Solid First Quarter for Russel Metals

The company reported net income of $34 million on increased revenues of $1.0 billion for the quarter ended March 31 (figures are in Canadian dollars). Higher selling prices led to increased revenues, which were partially offset by slightly lower demand. First quarter gross margins experienced pressure due to competitive pricing and the higher average cost of inventory.

The Toronto-based company does business in three segments: service centers, energy products and steel distributors. First-quarter revenues in the metals service centers segment increased 18 percent to $538 million compared to the same period in 2018. The average selling price improved 21 percent over the first quarter of 2018 and was consistent with the 2018 fourth quarter. Same store tons shipped were approximately 6 percent lower than the 2018 first quarter. Gross margins were 19.1 percent compared to 22.1 percent in the same quarter last year due to competitive pricing and increased material cost. Operating profits totaled $27 million, down from $29 million in the 2018 first quarter.

First-quarter 2019 revenues in Russel’s energy products segment decreased 2 percent to $373 million. The company’s U.S. field stores continued to grow year over year due to strong demand in the Permian Basin. A modest decline in selling prices for Russel’s OCTG and line pipe operations in both Canada and the U.S. led to gross margins of 18.9 percent, down from 19.3 percent in the 2018 first quarter. Operating profits totaled $30 million, down from $32 million.

Revenues in Russel’s steel distributors segment increased by 30 percent to $122 million in the quarter, reflecting higher North American steel prices and stronger Canadian demand. Gross margins of 13.9 percent in the first quarter of 2019, down from 21.6 percent in the 2018 first quarter, were impacted by the higher cost of inventory and product mix. Operating profits dipped to $9 million for the quarter compared to $11 million in 2018.

“We are pleased with the solid results achieved during the first quarter of 2019 and want to commend our team for their efforts in a tightening market. Our industry experienced an exceptional year in 2018 and, although 2019 will be more challenging, our first quarter is indicative of a solid start compared to previous cycles. Our service centers gained market share in the quarter through further growth in our value-added processing strategic initiative,” said Reid.

“Our energy product operations benefited from strong demand in the U.S. Permian Basin and lower but better than expected demand in Canada,” Reid added. “Although oil prices were positive, there was modest pricing pressure on OCTG and line pipe products. Canadian E&P companies have actively deleveraged their balance sheets, but we remain optimistic with respect to second half capital spending levels.”

Commenting on the ongoing negotiations over the new North American free trade agreement with the U.S. and Mexico, Reid said it will remain business as usual for Russel whether the pact is approved or not. “Until something happens, we will continue to turn our inventory and not take long positions. But I don’t see a whole lot changing. I am actually less optimistic than most that NAFTA will be ratified in the next two years.”