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 reflects Russel's continued strong financial and business risk profile despite some moderation in profits during 2023 and 2024 as a result of declining steel prices. Last year was a relatively active year for Russel in terms of acquisitions and capital spending; however, because of its strong balance sheet and internal cash flow generation, the Company managed to repay its long-term debt, resulting in improved credit metrics.

The recent announcement by the United States to impose a 25% tariff on all steel and aluminum imports is unlikely to have a material direct impact on Russel as it passes through cost increases to its customers and doesn't have any material exports into the U.S.; however, the indirect impact could be from lower overall demand for its products, supply chain disruptions, and higher steel and aluminum prices (which, in itself, is positive for Russel).

CREDIT RATING DRIVERS
Morningstar DBRS expects Russel's credit rating to remain unchanged in the near term. A significant deterioration in business risk metrics, including market position and operating efficiency, and/or a significant and prolonged deterioration in credit metrics such that the Morningstar DBRS-adjusted debt-to-EBITDA ratio increases above 2.5 times (x) on a sustainable basis could result in a negative credit rating action. Given Russel's relatively weaker business risk profile, it is important for the Company to maintain a strong financial risk profile for the current credit rating category. Conversely, Morningstar DBRS could consider a positive credit rating action if the Company demonstrates a significant improvement in its business risk metrics while maintaining its strong financial risk profile. This may include a material increase in Russel's scale and market position through geographic expansion in the U.S. along with a considerable improvement in operating efficiency driving strong and stable margins.

EARNINGS OUTLOOK
Russel's 2024 earnings declined further with revenue down 5% year over year, while the Morningstar DBRS-adjusted EBITDA declined 27% to $300 million. Russel's EBITDA margins declined to 7.0% in 2024 from 8.8% in 2023. The major reason behind declining revenue and margins has been moderating steel prices. In addition, the integration of the Samuel, Son & Co., Limited (Samuel) business has also affected margins as it carries a lower margin profile compared with Russel's existing business, although the Company is targeting to improve efficiency in that business over the coming years.

We expect Russel's revenue to grow in 2025 as steel prices are likely to stabilize while the volumes are likely to grow, although uncertainty remains around tariffs, which might affect both volumes and the pricing outlook. Margins are also likely to improve modestly over the coming years as the Company is spending heavily in facility modernization and value-added equipment, which will drive further shifts toward value-added processing. The integration of Tampa Bay Steel Corporation, which is a higher margin business, along with improvement in Samuel's operating efficiency are also likely to support margins. Overall, we expect Russel's adjusted EBITDA to grow to around $350 million in 2025.

FINANCIAL OUTLOOK
Russel had a strong cash balance going into 2024 and also generated significant working capital inflows, which the Company used to repay its long-term debt prior to its maturity as well as to invest heavily in acquisitions ($328 million) and capital expenditure ($90 million) along with dividends and share buybacks. Therefore, despite the Company's lower earnings and significant investments, the Morningstar DBRS-adjusted gross debt-to-EBITDA ratio improved to 0.7x in 2024 from 1.0x in 2023.

Going forward, over the near to medium-term, we expect some increase in leverage as Russel is likely to continue its acquisitions and capital spending in facility modernization and value-added equipment. However, given the Company's strong financial risk profile, Russel has ample room in its credit metrics, and Morningstar DBRS does not expect a modest uptick in leverage to be a material concern for the credit rating.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BB
Russel's CBRA profile 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; and diversified product and client portfolio. 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.

Comprehensive Financial Risk Assessment (CFRA): AAL/AH
The Company's CFRA reflects its strong internal cash flow generation along with conservative financial management policies.

Intrinsic Assessment: BBBL
The Intrinsic Assessment (IA) is based on the aforementioned CFRA and CBRA. Taking into consideration peer comparisons, among other factors, Morningstar DBRS places the IA in the middle of the Intrinsic Assessment Range.

Additional Considerations: None
Russel's Issuer Rating includes no further negative or positive adjustments because of additional considerations.

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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's IA can be found at https://dbrs.morningstar.com/research/448975.

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

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025), https://dbrs.morningstar.com/research/447184
-- Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025), https://dbrs.morningstar.com/research/447185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186

In assessing the credit risk of Russel, Morningstar DBRS uses the "Global Methodology for Rating Companies in Services Industries" to assess the credit risk associated with the distribution business of the Company, and the "Global Methodology for Rating Companies in Manufacturing and Production Industries" to assess the risks related to the Company's metal processing activities.

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/431153.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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