Good morning, ladies and gentlemen, and welcome to our first quarter 2023 earnings call for Russel Metals. Today's call will be hosted by Martin Juravsky, 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 the 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 Mr. Martin Juravsky. Please go ahead, sir.
Great. Thank you, operator. Good morning, everyone. I plan on providing an overview of the Q1 2023 results. If you wanna follow along, I'll be using the PowerPoint slides that are on our website, and just go to the investor relations section. If you go to page three, you can read our cautionary statement on forward-looking information. Let me begin with just a little bit of perspective on the quarter before I go into the detail. In Q1, we're very pleased with the financial results as we saw a pickup in performance across our business units. In addition, we advanced a number of internal initiatives related to our CapEx programs, systems, safety, and professional development of our staff. All these initiatives have set the stage for long-term growth of our business.
We also published our inaugural sustainability report, which you can find through the link on the main page of our website. We are very proud of our sustainability accomplishments, including a very low carbon footprint as measured on both an absolute basis as well as relative to our industry peers, strong governance and attention to safety, and engagement in our communities. Let's begin with going to page five to have a little bit of a discussion around market conditions. Steel prices picked up late in Q4 and continued that trend into Q1. In particular, both plate and sheet had price increases on the heels of higher scrap prices and remain at levels that are above historical frames of reference.
As you can see from the charts that are on the right-hand side of the page, supply chain inventories are modest in both Canada and the U.S. When combined with the recent pickup in demand, it allows the industry to be well-positioned from a supply and demand perspective. Specifically, on the demand side, we are seeing broad-based support from our customer base as we are focused on the industrial side of the North American economy, which from our lens, is doing quite well. I think the industrial side of the economy is still playing catch up with pent-up demand. We are seeing favorable demand dynamics coming from onshoring of North American manufacturing, infrastructure products, projects, spending on renewable energy, and as well as a variety of other areas of demand. If we go to page six, you can see a snapshot of our Q1 results.
We saw a sequential pickup in revenues, EBITDA, margins, and returns. If we look across the various charts going from top left, revenues were CAD 1.2 billion versus CAD 1.1 billion in Q4. EBITDA was CAD 160 million versus CAD 97 million in Q4, due to a pickup from each of our business segments. We saw an approximate 100 basis point pickup in EBITDA margins and solid results from each of our segments. From a bottom-line perspective, EPS and return on capital also improved with EPS of CAD 1.19 per share and Q1 2023 annualized return on capital of 27%. We continue to deliver exceptional results.
In terms of capital structure, we have net cash of CAD 105 million versus net debt of almost CAD 500 million at the end of 2019. The CAD 600 million increase in free cash flow gives us a lot of financial flexibility going forward. In particular, we are pursuing a range of strategic initiatives that we think should grow the business, and I'll talk about those items for a few more minutes. If we go to page seven, I'll go through a few items related to our detailed financials. From an income statement perspective at the top of the page, I covered a number of the high-level items already, but a few other items to note. Revenues of CAD 1.2 billion were by 8% higher than in Q4.
On margins, service centers and steel distributors improved while energy field stores was once again our highest margin segment. Interest expense came down to CAD 4 million, as the increase in interest rates is allowing us to generate interest income on our growing cash reserves. Overall, we generated earnings of CAD 74 million and earnings per share of CAD 1.19 per share. Our Q4 results were impacted by a few non-operating items. For the case of TriMark, we picked up CAD 9 million for our share of their earnings, and CAD 4 million of cash flow came in from dividends through TriMark in Q1. Stock-based compensation had a CAD 4 million negative impact in the quarter versus CAD 2 million in Q4.
We had a small, about CAD 3 million decrease in our inventory and our view reserves as the improvement in steel prices reduced the inventory risk and the inventory provision. From a cash flow perspective, in Q1, we used $18 million for working capital. There were a number of moving pieces with accounts receivable going up due to improved sales activity and AP coming up as well. All the while, inventory was relatively unchanged. CapEx of $14 million was similar to Q4, but higher than last year at this time as we are continuing to advance a series of value-added equipment projects and facility modernizations. As we said in the past, our annual CapEx should pick up and be around $75 million on average for the next couple of years.
From a balance sheet perspective, we are in a net cash position with net cash of a little over CAD 100 million, which is made up of our term notes of CAD 300 million that is more than offset by a cash position of a little over CAD 400 million. Our liquidity is almost CAD 800 million. Our book value is up again and is now approximately CAD 26 per share. Lastly, we have increased our quarterly dividend from CAD 0.38 per share per quarter to CAD 0.40 per share per quarter. I'll talk about that to give a little bit more context to it in a few more minutes. If we go to page eight, you can see our EBITDA variance between last quarter and this quarter.
In looking at service centers, the large pickup in volume was the biggest factor in Q1, as it added around CAD 23 million of EBITDA to the quarter. Margins picked up a bit as we moved through the quarter, and that contributed about CAD 7 million of additional EBITDA via the service centers. The operating costs for service centers did pick up a little bit as we had higher volumes and higher incentive-based compensation for that business unit. Energy field stores improved by approximately CAD 6 million in the quarter as the capital spending in the sector continues. Field distributors improved by about CAD 7 million due to pickup in steel prices.
There was a CAD 12 million unfavorable variance in the other category, which included the slightly lower earnings in Q1 versus Q4 from TriMark, the seasonal impact of our Thunder Bay terminal operation, and that should shift back the other direction in Q2, and the mark-to-market on stock-based compensation with the increase in our share price. If we go to page nine, that's some of the segmented P&L information. The service centers continued to do well as the market improved. Revenues, margin, EBIT picked up. Most of the impact was late in Q1. We think there's a favorable dynamic heading into the early part of Q2. In energy field stores, we are continuing to see positive market sentiment. Overall, market conditions remain upbeat as we look into 2023, although there is typically some softening in Q2 due to the Canadian spring breakup phenomenon.
Gross margins came in at 27% for energy field stores and have remained in that 25%-30% range since the monetization of the OCTG line pipe business in mid-2021. Distributors' revenues was down slightly for the quarter, but margins and operating profit were up as they benefited from improving steel prices and a favorable product mix. If we go to page 10, and we're having a deeper dive on some of the metrics specifically related to our metal service center business. The top right graph is the last five years for tons shipped. As you can see, the typical Q1 dynamic is a pickup from the seasonal impact of Q4, and we did see that in a very positive way this past quarter.
In Q1 2023, we had a 16% increase in tonnage and experienced the highest volume quarter that we have seen for several years. Demand continues to look solid into the early part of Q2. On the bottom left graph, we have the revenues and cost of goods sold per ton. Our revenue per ton, even though there was a decline for the quarter versus Q4, we did start to see that trend shift late in Q1 with a 3% increase in March versus February. For cost of goods sold, it did come down faster than our selling prices as we realized on the lag effect of lower cost inventory in our system. The bottom right graph shows gross margins and EBITDA per ton.
Margins picked up by about $20 per ton versus Q4 and remain well above historical levels. The current margin profile of $464 per ton remains healthy as we're seeing the continuing benefits from good demand and the increase in value-added processing in the portfolio having impact on our results. On page 11, we have shown our inventory turns. This chart shows inventory turns by quarter for each segment with energy in red, service centers in green, and steel distributors in yellow. In addition, the black line is the average for the entire company. A few high-level takeaways. Overall, our inventory turns improved slightly in the quarter from 3.7 - 3.9. When we benchmark ourselves versus our publicly traded peers, we are generally the top performer on this metric.
By sector, service centers improved a bit from 4.2 - 4.5. Energy field stores is flat at around three. For steel distributors in yellow, the inventory turns increased from 2.7- 3.2 as our inventory position declined in the quarter as we realized on backlog in that business. If we go to page 12, you can see the impact of the inventory turns on inventory dollars. Total inventory came down by about CAD 60 million from December 31st. This was mostly a reduction in steel distributors that was offset by an increase in energy field stores. An increase in energy field stores was really to serve its growing backlog of business. The service center saw a CAD 12 million reduction in inventory, which was mostly due to a reduction in average cost of inventory as opposed to tonnage.
Overall, our inventories are in pretty good shape as we have achieved a really nice balance between managing capital prudently and serving our customers in the marketplace. If we go to page 13, you can see the overall impact on capital utilization and returns. Our capital deployment is up a little bit to around CAD 1.5 billion. More importantly, our returns continue to be industry-leading with a strong start to 2023. Our LTM returns stand at 31%. If we go to page 14, I want to update our capital structure. The continuation of favorable market conditions and our disciplined approach to capital utilization has given us a lot of financial flexibility.
On the left table, you can see that our cash position went up to CAD 401 million, which was a CAD 255 million increase over the past year, and CAD 38 million increase just in the past quarter. As I said earlier, we are realizing the return on our cash balance that substantially offsets the interest cost on our outstanding term notes. Our equity base continues to grow and is now over CAD 1.6 billion. If you look at the chart on the right, you can see the continuation over the last number of years. Our book value per share is now CAD 25.90, which is an almost CAD 11 increase over the past two years. If we go to page 15, we have an update on our capital allocation priorities going forward.
Given our strong balance sheet, we have a multi-pronged approach to capital allocation. For investment opportunities, we continue to seek average returns over the cycle greater than 15%, and we have consistently delivered well above that target. The ongoing initiatives are threefold. We are continuing to identify and pursue new value-added projects. We moved forward on a number of series of projects in both Canada and the U.S. in the past quarter, and we're seeing more and more opportunities ahead of us that we continue, that we continue to target. Two, facility modernizations. We're moving forward with expansions and upgrading projects in Saskatoon, Joplin, Missouri, and Little Rock, Arkansas. These projects will evolve over 2023 and into 2024. In addition, we are looking at potential projects in several other locations where we have legacy setups that can be upgraded and consolidated into newer, modern operations.
These facilities will allow for volume growth, increase operating efficiencies, improve health and safety conditions, and in some cases, they will also allow for the monetization of higher value legacy real estate. In terms of acquisitions, we remain committed to our financial and operational criteria. That being said, the deal pipeline remains active. In terms of returning capital to shareholders, we have adopted a flexible approach. For dividends, as I said earlier, we have increased our dividends to CAD 0.40 per share per quarter from CAD 0.38. For the NCIB, we have acquired 1 million shares under the current plan and have 2.2 million shares of availability under that program. If we go to page 16, I wanna give a little bit more context to our dividend increase. Russel has had a history of dividend increases, having raised the dividend four times between 2009 and 2014.
It has been a static dividend for the past nine years. That being said, if we look back at the last five years, we generated almost CAD 18 per share in earnings and paid out cumulative dividends of CAD 7.60 over those five years, which equates to about a 42% payout ratio. Our change in business mix over the past few years has resulted in lower free cash flow volatility, stronger earnings power, and a very strong capital structure. We'll feel very comfortable to increase our dividend to CAD 0.40 and also maintain our ability to pursue a range of other capital allocation scenarios. We plan to periodically review our dividend level for potential future modifications by considering the prevailing market condition as well as our earnings, capital structure, and alternative uses of capital.
In closing, on behalf of John and other members of the management team, I'd like to express our appreciation to everyone within the Russel family. 2023 is off to a great start. We are very pleased with our financial results, but equally important, we were very pleased with the series of initiatives that led to record low health and safety incidents. Thanks to everyone across the company for your contributions on all fronts. That concludes my introductory remarks. Operator, you can please now open the line up for questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If you're using a speakerphone, you will need to 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 Michael Doumet at Scotiabank. Please go ahead.
[crosstalk]
Maybe first question, just on the sequential margin improving metal service centers. I think in your outlook, you highlight, you know, that demand trends, steel prices increase continue into Q2. I think you also, in a different section of your opening commentary, talked about the reduced average cost of inventory. Wondering whether that implies so far higher revenue per ton, and EBITDA per ton so far into Q2, and just how, you know, maybe you view the balance of Q2 in that segment.
Yeah. It's a good question, Michael, because the dynamics that occurred within the quarter were heading in the right direction. We had positive trends when we look at Q1 versus Q4 as it relates to overall margins, but the margins got better through the back end of the quarter than the front end of the quarter. We're seeing positive margin dynamics in the early stage of Q2 as well. Said another way, our margins that we're seeing in April were slightly better than the margins that we saw for Q1 on average.
Got it. That's helpful. Maybe just changing topics here. You know, the fact that you guys have, you know, effectively no net leverage is just amazing because, you know, presumably, well, you know, this business is working capital heavy. I'm assuming competitors are being more challenged with interest costs and credit availability. Do you think that's translating or maybe will translate into market share gains and, you know, potentially eventually M&A?
Hey, Michael, I think you're spot on there. I think it's gonna give us some opportunities in both in market share gains, and we're seeing that now, a lot of that's being led by our value-added initiatives, and so we're able to become more sticky with our customers. Again, putting our balance sheet in a position relative to our competitors, I think it opens opportunities for M&A, but we'll remain very disciplined to our criteria.
John, is it fair to say too that when we actually look at the industry data, this is not just a new phenomenon? If we look back where we are today versus the period pre-COVID, we've gained market share.
Yes. That's right.
Very nice, guys. Those are my two questions. Thank you.
Great. Thanks, Michael.
Thank you. Next question will be from Ian Gillies at Stifel. Please go ahead.
Morning, everyone.
Ian.
Morning.
With respect to the strength in HRC prices through Q1, is there any reason to think you won't be able to pass those on to your customers through Q2 as you're actually selling that inventory? 'Cause there seems to be some commentary around demand being weak in certain instances, and I'm just trying to get your view on how that dynamic's playing out.
If you look at the market right now, we're seeing a little bit of pressure on HRC due to scrap prices going down. We're not having any trouble passing it on. Keep in mind, I think Marty mentioned earlier, our turns are four and a half times, so we're moving through our inventory much faster than the rest of the market. We're not seeing any trouble, so we're sustaining those high margins that we saw at the end of the quarter. We're not very concerned about that and the ability to pass those on. We'll watch the market, again, I think this is more of a dynamic with scrap. We're not seeing a lot of import opportunities that are out there right now at attractive levels. Demand's very solid.
Again, I think you'll see scrap bounce along here, and impact HRC up and down.
Okay, that's helpful. Switching gears to the energy product side, it's obviously early days, and it's horrible related to the Alberta wildfires, but is there any update you can provide on what your intentions are for that business to do in the near term here? I know it's typically a seasonally weak quarter, but nonetheless would be helpful.
Yeah. It's Thursday, you're right. The forest fire dynamic is just how difficult for people operating in those situations. It hasn't had that direct impact on what we've seen. What we've seen is the normal seasonal dynamic that happens in Canada this time of year because of spring breakup. Hopefully, everybody is able to work through the forest fire situation out west. In terms of that being the cause and effect of what we're seeing in our business, generally speaking, what we're seeing from our energy business in Canada, also in the U.S., is just a generally positive trend. Yeah, there's gonna be Mother Nature that comes to play every now and again for parts of the year, we're trying to see through that. The trend for that segment is pretty positive.
Okay. That's helpful. If I could maybe just sneak in one last one with respect to steel distributors. I mean, the margins there were great during the quarter. Has that continued on into the second quarter, or has that business normalized out? Just I'm trying to get a sense of what's happening there.
It's normalizing out, Ian. There were some timing things that we had. We had some material held up at the port, came in late, you know, Q4, and so it flowed into Q1, and so we're able to monetize that, and the market changed, but they'll normalize out as we go through Q2.
Okay. I appreciate that. I'll turn the call back over. Thank you very much.
Thanks, Ian.
Thank you. Next question will be from Frederic Bastien at Raymond James. Please go ahead.
All right. Good morning, guys.
Good morning.
Hey.
There are concerns right now that the tightening credit environment will finally catch up to the segments of the construction sector that have thus far been resilient. Just wondering what your thoughts are on this and whether you're seeing or starting to see cracks at all in sort of the big steel-heavy projects that you're helping support.
The short answer is no right now. I mean, how things evolve over the medium to long term with the economy, and I think it goes to broader issues in terms of interest rates and inflation that are still out there. Those may or may not become relevant as things unfold, but the part of the economy that we deal with is still doing fine. At the margins, there may be some pauses in individual projects here and there, in regions here and there. Looking at things in their totality across the segments that we deal with, and we deal with a very broad range of industrial-type consumers, the broader dynamic is very good..
Yeah, there's little spots here and there where there may be some softening, but that's always gonna be the case when you look across the portfolio. On average, things are pretty good. How things evolve more over the medium to longer term, our crystal ball doesn't go out that far, but the short term is generally pretty solid.
Thanks. Thanks for that. The other question I have is around renewable power. There's a lot of investments being made in North America now to support the energy transition, et cetera. I recall this was sort of an end market that you were feeling pretty good about. Can you provide a bit of an update here and whether that comment you made in the past still stands?
Thanks, Fred. It's, yeah, we're very positive right now in the renewable wind, solar. We're seeing that money start to flow down in the U.S. in the initial stages. We think it'll have a big impact in Q4 of this year. We'll see it affect the plate market pretty dramatically. We're pretty bullish on what's going on there.
Awesome. That's all I have. Thanks.
Great. Thanks, Fred.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. Your next question will be from Michael Tupholme at TD Securities. Please go ahead.
Thanks. Good morning.
Good morning, Mike.
Quick question about the energy field stores segment and also looking at the JV earnings. Energy field stores, you saw an improvement sequentially in EBIT. The JV earnings, though, were down a little bit sequentially. Strong, but down a bit sequentially. I realize they're different businesses, but at the same time, it seems like the driver here is really just the improvement in the energy sector and the level of activity, and I would've thought that both would generally move in the same direction. Just kinda looking for a bit of a clarification on why they moved in opps direction sequentially. So keep in mind, the OCTG/ line pipe or the JV, again, it's driven by the downhole, the big project. When they have it's timing of the project. Really our field stores is driven by what's going on in the market, but they have the big large maintenance component. They maintain it for the life of the well as well as the installation of the well. They get some of these pickups intermittently in the period when that well's going in. The JV may have a well go in and then go into a lull. They will go throughout, and so they'll see that consistent maintenance and MRO-type business that you won't see in the JV.
Okay.
In some ways, the contrast between those two businesses is part of the reason we did what we did back in 2021. They both touch on energy, but in different ways. We feel pretty good about the field stores as being a good part of our portfolio on the long-term basis because of the dynamics that John talked about, and there are very different dynamics that impact the volatility and seasonality on OCTG/line pipe. In some ways, it's a little bit of a micro test that confirms the path that we started down a couple years ago in separating out those businesses and monetizing OCTG/line pipe.
Okay. That makes sense. Second question. I don't think you are often asked about this, corporate expenses this quarter look somewhat higher than certainly than they were a year ago, but also just higher than they've been in general over recent quarters. Wondering if there's anything to sort of explain that. Then secondly, how to think about corporate expenses going forward.
Yeah. There's a variety of moving pieces in there, but using Q1 as a baseline of this year is a good place to start, Mike. When you look over year-over-year comparisons, there's a variety of things that are in play. One is you do have mark-to-market on stock-based comp that has, you know, some variability into it. You've seen some inflation. Also the way the connectivity to variable comp also flows in there as well. As market conditions improve or as market conditions come down and profitability goes up and profitability comes down, the variable comp moves with it. That's why you will see some variance in corporate expenses.
The last piece is there is some inflation that is occurring this year versus last year across all parts of the economy, and that's one place that we're seeing it.
Okay. What we saw this quarter, you think that's a reasonable way to think about it over upcoming quarters for this year?
Yeah. That's a good starting point for your model, Mike.
Okay. Perfect. The comment you had in the release just regarding the fact that you had evaluated a number of potential acquisitions in the quarter. I mean, I know this is part of the strategy, and it gets talked about on quarterly calls quite regularly. I don't recall seeing a comment like that in the release. Just wondering if, you know, maybe just clarify for starters if that is in fact sort of new and the motivation for including that and maybe, you know, maybe more importantly, like maybe just comment on the pipeline and what you are seeing in terms of the opportunity set right now given the strength of the balance sheet.
Yeah. I actually don't remember offhand what we have said or haven't said in the past, to be perfectly honest. In terms of capturing where things are right now, it is active. Now that being said, we've seen a lot of deal activity in terms of potential deal flow over the past period. It was hard to find the right situations for us as we look back to 2022. I'm probably more optimistic today in terms of the situations that are in and around us. You know, there's still some wood to be chopped in order to move things forward. I'm more optimistic about the pipeline that I'm seeing today than the pipeline that we were seeing, say, six months ago.
Okay. Is it primarily the U.S. that we should be thinking about as really the focus area, and more specifically service centers in the U.S.?
Keep in mind, we've said that for years, and then we end up doing something in Canada along the way. We'll remain opportunistic. Ideally, yes, it would be U.S. service centers that we're focused on.
Okay. Okay. That's all I had. Thank you.
Great. Thanks, Mike.
Thank you. At this time, gentlemen, we have no other questions registered. Please proceed with closing remarks.
Great. Thank you, operator. Thank you everyone for joining our call. If you have any questions, please feel free to reach out at any time. We look forward to staying in touch during the balance of the quarter. Thanks, everyone.
Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect.