billion, noting the highest prior revenue of CAD 3.9 billion reported in 2014. Expect we will surpass that in the 2018 year. The other numbers to note here are the EBIT as a % of revenue, 8.5%. Very, very strong number if you can compare it to even 2014, below 6%.
EBITDA as a % of revenue, 9.4%. Looking down at our balance sheet, net working capital of CAD 1.2 billion, slightly higher than our 2014 numbers. Steel prices are higher, that is impacting or increasing, I should say, our accounts receivable and our inventory numbers. Both of them are in good shape at this point in time. We'll speak to inventories when we go later in the slide deck. Turning forward in the information to Page 13, we did add some additional information or an update on where we think we are on the tariffs and safeguards at this point in time. Obviously, they're causing a lot of uncertainty in the steel industry, the stock market. We continue to watch them, we feel that we are in good shape for whatever should happen in the future. Turning onto the next Page, 14. There is the segment information.
Revenues for metal service centers up 35% in the quarter. That does include, obviously, our acquisition information, revenues for energy products were up 38%. You'll notice that it's over CAD 100 million of increased revenue for energy in the quarter, that is driven by the large line pipe orders. Just want to bring your attention to the impact the large orders had on our segment gross margin at 17.3%. We do receive a lower segment margin on large projects, thus, the mix has driven our margin down. All of our other operations were consistent with the prior quarter, Q2. Steel distributors had higher revenue in the quarter compared to last year, third quarter. Looking down, you'll note the segment operating profits. Steel metal service centers did the largest contribution to our higher net income, although energy and steel distributors were significant contributors to the good results.
Going down to the segment margin, just to speak to metal service centers. For the quarter, we had 24.3% compared to our year-to-date is 24.1%. We had been up in 25% Q2. There is some pressure on margins related to increase in average cost of inventory and selling price seeming to be flatlining now. Steel distributors' gross margin did come down, and the higher gross margin year-to-date is because we were selling off inventory that we had at a lower price earlier in the year. We now have replaced most of our inventory with higher price inventory. As I mentioned before, the segment operating profit for all of our three segments in total is at a very high level. Very happy with how our operations have done to drive that bottom line. Turning over to Page 16.
Just point out there, we have the 28% for the quarter higher selling price while we have 18% higher selling price for the nine months ended. Similarly, I had commented that our same store sales in tons were consistent with Q3 2017. On a year-to-date basis, our same store sales are up 5% year-over-year. Just to remind you that we acquired Color Steels September 2017, and the acquisition of DuBose was April of this year. They are adding to our revenue and our tons in addition to our same store tons being flat. Turning forward to Page 20, capital expenditures. For the nine months, we've spent CAD 31 million on capital expenditures. Depreciation expense for the nine-month period is CAD 21 million.
We've made the comment for the last year that we will continue to spend more than our depreciation expense, because we're adding investment in value-added processing, which has helped for us to maintain our margins and our segment margins in our metal service centers. We would expect that we'll be at a high CAD 30 million for this year. Turning to Page 21, just point out the inventory levels. In the metal service centers, our tons are actually down on a same store basis. They are up because of our acquisition. The turns are in very good shape at 4.3%. If you look back over the comparative periods, we feel that our inventory is in good shape in our metal service centers. Energy, the inventory dollars are actually down from second quarter. They are up year-over-year due to the line pipe business.
We're doing additional activity and pricing of product in that segment. Similarly, the steel distributors is up significantly due to the fact that they're been able to bring in product, and we'll be selling that throughout the fourth quarter. We were not concerned about any of the inventory levels at these three segments. Those are my comments. I'm going to turn it over for questions.
Thank you. Ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. Note that questions will be taken in the order received. Should you decide to withdraw your request, you will need to press star followed by two. We ask that if you're using a speakerphone, to please lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. Your first question will be from Anoop Prihar at GMP. Please go ahead.
Good morning. It was a very good quarterly performance, congratulations on that front. Just a couple of questions. First of all, with respect to the strength in the margins in the service center business, I know you said that pricing was strong, I'm just curious to the extent to which the tariffs and all the noise in the marketplace have perhaps created some inefficiencies that you guys have been able to exploit from a pricing perspective, that's adding to some of the mix here as well.
Yeah. You get two countries perform very differently. Canada, again, I think we mentioned on our last conference call, there has been a disconnect in the pricing, currency adjusted. The Canadian price didn't go up as far, it didn't fall as far. There wasn't the reset, I think, if you will, on the flat roll and the product of flat roll that happened in the U.S. that created maybe some margin pressure for our U.S. service centers. Then also very disciplined market in Canada, along with our continued growth and value-added processing helped stabilize those margins.
How much of the increase in the margin can you attribute to the value-added processing?
It moves around on a quarterly basis. It also moves around the price of steel. I would say it's 1%-1.5% right now.
Okay. The line pipe contribution that we had in Q3, is that spilling over into Q4 at all?
Yes. There's a significant amount that we will have in October, November, and December. We'll primarily clean the big project up. We have some other projects that will tail out as well. We'll have a strong Q4. It won't be as big as Q3, but it should be a pretty good Q4 on that as well.
I recall from our Q2 call, we spoke about pricing potentially stabilizing into Q3. We see the Q3 numbers on the pricing just seems to keep on going, yet we're talking about stabilizing again for Q4. Is it really going to stabilize? Do you think we're going to have this pace here for a while?
I think we're within a bandwidth. Again, we saw it go up in Q3, it's come back down to that bandwidth again. I think the U.S. mills may have overshot the mark just a little bit, it's just resetting itself. We seem to be hovering around that same area. Plate products are obviously very strong. Backlogs are very strong. If there's going to be an increase, I think it would be in plate products. If you look at the world spread, market spread to flat roll into plate versus the North American spread right now, there is room for imports. I think, obviously, the tariffs and the quotas in the U.S. as well as what the Canadians have recently put in, I think will keep those at bay.
We'll maintain the 80%-85% utilization rates at the mills, which should keep price pretty stable.
Okay, great. Thank you very much.
Thank you. Next question is from Derek Sprang at RBC. Please go ahead.
Good morning. This is Kyle Brock on behalf of Derek Sprang. First of all, congratulations on the impressive quarter. Prior to the emergency measures that were recently enacted by the Canadian government, were you seeing any signs of increased foreign steel products coming into Canada as a result of U.S. steel tariffs?
Prior to, we saw a little bit come in. The Canadian government moved pretty quickly. Again, I applaud their efforts to maintain that, to keep that from Canada, from becoming a dumping ground. I think overall, we saw some. We actually were able to take advantage of some of that through our distribution division in Canada through work. Overall, there should not be a significant impact to the market. That should flush itself out within 30-60 days.
Okay, great. Thank you. With respect to working capital, how should we be thinking about it in Q4 and into 2019, given the pretty significant draw in 2017 and so far year to date?
The receivables typically will go down at year-end. We always have a slowdown of our sales in November, December, seasonality, in particular in the U.S. because of the U.S. Thanksgiving and Christmas driven demand down even more than in Canada. I expect that inventory will be relatively flat. We are not anticipating any significant steel price increases. I think our average cost of inventory has started to match on and equal what is out in the market at this point. I would anticipate in the quarter, we will see some working capital come in. It will go down a little bit. In March quarter, it will go up again for two reasons. First of all, we will have higher revenue in that quarter, which will bring the AR back up. I am anticipating steel price of inventory is going to stay relatively stable.
Inventory won't change that much, but we will, excuse me, have income tax payments that will have to be made in Canada because we have higher income in this year. In addition, we will have bonus payments in the first quarter, which will reduce our accounts payable.
That's great color. Thanks very much. That's all for me.
Thank you. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one. Your next question will be from Robert Arra at Investor. Please go ahead.
Yes, good morning and congratulations on your fine results. My question is quite simple. As far as the USA tax on steel products, is it inflating our earnings or would it be a boost if those taxes were removed?
There may see some margin improvement there. We'll get some lift on that. Again, I don't see there being anything significant either way for us on it.
Yeah. If the tariffs go out, steel prices will go down slightly, but we don't believe that is going to have a significant impact one way or the other on steel prices. It will vary by product, but, we're obviously benefiting from higher steel prices, and tariffs have raised steel prices, which the mills have raised them also, but it has not significantly driven our margins in our minds.
Okay, on that same question, if the tax was removed on Canadian exports only and United States kept their taxes on other foreign imports, does that make a difference?
That's really probably our best scenario. It could go out of Canada , U.S., and Mexico, if they relieve the tariffs. They may go to a quota system, may not, but it would give us reasonable trade in North America, and it would benefit the North American pricing compared to the world market for imports as in they would be kept at bay to some degree. Obviously, North America needs imports. They don't produce enough to cover all of our demand needs. I think that would allow us to have a little bit of spread there that would keep the mill manufacturers in North America at a busy operating level, which would obviously keep the pricing at a more stable level for us. A little bit of an inflated level.
Again, that to us, is probably our best scenario, is if we eliminate the tariffs that are in North America right now and we trade freely but maintain them on the rest of the world. The real problem is not in the U.S.; it's not in Canada. There's overcapacity in the world market, predominantly driven by China, and that's what they've got to maintain addressing them.
Thank you very much for your clear answer. I have no further questions.
Thank you.
Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. At this time, Ms. Britton, it appears that we have no other questions.
Okay. I thank everybody for attending the call, and we'll talk to you next quarter.
Thank you. Ladies and gentlemen, this does conclude your conference call. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.