Nick Garago at RBC Capital Markets. Please go ahead.
Hey, thanks for having me on, and congrats on the really solid quarter there.
Thank you.
I wanted to ask on the commentary on the outlook. You flagged some uncertainties surrounding trade policy, that Q1 was potentially helped out by some pull forward. On one hand, we might see a bit of an air pocket in Q2, but if we look at some of the commentary from your U.S. peers, they were kind of flagging they're expecting volumes to hold up pretty well into Q2, which is pretty impressive given how good Q1 was. Within that context, can you just give us an update on how you're thinking about volume trends into Q2?
Yeah. Nick, that's a fair observation, including looking at what some of the publicly traded comparables have already talked about. I don't think our view would be any different from that, which is there's probably some elements of pull forward demand, but the ultimate test is how things have evolved since the tariffs came into place. Shipment levels remain at a pretty reasonable clip and steady clip. It's not like there was a bubble that was out there. There was probably at the margin a little bit that was brought forward. It's hard to quantify it, but overall, we're now sitting here in May, and the tariffs were put in place almost two months ago, and shipment levels remain at a relatively solid level. We haven't seen any of that big variance that could have been in place.
The commentary that some of our competitors have come up with in their Q1 commentary, we probably echo some of those same views.
Can you provide a little bit more detail on what you're seeing in the US versus in the Canadian business, and any change in those trends potentially since tariffs were implemented a few months back?
Yeah. I'd say overall, what we're seeing in the U.S. versus Canada is more of the same, both pre-tariffs and post-tariffs, which is it's fairly straightforward that the U.S. has had a more robust economy over the past couple of years than Canada has. Our Canadian business is well positioned and does well, but the level of performance in our U.S. business is probably a notch higher than it has been in the Canadian business, and it characterizes that as both a little bit pre-tariffs as well as post-tariffs. It is more of the same, but there is a distinction between the performance of the Canadian economy overall versus the U.S. economy over the past period of time.
Yeah. I appreciate the call, Martin. I'll turn the line over. Thank you.
Great. Thanks, James.
Thank you. The next question comes from Devin Dodge at BMO Capital Markets. Please go ahead.
Yeah. Thanks. Good morning.
Hey, Devin.
Look, I was going to ask what the energy field stores. Look, we saw that one of your US competitors recently sold its Canadian operations, which I guess would bring maybe a greater focus on some of those assets under the new ownership. Just wondering if you have seen or do you expect to see a more competitive environment in Canada?
Absolutely.
Yeah. I don't think it changes the landscape. It just changes the names on the door. There are still a number of competitors that have shrank quite a bit over the last two years since they were exiting Canada quietly. It has allowed us to gain some market share there. I don't see really any landscape change outside of what it's been for the last four to six months. I am really more interested in where Canada is going as a whole because I think it is going to really benefit us from the energy perspective out there. Mr. Carney's comments, I think, yesterday, where he wanted to reestablish Canada as an energy superpower, which is obviously going to benefit any of our energy business as well as our service centers.
Okay. Got it. Thanks for that. Just one clarification. If I look on a year-over-year basis, revenue per ton in service centers was down 8% or around 8%. That is both on a reported basis as well as a same store. I would have expected the mixture towards non-ferrous would have had a more positive benefit. Are you able to provide any color or kind of help explain that?
Yeah. The non-ferrous, when you look at it in totality, keep in mind our non-ferrous, a lot of that growth has come from our US side of the service centers. Some of those numbers Marty referenced, and we did grow some. The adding of Samuel was completely a much bigger mix in carbon. 100% of the U.S., and again, all but two locations in Canada were carbon. It did displace some of that a little bit. That should continue to grow, and you should see a change in that in the future.
The thing I'd supplement too, Devin, is when we look at our publicly traded US competitors and looking at what their Q1 2024 versus Q1 2025 price realizations were on the same store basis, we actually were better on a relative basis than they were when we used those same comparisons. Everybody collectively is down compared to Q1 of this year versus Q1 of last year. The relative change, our relative change in price realizations is better than theirs were.
Okay. Got it. Just one last one, likely for you, Martin, but obviously, the balance sheet's in great shape here. We've seen this recognized by rating agencies. This is great to see. Just in order to maintain that investment-grade credit rating, what do you feel is the range for leverage on a go-forward basis?
Yeah. It's a good question, Devin. Let me answer it in an indirect way first, and then I'll get to your very specific question. It starts with more of a philosophy of being committed to an investment-grade type approach. We think there's a tremendous benefit with the ability to execute in the Canadian investment-grade market at attractive levels. There's a commitment to doing it. The commitment goes beyond just what is a single metric that makes sense. This has been a multi-year migration to get to this point, and I don't want to go backwards. That being said, when you look at the rating agents and some of their commentary, they'll use guides, for example, less than two times debt to EBITDA as a frame of reference.
That's plenty fine for us, given our capital structure and liquidity and types of use of capital that we might have. From a net debt to invested capital perspective, 30% or so at the high end. I don't even see anything on the horizon that gets us from where we are today, which is in the low single digits to that level. Being able to achieve and maintain that investment-grade status is quite important as it relates to maintaining the low cost of capital.
Okay. Good color. I'll turn it over. Thank you.
Thanks, Devin.
Thank you. The next question comes from Frederic Bastien at Raymond James. Please go ahead.
Hey, guys. Good morning. We've been hearing about some project owners taking a wait-and-see approach to new projects, which obviously makes sense given the tariff uncertainty. I am wondering how this uncertainty might be impacting or shaping your potential buyers—sorry, potential sellers of steel distribution business, i.e., your targets. Are you having different discussions nowadays with these mom-and-pop operators? I am just curious how the M&A landscape is looking right now.
Yeah. Thanks, Fredric. The M&A landscape is very active right now. People are looking at things through a little bit of a different lens. We just came through a very robust period with 2021 and 2022. I think the expectations have been reset now. Obviously, there is a very volatile political landscape out there that continues to evolve on a daily basis. I think people are looking at this very differently. We think there will be a fair amount of opportunities to look at. We'll see if there is anything that comes to fruition.
Thanks. Martin, anything you need to add, or is this—
No. You know what? It's a fair observation. I think the other interesting thing for me is when we do a look back over the last number of years and how the M&A landscape has unfolded, there's been years where we've been active, and there's been years where we've been very active, but we haven't found the right opportunities that meet our criteria. We kind of stick to our criteria of what works, what doesn't work, and sometimes those things line up. It just so happened that there were two M&A transactions that we were able to push across the finish line last year. There were also years like 2022 and 2023 where, for a variety of reasons, including in some cases, vendor value expectations, we didn't find the right opportunities. We don't chase for the sake of chasing. We stick to our criteria.
If we get the right opportunities at the right valuations that fit our operating criteria and our cultural criteria, we're more than capable of moving across the finish line. We remain very active, but it's yet to be seen whether we find those things that line up with our criteria or not. If they do, terrific. If they don't, we bide our time, and we're patient capital.
Okay. You did a good job over the last, I guess, several quarters telling us there would be a lot of heavy lifting behind the Samuel acquisition. I am wondering how that integration is proceeding right now, and are you ahead of plan or anything that is going to, according to your expectations, just to get an update here would be appreciated. Thank you.
We're tracking the plan for phase one's done. We've got about three distinct phases. Phase two is now being implemented with some conversions from the Samuel system to our system so we can further integrate inventories, look at operating costs. That was done this past weekend in Canada. It'll be done the first week in June. In the U.S., everything's went smooth there. That allows us to move fully forward with step two. Step three, we'll continue to look at the real estate rationalization opportunities that are out there. We feel still pretty comfortable that this is all going to be done within this calendar year.
Thanks. I'll squeeze the last one. You cited a number of factors behind the volume gains. I was just wondering if you could split those between M&A, I guess, the recent acquisitions, just market share gains, and just straight good old industry demand.
On the M&A front, the only real change between Q4 and Q1 was a full quarter of Tampa. Tampa was a nice contribution from a margin and from an earnings perspective, but it is not a big volume operation. It was a relatively small volume impact from Tampa Bay being in there for a full quarter. If you look on a same store basis versus a consolidated basis, it was a little bit of volume, but it really did not have much of an impact. By and large, when we look at Q4 versus Q1, most of that was really about the macro, the seasonal factor, as well as just general market conditions, which were favorable in Q1.
Thank you.
Thanks, Fredric.
Thank you. The next question comes from Michael Tupholme at TD Cowen. Please go ahead.
Thank you. Good morning.
Hey, Michael.
You saw in service centers a nice quarter-over-quarter improvement in gross margins in Q1 with steel prices still up but leveling off lately. Wondering if you can help us think about service center gross margin performance in Q2 2025 versus the 20.9% you just delivered in the first quarter.
Yeah. It's a really good question, Michael, because there were a lot of moving pieces in Q1 and frankly into the early part of Q2 as well. We benefited by a little bit higher prices in Q1 as a whole, but it obviously picked up steam at the back end of the quarter. At the same time, on the cost of goods sold side, we still actually had some lower cost inventory, which actually helped us from a margin perspective. When we look at Q1, we benefited from a little bit better top line, and the cost of goods sold did not really move by a whole heck of a lot. Actually, the margin increased, some of that was just a function of the lag effect that worked in our benefit in Q1. That continued into April and probably early May.
That'll probably normalize down a little bit, all other things being equal, as we get into June and July, I suspect. What it probably means is we'll still have a very good margin profile in Q2 as compared to Q1.
Okay. That's definitely helpful. Would the same hold true? Does the same sort of higher-level commentary hold true for steel distributors? Is the dynamics there similar?
Yeah. Similar, Michael. Yeah.
Okay. Then back over on service centers and, again, sticking with gross margin, sort of trying to look through some of the noise, I guess, that can result from changing metals prices. With all of the value-added investments that have been made over time and recently, and I guess also some of the acquisitions, how should we think about normalized steady-state gross margins within service centers at this time?
It's a bit of a moving target in some respects. I'm going to answer it without answering it too directly because, as an example, one of the things on that CapEx page that I talked about is we've got a number of new pieces of equipment that we're installing in real time. Those have not taken effect yet. The goalpost keeps moving for us. That being said, we directionally view the multi-year migration in margins to be probably a couple hundred basis points on an apples-to-apples basis. That being said, it's hard to do an apples-to-apples when the cycle keeps moving all the time.
If we did things on a steady-state basis and we looked at the stuff that has been done in 2024, the stuff that is in the pipeline for 2025, it should add a couple hundred basis points over the course of a couple of years. We're still at the front end of seeing some of those benefits. I keep referring back to that one slide where I talked about the new lasers that are going in in a variety of locations. Those are impactful, but they're just happening right now.
Okay. That makes sense. Thanks for that. Over on energy field stores, can you talk about the top-line outlook for that segment in 2025? I guess what I'm wondering is, should we be assuming some year-over-year revenue growth as you move through the year? Or is what we saw in the first quarter when we saw sort of similar revenues on a year-over-year basis, is that more what we should be expecting here, just sort of a more consistent performance on a year-over-year basis? I realize there's seasonality, but I'm thinking about year-over-year here.
Let me answer that in a really indirect way if I can. In some ways, it's a look back. That business for us has been fairly steady. I mean, it does move around, and there's some seasonality attached to it, but it's been relatively steady if we look back over the past period of time. All of the things being equal, it has been, and we would expect it to be a pretty steady contributor. That being said, with John's comment that he made earlier, there is public policy that is evolving in real time. We think we should be a net beneficiary of how some of that is evolving. We do not know what the timing of that is going to be. I would hate to be too prescriptive of what quarter that impacts, let alone what year that might actually show up.
Directionally, those things are all good for our business on both sides of the border, frankly, not just on the Canadian side of it. If we kind of strip that stuff aside, it has been a pretty steady business for us over a period of time, and it will ebb and flow a little bit. Even just as I look at Q1 as an example, it was a slow start to the year, but it picked up in March. When we look at Q1 as a whole, it was an okay quarter, but it was really more March-related than January and February-related. Over the course of several quarters, it has been a very, very consistent performer for us, and we expect that to continue, public policy aside, and what is potentially positive for the industry as a whole.
Yeah. That's definitely helpful. Thank you for all that. And then just in terms of energy field stores, in terms of the margins, again, quite consistent and stable in the last several years, and obviously much improved from what they used to be in that segment after all the changes you made. A little bit of a tick down in the first quarter. Is that mix-related? Is there anything going on there to explain that? And should we expect them to kind of go back up to the levels we've seen in the last few years? Or is this more of a current run rate, the gross margin?
It was a little bit mix-related, but I think part of the frame of reference is there is a bandwidth that it operates in from a gross margin perspective. Even though Q1 was down from a gross margin perspective, it was within the normal bandwidth. If we look also at how the gross margins are relative to our other business segments, it continues to remain our highest gross margin business. Yeah, it was a down quarter from a margin perspective, and that related to mix, but it was within the range, probably towards the low end of the range.
Okay. Got it. Lastly, just in terms of CapEx, and I apologize if I missed this, is the expectation that it's similar in 2025 on a full-year basis? How do we think about that? Maybe if you can just also comment, the fact that you finished up a lot of the facility modernization work, I think you said you're contemplating what you do next there, but how do we think about that? Is that something that could begin in the fairly near term, or is that more in the next few years?
It's probably a two-year frame of reference of where some of those facility modernizations become potential realities. To deal with your first question first, last year, we spent about $90 million on CapEx. Q1 was $29 million, so a little bit ahead on a run rate basis. If you use the frame of reference of $100 million for 2025, it's rough words of magnitude. That being said, we tend not to look at it on necessarily an annual basis, even though that is a structured period of time, as what we have is an evergreen list of projects that runs for several years. Things are coming on. Things are coming off all the time. That pipeline of projects is probably about $200 million today. Again, some of them are very, very preliminary, and some are fairly advanced. It is a multi-year evergreen list.
That's why we look at the pipeline directionally and say there's still a fair amount of discretionary projects that are not just what was done in 2024, but on the come for 2025 and probably also on the come for 2026.
Perfect. I will leave it there. Thank you.
Great. Thanks, Michael.
Your next question comes from Ian Brooks Gillies with Stifel. Please go ahead.
Morning, everyone.
Hey, Ian.
As it pertains to steel distributors, with everything going on in the global steel market, do the opportunities set there feel like this is a bit more like 2023 as a whole rather than 2024? Acknowledging everything could change in two months' time.
The last comment's probably spot on.
Yeah. I was going to say, if you're looking at directional pricing for the moment for steel versus are you looking for tariffs in the next 60 days? It can push or pull either way. I feel like we're in a much better place than we were in 2023 on both sides of the border. Again, the businesses operate very differently. Canada operates much more contractually, back-to-back sales versus much more transactional in the U.S. We are seeing opportunities on both sides. We think there's probably some cooler heads going to prevail in the near future, and this will revert back to a more normalized setting. We are seeing opportunities within both countries, either from domestic mills or trading partners that have quotas or opportunities to come into the country. Right now, we think it's going to be a pretty solid year for them.
Understood. Going back to the Greenfield project scope of $200 million, Martin, can you remind us how you think about those projects, either whether it be from an IRR basis and/or from an EBITDA payback basis, just to think about the potential growth opportunities?
Yeah. Just one item of clarification, Ian. It's not $200 million worth of Greenfield. It's $200 million of CapEx, some of which is for modernization, some of which for equipment upgrades, some of which is for just normal course CapEx. That $200 million is not just for modernization. That being said, when we look at projects, they have quite a vast range of paybacks. Some of them that might relate to, frankly, more safety and good housekeeping. They do not have great paybacks, but there are things that we do as a matter of course. There are some projects like equipment and some of these value-added pieces that might have a two, two-and-a-half-year payback. It's a whole waterfront in terms of projects, and we look at them quite holistically. Some of them are not discretionary, which we have to do as a matter of course.
They may not have a payback attached to them. From a portfolio perspective, the 15% is really the frame of reference. That goes to both CapEx and M&A. Some are better. Some are lower than target, but we're trying to achieve that 15% across all the capital deployment scenarios, recognizing that they're not all equal. They have different priorities depending upon circumstances.
Understood. One last one for me on the M&A side. When Tampa Steel & Supply was purchased, it was viewed as a launching point into the Florida market. Obviously, it's still early days there. How would you define, I guess, your entrance into that market so far? What are you learning about the market and potential other, I guess, targets to grow that business over the next number of years?
Again, you're playing on words there with launching and all being in the Florida market and NASA. We have had a really good move there. It's only been four months. It's a real plug-and-play. There's a great team in place. They have all the value-added processing in place, a very good mix of non-ferrous. It's allowing us to reach out further into markets that are probably outside of their coverage zone right now. It wouldn't be long-term sustainable to develop a marketplace to either go Greenfield or look at acquisition. We felt like this would be literally and figuratively a beachhead for us, being in central Florida, so we could look at going both north and south. We see that as something that could develop quickly over the next two to three years.
Perfect. Thanks very much. I'll turn the call back over.
Thanks, Ian.
Your next question comes from Maxim Sytchev with National Bank Financial. Please go ahead.
Hi, good afternoon, gentlemen.
Hey, Maxim. John, maybe the first question for you, if I may, in terms of looking at the broader trends, I mean, on the one hand, you read auto resi kind of under pressure, general manufacturing, people are sort of pushing decision-making to the right. What were maybe the key industry drivers behind the volume improvements year-on-year? And kind of also the positive commentary from what it seems for Q2. Just maybe if you can put it in buckets if possible. Thanks.
Yeah. I think it's broader than industry buckets that are out there, Maxim. Just part of this is our transactional nature and the way we've structured the business to be successful. When you look at a cyclical industry, and if we're cyclical throughout periods of time, the only thing that's constant is the price is always going to change. What we're able to do in this transactional in times of extreme volatility caused by whatever's out there right now, obviously with the tariffs being the big point, we're able to work with buyers of our product because they're trying to buy hand-to-mouth. They don't know if the price of steel is going up. They don't know if it's going down. They're very nervous. They are really not taking long positions on inventory.
As Martin said, it's very difficult to quantify, but we don't think there was a lot of pull ahead. I just think that our transactional nature to our business really benefits people, that they know they can get served the next day, get it quickly, they can move into the value add, or we can help them. They don't have to take long-term positions and put themselves in volatile spots. I think that's where we typically, in times of that transition, be it up or down, we typically gain market share because it lets people protect their position. I think we saw that in the late first quarter, and we're seeing it in the early second quarter. It's more of our business model fits volatility, which is an industry we live in.
Good. I guess does that kind of comment apply to the non-ferrous business, like for example, what Tampa is doing as well?
Yeah. We are, again, non-ferrous. We're still taking the same template that says we're not going into the long-term contractual business. We have some longer-term commitments on that, but again, we're not going into the contract-type business. We are trying to remain hyper-transactional on that. As we're eeking our way into that and growing that market share, we're doing it very targeted at lean transaction.
Okay. Okay. That's great. And then one last question around energy stores. I mean, the fact that oil pricing has contracted somewhat, and I think in the past few you mentioned that it's more relevant from an OpEx perspective. So we should not be extrapolating the lower oil price into kind of corresponding volume declines. How would you, I guess, qualify quantify this relationship?
Yeah. Keep in mind, again, for Apex, for Leap, for our field source, a big portion of their business is based on the maintenance and the life of wells. So those wells that are already existing. They are a little bit immune to oil pricing because they have to maintain them for the life of that well. That is why, again, we started off slow in Q1, but you saw that steady state because they were in that maintenance mode. When things pick up in the energy pack, we saw some projects get released in March, some of those things, and they would push us back up over the top. Again, our steady state business is going to be on that maintenance of the life of the well that is out there. Anytime oil is improving, we really jump up quickly.
Yeah. Yeah. Okay. No, that's great. That's excellent. Thanks so much, John.
Thanks, Maxim.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one. Your next question comes from Devin Dodge with BMO Capital Markets. Please go ahead.
Yeah. Thanks. Just had a couple of quick follow-up questions on pricing. If I look at US prices for plate and sheet in Q1, I think they were up high single digit or low double digit versus Q4. I look at Russel, I think it was 1% sequential improvement on a same-store basis, more like 2% on a revenue per ton with that M&A in there. Just wondering if that reflects different pricing trends in Canada versus the U.S., or is there something else that helps explain that sequential pricing gap versus market?
Devin, just one element first just as a comparison point. This in some ways goes to the earlier discussion about relative to our competitors. What we did on a same-store basis in Q1 versus Q4 is our price realizations were up 1%. As I look at a couple of our competitors who report similar type of data points, they were either down 1% or up 1%. We were within the norm of the industry. The industry, by and large, is more U.S.-weighted than anything else. Sorry. Did that make sense, John?
Yeah. No. Yeah, Marty's exactly right. There also is a timing lag. From the minute you see the new steel pricing to its purchase delivery shift, there will be a timing lag. We saw some of that in third quarter. We saw markets really ramp up in Q3, but there was the effect of—I'm sorry—in the third month of the quarter in March. There was that lag in January and February that were out there. Those were carried forward. Again, based on our inventory turns, it takes two to three months to cycle through.
Okay. Got it. I got it. I guess maybe extending that last answer, just if you look at the service center business, how did average revenue per ton in April compare to the Q1 average?
Let's put it this way. It would have been comparable to March, but March was higher than the Q1 average because if we look through Q1, February was higher than January. March was a lot higher than February, and April continued at a level similar to March. That is why April would have been higher than the Q1 average, but March was also higher than the Q1 average.
Okay. Got it. Thank you.
Okay. Thanks, Devin.
There are no further questions at this time. Please proceed with any closing remarks.
Great. Thank you, Aubrey. Thank you very much, everyone, for joining our call. If you have any questions, please feel free to reach out anytime. Otherwise, we look forward to staying in touch during the balance of the quarter. Take care, everyone.
Ladies and gentlemen, this concludes your conference call for today. We do thank you for participating and ask that you please disconnect your lines. Have a great day.