Toronto, Ontario-based Russel Metals Inc. announced financial results for three months ended March 31, 2021.
The company reported a net income of $81 million in Q1 2021, compared to a net loss of $9 million in Q4 2020 and net income of $11 million in Q1 2020. Revenues of $885 million were higher than the $815 million experienced in first quarter of 2020 and the $671 million in the fourth quarter of 2020.
In a press release, the company said each of its segments generated a substantial improvement in operating profit for the first quarter of 2021 versus the fourth quarter of 2020. The metals service centers segment generated a record operating profit as a result of strong market conditions. The steel distributors segment generated an improvement in operating profit for the quarter due to favorable conditions that allowed the company’s US business, in particular, to benefit from market opportunities. The energy segment generated an improvement in operating profit as a result of recent initiatives that were focused on repositioning the segment and reducing the capital employed in OCTG and line pipe.
The company said steel prices increased substantially in the later part of 2020 and early 2021, due to increases in scrap and iron ore prices, improvements in demand and low inventory levels in the supply chain. This resulted in increased revenues and gross margins in the metals service centers and steel distributors segments.
Metals service centers had a quarter-over-quarter increase in tons shipped of 10 percent, exceeding pre-pandemic volume and a quarter-over-quarter increase in selling price per ton of 26 percent. Compared to the 2020 first quarter, tons shipped increased 4 percent and selling price per ton increased 28 percent. Demand in energy products has also begun to recover from the low levels experienced in 2020 but remains below pre-pandemic levels.
The company also noted that in mid-2020, it stated a goal of reducing the capital deployed in its OCTG and line pipe businesses by $100 million by the end of 2021. The rationale of lowering exposure to the energy sector was to reduce earnings volatility and enhance returns on capital over the cycle. Over the past three quarters, the company has reduced OCTG and line pipe inventories by $99 million, including $34 million in the first quarter of 2021.
In addition, on April 14, 2021, Russel entered into an agreement to merge its Canadian OCTG and line pipe operations with that of Marubeni-Itochu Tubulars America Inc. Russel will contribute net assets of approximately $111 million comprised primarily of inventory and accounts payable and receive cash consideration of approximately $79 million, preferred shares with a face value of approximately $32 million and a 50 percent common equity interest in the combined entity. This transaction, which is subject to regulatory approval, will result in a near term cash realization of approximately $138 million. Upon completion of this transaction, Russel’s remaining OCTG and line pipe business will be in the US, where the company will continue to liquidate in an orderly manner the remaining inventory, which totaled approximately $40 million as of March 31, 2021.
As for an outlook, the company said that in the metals service center and steel distributors segments, it expects the near-to-medium term market conditions to remain strong. Demand is expected to grow across a range of North American end markets. At the same time, product availability remains constrained in the supply chain. The result is expected to be a favorable operating environment in the second quarter for Russel’s metals service centers and steel distributors segments. In the energy segment, the company typically experiences a seasonal slowdown in Canada during the second quarter due to spring break-up conditions. However, Russel said it is anticipating a general rebound of energy activity in the second half of 2021, as the sector recovers from the lows experienced in 2020.