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

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Russel Metals Inc. (Russel or the Company) at BBB (low) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation and the Stable trend reflect Morningstar DBRS’ expectation that Russel’s business risk and financial risk profile will remain strong for the current credit rating category. While operating performance has been normalizing since last year due to a decline in steel prices from abnormally high levels in 2022 and 2021, internal cashflow and profit generation remains robust, leading to strong credit metrics.

CREDIT RATING DRIVERS
Morningstar DBRS expects Russel’s credit rating to remain unchanged in the near term. Although not currently anticipated, any significant deterioration in business risk metrics, including market position and operating efficiency, and/or significant and prolonged deterioration in credit metrics could result in a negative rating action. Conversely, although unlikely, Morningstar DBRS could consider a positive rating action if the Company demonstrated a significant improvement in its market position through geographic expansion in the US along with material improvement in its product mix toward more specialized value-added processing.

EARNINGS OUTLOOK
Russel’s 2023 revenue and EBITDA, while lower compared to 2022 and 2021 due to a decline in steel prices, were better than Morningstar DBRS’ expectations. Going forward, Morningstar DBRS expects Russel’s earnings profile to continue normalizing in 2024, but at a relatively slower pace compared to 2023 as steel prices could further decline. That said, the acquisition and integration of the Samuel metal service centers announced in December 2023 will add some inorganic growth to the business.

Morningstar DBRS expects Russel’s revenues to remain relatively flat at around $4.5 billion in 2024 while EBITDA margins are likely to shrink as steel prices normalize. Moreover, the acquired Samuel’s business is relatively lower margin compared to Russel’s current metal service centers. However, a further shift toward value-added processing could add some margin uplift over the next few years. Morningstar DBRS expects adjusted EBITDA margins in the range of 7.0% to 8.0% over the medium term.

FINANCIAL OUTLOOK
In line with the earnings outlook, Morningstar DBRS believes the Company’s cash flow from operations is likely to decline moderately in 2024 due to further normalization in steel prices. Capex may increase further to around $125 million in 2024 due to the Company’s plans for facility modernization and increases to its value-added equipment. In addition, Russel is expected to invest $225 million in the acquisition of seven Samuel metal service centers, which is expected to close by Q2 2024.

The Company’s senior unsecured notes are due in 2025 and 2026 but redeemable before maturity. Given its strong cash position, the Company is expected to pay off this debt on or before maturity without immediate refinancing. Additional debt requirements would depend on future acquisitions, for which Morningstar DBRS believes Russel has ample capacity. Overall credit metrics are likely to remain strong for the current rating range in the near term, but Morningstar DBRS expects leverage to increase over the medium term as Russel contemplates more acquisitions.

CREDIT RATING RATIONALE
Russel’s current credit 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 credit 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. Morningstar DBRS also notes that the countercyclical nature of working capital investments and Russel’s variable cost structure provide some support during a cyclical downturn.

Morningstar DBRS notes that in this review the applicable rating methodologies for Russel Metals Inc. are the “Global Methodology for Rating Companies in the Merchandising Industry” and the “Global Methodology for Rating Companies in the Industrial Products Industry” rather than the “Global Methodology for Rating Companies in the Services Industry” and the “Global Methodology for Rating Companies in the Industrial Products Industry,” which were used in the prior annual review. There was no change in the credit rating.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(1) Weighting of BRA Factors
In the analysis of Russel Metals Inc., the relative weighting of the BRA factors was approximately equal.

(2) Weighting of FRA Factors
In the analysis of Russel Metals Inc., the relative weighting of the FRA factors was approximately equal.

(3) Weighting of the BRA and the FRA
In the analysis of Russel Metals Inc., the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodologies:

Global Methodology for Rating Companies in the Merchandising Industry (July 21, 2023)
https://dbrs.morningstar.com/research/417461/global-methodology-for-rating-companies-in-the-merchandising-industry

Global Methodology for Rating Companies in the Industrial Products Industry (February 20, 2024)
https://dbrs.morningstar.com/research/428395/global-methodology-for-rating-companies-in-the-industrial-products-industry

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.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-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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