Good morning, ladies and gentlemen, and welcome to the 2026 third quarter results for Russel Metals. Today's call will be hosted by Mr. Martin Juravsky, Executive Vice President and Chief Financial Officer, and Mr. John Reid, President and Chief Executive Officer of Russel Metals. Today's presentation will be followed by a question-and-answer period. At that time, if you have a question, please press star on your telephone keypad. I will now turn the call over to Mr. Martin Juravsky. Please go ahead, sir.
Great. Thank you, operator. Good morning, everyone. I plan on providing an overview of the Q3 2026 results. If you want to follow along, I will be using the slides that are on our website. Just go to the Investor Relations section, and it is located in the Conference Call submenu, or you can click on the link that is in the Investor Conference Call paragraph of our recent press release. If you go to page three, you can read our cautionary statement on forward-looking information. I am going to start the call by repeating what I said during our Q2 results call, and that is, this year is providing great illustration of how the portfolio changes over the last few years has resulted in a meaningful reconfigured business with much better earnings generation profile.
In 2024 through 2026, we deployed almost CAD 700 million for acquisitions and CapEx and sold around CAD 90 million of non-core assets. These changes were aimed at growing the business, enhancing our return on capital, and improving our earnings profile through the cycle. The previous Q2 results, and now the Q3 results, illustrated that earnings power. If we look specifically at Q3, the market conditions were strong, but were also very broad-based across our business segments and our geographic regions. To use a bit of a cliché, we were firing on all cylinders. We had record quarterly revenues and earnings per share. The favorable market conditions began towards the end of Q1 and continued through to the end of Q3, and even in the early stages of Q4 so far.
The strong Q3 results were experienced despite the seasonal pullback in volumes in July and August that occurs in both Canada and the U.S. because of holidays. If we look at our metal service center segment tonnage in Q3 2026 versus Q3 2025, we were up 29% overall, or 7% on a same-store basis. This reflects both the impact of the most recent acquisition of the Kloeckner operations, but also our ability to gain market share. If you go to page five, you get a snapshot of the quarter. In Q3, we set a record for consolidated revenues, EBITDA, earnings per share on both an adjusted and an unadjusted basis. To drill down a bit, there are three key points that I want to make. One, the strength in most of the markets we serve. Two, progress on the Kloeckner integration.
And three, a pickup in the relative performance of our Canadian service center operations. On the first point related to market conditions, we saw a 330 basis point improvement in our overall gross margins for Q3 versus Q2, with sizable gains in both our metal service center and steel distributor segments. On the second point, the former Kloeckner branches generated another CAD 33 million of EBITDA in Q3, which brings the year-to-date total to CAD 57 million. This amount compares to our purchase price of CAD 128 million and has so far provided an annualized return on capital of 42%. Hindsight's 20/20, but that transaction could not have been timed any better and it's worked out exceptionally well so far. When we look at the gross margin migration of the former Kloeckner branches during 2026, we have now captured a significant amount of the previous underperformance.
In addition, the other key piece for the Kloeckner integration is that on October 1st, we migrated off the transition services agreement with Kloeckner, and we are now running those branches on Russel's back office systems. That's a really big milestone for us. On the third point, our Canadian service center business, just like the broader Canadian economy, has been lagging the performance of the U.S. economy for a couple years. However, we started to see a noticeable improvement in the relative performance of our Canadian service centers over the past several months as the economic conditions across Canada have improved and the outlook remains favorable. The last item on that top box is that we closed the sale of our Color Steels subsidiary.
That business generated about $70 million of revenues in 2025, had a book value of around $35 million, and we sold it for $42 million to recognize a $7 million pre-tax gain on sale. The sale is another example of selectively refining our portfolio to optimize return on capital. In the case of Color Steels, it was a standalone niche business for us in Ontario that had a focus on residential construction, which is not a priority for Russel. If we go further down that page into the middle row of the diagram, our Q3 CapEx is $26 million, which was a pickup from Q1 and Q2, as some of our recently approved discretionary projects are starting to unfold. I also expect this average quarterly CapEx to remain similar into 2027 as more of these projects are being advanced.
Capital deployed is over $2 billion for the first time. Our capital grew from $1.3 billion at the end of 2023 to $1.8 billion at the end of 2025, and as I said, it's now over $2 billion. More importantly, we generate strong return on invested capital with that. Our annualized ROIC was 35% in the quarter and is now 27% year-to-date in 2026. Once again, our returns are industry-leading when compared to our publicly traded comparables. Continued to grow our U.S. business. Our U.S. platform represented 57% of revenues in the quarter, which was up from Q1 and Q2 2026, and up significantly compared to 2025. The last row, returning capital to shareholders with a flexible approach. In Q3, we returned $24 million by dividend, but did not undertake share buybacks.
That being said, since our NCIB was put in place back in 2022, we acquired a total of 8.7 million shares at CAD 38.13 per share for CAD 333 million. That worked out pretty well for us. In the bottom right box of the page, maintaining a strong capital structure is critical as we operate in a cyclical industry. As a result, our liquidity is strong and we have flexible bank covenants. No financial covenants in our term debt, and our maturities are 2030 for both the bank debt and our term debt. We will go to market conditions on page six. I am going to sound like a broken record, but market conditions remain really strong and are broad-based. This rally seems to be driven by strong fundamentals on both the demand and supply side for the products and markets where we operate.
We saw carbon sheet and plate prices give a steady increase over the past 12 months or so. Hot rolled coil and plate prices in the U.S. were up in Q3 versus Q2 and are currently prevailing slightly higher than the Q3 averages. Overall demand is good, and supply chain inventories are limited, as shown on the two right-hand charts. Steel mill operating rates are tracking near 80% with extended lead times for many products. This suggests continued optimism through the latter part of 2026 and into 2027. One observation with Q4, though, is that we will see some seasonal declines in volume due to fewer operating days around Canadian Thanksgiving, U.S. Thanksgiving, and the December holidays, which will lead to lower overall tonnage in Q4 versus Q3.
The bottom chart shows the prices for specialty metals, and you can see after a pullback in aluminum prices a few months ago, it stabilized at price levels that are favorable as compared to historical averages. If we go to page seven, you see the summary of our trend EBITDA, and we have talked a lot in the past about changing our EBITDA profile to raise the cycle floor, raise the cycle ceiling, and as a result, raise the cycle average. In addition, we focused on reducing the volatility through the cycle, and this chart presents those elements, and it shows the unadjusted EBITDA on a trailing 12-month basis. Key takeaways, 2023 to 2026 EBITDA profile, which is the right-hand chart, looks an awful lot better than the profile in the 2017 to 2019 period in the left chart, as our initiatives has translated into tangible results.
Our average EBITDA is higher, and the peaks and troughs are less volatile. Also on the right chart, our trailing 12-month trends continue to improve. Lastly, our LTM unadjusted EBITDA as of September 30th was CAD 530 million, and the improvement in those LTM trend results should continue into Q4, as I believe that Q4 2026 will be better than Q4 2025. On page eight, we have a view of our working capital trends on the bottom chart in comparison to unadjusted EBITDA trends on the top chart. The top chart, as I said earlier, our unadjusted EBITDA and our adjusted EBITDA hit record levels in Q3. Unadjusted EBITDA was CAD 200 million. The adjusted EBITDA was CAD 230 million. On the bottom chart in Q3, we did use cash for working capital purposes due to the pickup in business activity.
That being said, a large portion of the use of working capital was temporary in nature, as we decided to prepay a significant amount of accounts payable in September to simplify the Kloeckner systems conversion that I mentioned earlier. On page nine, we have a snapshot of historical results. Revenues were a quarterly record at over CAD 1.8 billion. EBITDA was up due to favorable conditions that I previously mentioned. Adjusted EBITDA in the far right chart on the top excludes the mark-to-market on stock-based compensation, also excludes the Q1 gain on the Delta sale, and also excludes the Q3 gain on the Color Steels sale. The adjusted EBITDA of CAD 230 million for Q3 is a big lift from the CAD 154 million in Q2, and I said earlier, was a quarterly record.
EPS, we go to the bottom part of the page, in Q3 was $2.29 per share, which was a record and much higher than Q2. The middle table shows the adjusted EPS at $2.67 per share, which was also a quarterly record and more than a $1 per share pickup versus Q2. Bottom right chart shows our return on invested capital. This uses the unadjusted results, so our return on invested capital for 2026 was strong, above our cycle target, and industry-leading again. On page 10, we have the reconciliation of unadjusted to adjusted results. This is to put the quarter-over-quarter comparisons on an equivalent basis and make it easier to see the operational trends.
The only adjustments are two items, the mark-to-market on stock-based comp, which in Q3 was CAD 37 million due to the $3 per share increase in the share price between June 30th and September 30th. The second item being the exclusion of the CAD 7 million gain on the Color Steels sale, as that was a non-recurring item. On this page, the gray row showed the comparable results and illustrated, as I said earlier, the large step-up from an adjusted EBITDA, adjusted net earnings, and adjusted EPS perspective to set all-time quarterly records. Going into more detail on page 11. From an income statement perspective, some of these items were already covered off, but I will highlight a few new items in particular. Record revenues of over CAD 1.8 billion. It was up 10% from Q2 and up 56% from Q3 of 2025.
I will talk more about volumes later, but it was another very good shipping quarter. Gross margin percent was up 330 basis points versus Q2, which was a much larger step-up than that experienced by our other publicly traded comparables, and I think that was primarily due to the significant improvement in our Canadian service center business and the former Kloeckner branches, and I mentioned that earlier. The contributions from the former Kloeckner branches picked up again in Q3 on the back of the pickup in Q2. If we look at the cumulative EBITDA contribution from the first nine months, it has totaled CAD 57 million. Mark-to-market on stock-based comp was CAD 37 million expense in Q3 versus a CAD 15 million expense in Q2. As I said earlier, we pull those out of the adjusted results for purposes of easier comparison.
In addition, we removed the CAD 7 million gain on the Color Steels sale from the adjusted results to also allow for comparative purposes. Cash flow, perspective middle of the page in Q3, we used about CAD 200 million for working capital due to the surge in business activity that I said earlier. A noticeable balance temporary due to the prepayment of accounts payable to facilitate the Kloeckner Systems conversion. We realized CAD 42 million on the sale of Color Steels. Cumulative share buybacks since August 2022 are 14% of our then shares outstanding for CAD 333 million at an average cost of a little over CAD 38 per share. Our quarterly dividend was CAD 0.44 per share in September for a total of CAD 24 million, and we have just declared the same quarterly dividend of CAD 0.44 per share that will be paid in December.
CapEx of CAD 26 million was a pickup from Q2 as we were implementing the discretionary projects that I mentioned earlier. Lastly, at the bottom of the page, from a balance sheet perspective, we remain in a really strong position with only CAD 214 million of net debt, which equates to less than a half turn net debt to EBITDA. FX rate was flat September 30th versus June 30th, so no impact on our OCI account, and our book value continued to grow and is up CAD 1.85 per share from June 30th and is up about 14% from this time last year. If we go to page 12, this is the reconciliation of adjusted EBITDA variance last quarter to this quarter.
If we look at the metal service centers, starting on the left part of the page, the volumes were down about 3% due to normal seasonal activity, and this translated into a CAD 7 million impact. However, margins picked up by CAD 171 per ton, which resulted in about a CAD 85 million improvement contribution to our margins. Costs were up CAD 9 million due to higher incentive compensation that is tied to financial performance. Energy field stores were up CAD 1 million, which is a continuation of their strong bottom line results, and steel distributors were up CAD 11 million as they benefited from the favorable market conditions. In the other buckets, corporate expenses were up due to higher variable comps and professional fees, and there was also a small pickup at our Thunder Bay terminal operation. Page 13, segmented P&L information.
Metal service centers, I will go through this in more detail on the next page, but it goes without saying, was a big increase over Q2. Energy field stores revenues were up again. Gross margin percentage was down due to product mix, but was still pretty good. Operating profit in Q3 2026 was actually the highest quarterly level in the past three years. Distributor revenues, gross margin, EBIT were all up sharply in Q3 versus Q2 as they benefited from the strength in the market. Go to page 14, deeper dive on the metrics of the metal service center business. Top right graph is tons shipped. Q3 was a near record despite the seasonal factors that impact Q3, and these shipments were up 7% over Q3 2025 as measured on a same-store basis and up 29% overall, which reflects the gaining market share and strong demand.
Price realizations per ton were up 13% versus Q2, which really translated to a nice margin pickup that is shown on the bottom right graph. Our gross margins per ton of $700 was a $171 per ton pickup versus Q2 and was one of the best results that we have ever experienced. Page 15, inventory turns. Overall, our inventory turns were steady at around 4.2 in Q3, with inventories tight as business activity is strong. Page 16, we have our inventory dollars. Total inventory was up about $113 million since June, which is driven by higher cost per ton for the metal service center and steel distributor segments, while tonnage was relatively flat. Page 17, capital structure update. Liquidity is strong, which gives us a lot of flexibility.
We are investment grade rated by both S&P and DBRS. Since last quarter end, our net debt increased by $69 million. Our liquidity is $418 million, which gives us plenty of dry powder when we find capital deployment opportunities that meet our criteria. Page 18, we have a summary of our capital allocation priorities. Left part of the page, we show the investment approach. We seek average returns over the cycle greater than 15%. As already discussed, we've consistently delivered above that target. Year-to-date 2026 is 27% annualized. Facility modernization front, we have three projects on the go that are each around $10 million, and additional projects are expected once those feasibility assessments are completed. In addition, there are a series of value-add equipment projects also underway.
On the acquisition front, we have been active over the past few years, and we continue to look at opportunities that could complement our existing business. That said, we are currently focused on potential tuck-in opportunities that could fit with our U.S. service center operations over the near term. On the right part of the page, we show our approach to returning capital to shareholders. Here, we have a flexible approach, and more details in the next page. Page 19, deeper dive on returning capital to shareholders. Top left graph, we have our longer-term dividend profile. After the June dividend increase to $0.44 per share per quarter, we have now completed four dividend increases the past four years, which in total represented a 16% cumulative increase since the early 2023 dividend level. Bottom left show our quarterly NCIB activity since we put it in place in August 2022.
We view it as an opportunistic way to buy shares. As we said earlier, the cumulative NCIB since 2022 was a 14% reduction in our share count at an average cost of $38.13 per share for a total of $333 million. That opportunistic approach, I think, has worked out extremely well. On the top right chart, the aggregation of dividend versus NCIB over the past years shows the cumulative impacts. It's worth noting on the chart that even though our dividend per share has increased by a meaningful amount, our total dividend outlay has remained at around that $24 million per quarter because of the reduction in our share count, which is shown on the bottom right-hand chart.
So in closing, and on behalf of John and other members of the management team, I would like to express our thanks to everyone on the Russel team for their contributions. It is very nice to see how the hard work over the past few years is translating into such strong results. Operator, that concludes my introductory comments. You can now please open the lines for questions.
Okay, 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 number 1 on your touch-tone phone, and you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number 2. And your first question comes from the line of James McGarragle of RBC Capital Markets. Your line is now open.
Hey, good morning, and congrats on the strong results.
Thanks, James.
Yeah. I just had a question. With competitors like Reliance, they are obviously dedicating a lot of capacity to the border wall projects, data center infrastructure, and I am sure you are seeing the indirect benefits through tighter industry capacity and better pricing. I guess what I am asking is the demand you are seeing and the pricing strength, is that from a few specific service centers that are benefiting from projects or in a few specific sectors? Are you seeing demand strength more broad-based across all of your end markets?
Yeah, thanks, James. It is broad-based. 36 years in the industry, I do not recall ever seeing this broad-based of demand, so we are participating in data centers, as you mentioned. We do actually do some participation with the border wall project as well, but we are seeing it across everything from infrastructure, government spending on both sides of the border. Manufacturing is doing really well. If you look at the Purchasing Managers' Index, which is a good indicator for manufacturing, it stayed above 50, which means it is expanding for a long period of time now. So it is really broad-based that we are seeing. The steel mills, in particular, when you look at their lead times, are extended well into 2027, and some will have rolling schedules, but they are already closed out, so they are allocating tons.
We are just seeing an extreme broad-based demand across all industries that we serve right now, so it is a very exciting time for us.
I also wanted to ask on some of the market share gains that you have had. Obviously, you have outperformed the industry in terms of volumes. Can you just talk about what is driving that? Is that your procurement advantages, your strong service offering potentially? Yeah, I just want to get your view on if you think this is sustainable, or do you think there is any risk that you give some of this back when the market, or when and if the market eventually starts to slow down?
Because I think part of this is from our value-added initiative that we're seeing, so we continue to gain share in that, and it's just you chip away at it every quarter, and you continue to grow and continue to build on it, so it's a very sticky piece to our business. It's not something that's as transactional, maybe as three bids and a buy type scenarios. So we continue to grow on that platform. We've expanded in our non-ferrous area, so that's a new growth product for us that we continue to expand in. Then obviously, with the acquisitions with both Samuel and Kloeckner that we've acquired, we've started to
Okay. Appreciate it, and I'll turn the line over. Thank you.
Thanks, Jim.
Your next question comes from the line of Frederic Bastien of Raymond James. Please go ahead.
Hi, guys. It's lost for words to describe your results, so congrats on that. Until recently, the market seemed to be operating under the assumption that elevated steel tariffs were here to stay. Now, following the Democratic sweep, is that still a reasonable assumption? Has anything changed in your thinking about where steel prices could be headed next year?
It's a good question, Fred. I don't know that I have a concrete answer there. We'll see where this evolves to. I think that the tariff situation is probably here to stay as you look at North America as a whole. Again, on the world capacity level compared to what we're using in North America, I would assume if there's an agreement, it's in the works, which we've heard it was imminent for a year now, so I'll be hesitant to say it's imminent. But if we have that agreement, I would think they would work very collectively together to provide a very level playing field for North America as a whole, being both Canada and the U.S. So I think that will stay in place in some capacity. How it works out between the two countries, I really don't know.
I just know that we'll be on a level playing field in North America with all of our competitors at that point.
Okay. Thanks for that. My model extends a number of years, and I don't know if I've seen the metal service center margins come in that high. Where do you think these margins could settle in the fourth quarter?
Yeah, Fred, let me put it to you this way. The thing that we're seeing in the early part of Q4 is not all that different from what we saw at the tail end of Q3. So pricing levels, margins are holding in at a pretty strong level. What extends beyond October into November and December, still to be written. At some point, I assume steel prices will plateau, and then there might be a little bit of margin compression at that point. But we're still seeing pretty strong results in the early part of Q4 on the margin front.
Just to add on that, Fred, we've seen increases from the steel mills as recently as this morning. So it looks like it's continuing that slow trend upward. Again, with the backlogs where they are at the steel mills, there just doesn't seem to be a lot of pressure on the pricing. There's always market dynamics or a black swan event that could change that. But to Marty's point, I think you're just going to see more of the same type performance in Q4, notwithstanding the standard holiday season that we have out there.
Okay. I'd expect you to take advantage of the current favorable conditions to replenish your war chest and position the business for the next M&A window. Is that a fair assessment of your thinking?
Well, I would characterize it a little bit different because we have had a very flexible balance sheet, which has allowed us to take advantage of market opportunities when they present themselves, and I use Kloeckner acquisition as a good example. One of the things that allowed us to do that transaction was we did have a very strong capital structure, so we could write a check in very easy order, and we could move quickly in very easy order. It really becomes a function of not so much of a war chest and whether we have it, because we do have it. It becomes a question of what are the right opportunities that we want to seize upon. We go to the here and now.
There are some interesting opportunities, not anywhere close to the finish line yet, but there are some interesting opportunities for tuck-ins that are on our radar screen.
Thank you very much.
Thanks, Fred.
Once again, if you wish to ask a question, please press star one to join the queue. Your next question comes from the line of Jonathan of Goldman Sachs. Sorry, it's Jonathan Goldman of Scotiabank. Please go ahead.
Hey, good morning, guys. I have been called worse. Thanks for taking my questions. Maybe just as a housekeeping one to start. Marty, you mentioned fewer days in Q4 just because of holidays, Thanksgiving, otherwise. I am thinking about the comparable to Q3. How many fewer days in the period would there be, comparing like to like?
Yeah, it is like mid-single digits, like call it 5%-7% impact to its operating days. The one other wildcard, though, is separate apart from the operating days. You do, from time to time, have another dynamic that plays out, and we do not always have visibility on that, which is at some point, in some years, people just have put their order books away in December, and when they start taking holidays. Oftentimes, there is a little bit of a lack of visibility of what December looks like, because even though there is some statutory holidays in there is other situations where people tack on additional days to their statutory days, and what they might have ordered in a normal month, that may then slip into the next month.
The end of December is a little bit hard to predict, but as a general, 5%-7% impact on operating days is a good rule of thumb.
Okay, that is helpful. You guys talked about kind of Canada maybe accelerating, whether it was through the quarter of the metal service centers. Reid, what are you seeing there? What are the end markets that are accelerating? How much does it lag the U.S., and how should we think of a kind of volume trajectory in that region?
[inaudible], Canada kind of really joined the party in June, late May, early June, picking up. Again, as I mentioned earlier, we are seeing it on a broad-based number of fronts. Data centers are very busy that are out there, infrastructure related to data center, infrastructure related to energy. Nation-building projects are starting to get traction now where we are seeing things. Manufacturing is picking up. Ag had been at a very low point. We are starting to see traction there. Really, every end market we are touching right now is all picking up in Canada. It had already been very busy in the U.S., so it has narrowed that gap between the two. But our U.S. continues to be, as Marty cited earlier, about 57% of our business. So, we are a little larger in the U.S., but again, both sides have come on very strong.
Canada's numbers, again, were very, very strong for the quarter.
Okay, that is good to tell. John, maybe I can sneak in another one, the conversation about tariffs and whether they stay or not stay. But can you maybe talk about all the investments you have seen in the U.S. recently, or at least announcements of capacity expansion in steel? I mean, even in Canada, I think there has been some pretty poignant rhetoric about having kind of some sort of protection to make a level playing field in North America. The interests in North America about protecting domestic steel, how deep do you think that impetus is right now?
Again, you had a couple questions there. Again, the investment we are seeing, there is investment in steel mills going into the U.S. right now. Obviously, with the acquisition of US Steel, there was a commitment made by Nippon to the U.S. government. They have spent several billion dollars on steel mills now. We are seeing the government in Canada is stepping in, I think with CAD 5.5 billion to help the steel industry in Canada. Keep in mind, the U.S. total capacity to date is roughly 110 million tons a year. That is not even 10% of the world market. Canada is much smaller. So again, if we do a large investment in the North American market, it is still not impacting the world market in a dramatic fashion. It is helping offset capacity from where imports are coming in.
We still need to import steel throughout North America to meet our demand, either by product we do not make, either in Canada or the U.S., or where we are underserved. There still is an import capacity, so that can be offset with domestic capacity. All these mills that are coming online could offset the import numbers that are coming in, and that will play into the tariffs that you mentioned. Again, I think the two countries will be working closely together to make sure there is not a disruption to hurt our longer-term manufacturing base, our industrial base, obviously our steel industry base. All those bode well for us.
The only thing I would add is, when folks are making announcements on investing here and there on various projects, the lead time associated with those coming to fruition is not months or quarters, it is years. There is no doubt that there will be opportunities for reinvestment in the North American steel producing side of things, but those do not happen quickly or overnight.
Okay. Just to clarify, you are talking about U.S. and Canada working in tandem as a North American unit against the world, or you are talking about Canada versus U.S. in terms of kind of working out a trade agreement in terms of steel protectionism?
I would hope they can work as kind of a united front to keep the North American economy working as one and then trade amongst each other in an effective way. But I do not have the answer to that question right now. That seems to be a moving target. We will see where that settles out. Again, they are in talks right now that seem to be moving further than they have in the past, but I do not have any clarity as to what that is going to look like in the near future.
No, fair enough. Thanks for taking my questions. We will get back with you.
Thanks, Jonathan.
There are no further question at this time. I will now turn the call back over to Marty Juravsky for the closing remarks.
Great. Thank you, operator. Thank you, everyone, very much for joining our call, and if you have any questions, please feel free to reach out anytime. Thank you.
Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.