Russel's Q3 Earnings Hurt by Declines in Steel, Energy Prices

John G. Reid, Russel president and CEO, told analysts and investors that he believes steel prices are at or near the bottom. The company has worked hard to right-size its inventories and position itself to purchase as demand improves. “Our people are adept at working through down markets. We look at down markets as an opportunity to thrive. We can grow our share regardless of how down the market is,” Reid said.

Russel expanded its presence in the energy field store market with the $109 million acquisition of City Pipe & Supply Corp. and continues to increase its value-added processing capabilities in its service center operations. City Pipe strengthens Russel’s footprint in the Permian Basin and dovetails nicely with its existing operations in Oklahoma, Texas and North Dakota through its Apex Remington energy field stores, Reid said.

Russel Metals is one of the largest metals distribution companies in North America. It carries on business in three metals distribution segments: metals service centers, energy products and steel distributors. Revenues in Russel’s energy products segment in the 2019 third quarter decreased 36 percent to $298 million compared to $463 million in the 2018 third quarter primarily due to reduced year-over-year North American rig counts and a large line pipe shipment in 2018 revenues not replicated in 2019. Gross margins as a percentage of revenues were 16.7 percent compared to 17.3 percent for the 2018 third quarter reflecting margin pressure in OCTG and line pipe products. This segment had lower operating profits of $18 million compared to $40 million in the same quarter last year due to decreased volumes and margins.

Revenues in Russel’s metals service centers decreased 15 percent to $474 million for the third quarter compared to the same period in 2018. Same store tons shipped in the third quarter of 2019 were approximately 5 percent lower than the third quarter of 2018. The average selling price was 11 percent lower than the 2018 third quarter. Gross margins were 18.5 percent compared to 24.3 percent in the third quarter of 2018 and 18.7 percent in the 2019 second quarter. Gross margins as a percentage of revenues in the third quarter of 2019 were lower than 2018 due to declining steel prices and competitive pricing pressure caused by softening demand. Operating profits of $16 million compared to $55 million reported in the same quarter in 2018.

Revenues in Russel’s steel distributors segment in the 2019 third quarter decreased by 18 percent to $94 million compared to $114 million in the 2018 third quarter. Gross margins as a percentage of revenues were 10.9 percent compared to 18.6 percent as margins returned to more traditional levels. Operating profits were $3 million compared to $10 million in the 2018 third quarter.

For the nine months ended Sept. 30, Russel’s revenues totaled $2.8 billion, down 7 percent from $3.0 billion for the same period in 2018 due to reduced selling prices and softening demand in the third quarter. The company’s 2019 year-to-date earnings of $83 million were down from $173 million for the same period in 2018.

Russel is always on the lookout for acquisitions and expects more possibilities in 2020. Sellers have set unrealistic sales prices based on record returns in 2018. “As we go into next year, we will see recalibrated expectations and there should be opportunities at a more reasonable level,” Reid said.