DBRS Morningstar Confirms Rating of Russel Metals Inc. at BBB (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Russel Metals Inc. (Russel or the Company) at BBB (low) with a Stable trend. The rating confirmation reflects solid F2022 operating results that were essentially in line with DBRS Morningstar’s expectation. The Stable trend reflects DBRS Morningstar’s expectation that the Company’s financial profile is forecast to remain strong and supportive of its investment-grade profile despite a projected normalizing in earnings and cash flows in 2023 and 2024, reflecting a softening market in comparison to 2022. Russel’s rating reflects the Company’s core structural strengths including its leading position as a metals distributor in Canada and in the southern and midwest United States, excellent customer service reputation, diversified product portfolio, and strong operating efficiency. The assigned rating also acknowledges certain structural challenges, particularly the exposure to volatile commodity markets, to which Russel is not fully protected despite the strong mitigants in place. DBRS Morningstar also notes that the countercyclical nature of working capital investments and Russel’s variable cost structure provides some support to the cyclical downturn.

In F2022, revenues increased 20% year over year to $5.1 billion, while EBITDA margins declined by more than four percentage points because of normalizing steel prices; that said, the margins are still well above the historical average. Going forward, DBRS Morningstar projects the Company’s earnings and cash flow profile to normalize further in 2023 and 2024 as steel prices continue to revert back to their historical levels. Revenues are likely to come down to around $4.5 billion in 2023, while margins are also likely to further soften from current levels. However, the Company’s ability to reduce operating expenses in an economic downturn (because of its variable cost structure) is expected to provide some cushion. Russel is also likely to generate positive cash flows of approximately $120 million to $160 million from working capital in 2023, providing support to the overall cash flows, while capital expenditure is estimated to increase to around $100 million, compared with $42 million in 2022, because of the Company’s plan for facility modernization. In addition, given Russel’s track record of relatively modest acquisitions as well as their currently very strong cash balance, DBRS Morningstar anticipates some near- to medium-term acquisition activity. DBRS Morningstar notes that the Financial Risk Assessment for Russel is based on projected 2023 and 2024 credit metrics, which better reflect a normalized operating environment. Despite the anticipated softening in credit metrics, the financial risk profile is expected to remain appropriate for the current rating.

Overall, DBRS Morningstar believes that Russel remains well supported from a business risk and a financial risk perspective at the current rating level. Although not currently anticipated, any deterioration in market position and/or significant and prolonged increase in leverage could result in a negative rating action. Conversely, a positive rating action would be considered if the Company demonstrated a significant change within its product mix toward more specialized value-added processing and/or a material increase in its market position through geographic expansion.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May, 17 2022).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies applicable to the rating are Global Methodology for Rating Companies in the Services Industry (February 14, 2023; https://www.dbrsmorningstar.com/research/409773), Global Methodology for Rating Companies in the Industrial Products Industry (February 14, 2023; https://www.dbrsmorningstar.com/research/409775), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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