Q2 2020 Russel Metals Inc Earnings Call
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Okay can I get the spelling of your first name please.
First name David the I'd last am Brown be are all W.
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Thank you.
Thank you for muscle Russel metals or from a different company.
No I am from IRA A.I.E.R.A.
Hey, I E R. Eight.
Perfect.
Thank you all teacher to your conference it has already begun.
The conference is now being recorded to operate the overall left in the economic conditions impacted activity, particularly the front part of the order.
In order to adapt we made a series of rapid changes throughout the quarter relating to staffing, which is down around 15% cost containment discretionary spending which is also down a fair amount in inventories as we pulled back on our procurement activities.
I think the results for the quarter show the flexibility of our business model.
I think as most of you are aware variable costs are big part of our business they represent around 85% to 90% of our total cash cost will include cost materials employee expenses other operating expenses.
And it's just one example, our variable up employee expenses are down over 25% versus Q1 of this year in down over 50% as compared to the 2019 average.
Counter cyclical cash flows we talk about this a lot in the quarter, we generated $95 million from noncash working capital this quarter.
Diversification across North America, just as coated 19 impacted the global economy in very different ways. We've seen that our risk has been reduced by having a broad geographic platform and very diverse customer base. We do not have all of our eggs in one basket.
Lastly, our capital structure is in great shape, with our net debt coming down or liquidity going up substantially in the quarter. If you go back to our Q1 conference call. We talked a lot about the ability to generate cash flow in this part of the cycle and I think our Q2 results provided that illustration.
If you go to our financial results on page six.
From an income statement perspective.
The gross margin percentage remained around 19%, but the dollars came down with lower sales activity.
As compared to Q1, our sales in Q2 declined by about $227 million in gross margin declined by about $42 million, but our EBIT and our EBITDA only declined by by by about $4 million.
As mentioned earlier, we quickly adapted to the environment and were able to bring down our net cash costs on almost a dollar for dollar basis with the decline in gross margins.
This bottom line was achieved despite a couple notable items one with our share price increasing in Q2 versus a decline in Q1, the mark to market on our stock based compensation was a 3 million dollar expense in Q2 versus a $4 million recovery in Q1. This is.
Noncash.
But it flowed into our EBITDA.
Also we took an additional $5 million provision related to the potential risks in our inventories energy in particular. This is also a noncash item, but it flowed into our EBITDA.
Overall, given the strong financial profile of our company. We're pleased to once again declared dividend of 38 cents a share for our shareholders.
From a cash flow perspective, 95 million dollar reduction on working capital with the biggest shifting from accounts receivable our credit team did an absolutely terrific job in our pace of collections was well above normal.
We also lowered our inventories and I believe that dependent upon the future economic conditions will make further progress on inventories in the months in quarters ahead.
Capex at $5 million is pretty modest in there are no large commitments on the come.
From a balance sheet perspective.
Net debt declined from $443 million last quarter to $368 million at the end of June or 75 million dollar reduction as a result, we're sitting on a net cash position about $77 million, excluding our term debt and this gives us a lot of dry powder.
And operational flexibility.
For shareholders equity there is an accounting adjustment because of the FX shift at quarter end second quarter versus quarter end quarter one.
The bottom line is that we made really good progress in driving free cash flow and I believe we still have more on the come.
If you go to page seven we have some segments at PNM information.
The service centers that well under some really tough market conditions, despite revenues coming down to $373 million, our gross margins held in and around 21%. In fact, we generate a higher operating profit in Q2 than we did in Q1 tons shipped were down 14% versus Q1, which is better than the industry.
Data that we've see among our competitors.
The stability of our gross margins in a declining market in many respects was due to the value added processing and the investments that we've made over the last number of years.
As mentioned earlier, the team's ability to adapt quickly to the evolving market was a big factor in driving down costs.
In energy.
There were several macro factors on top of coded, including low energy prices drilling activity levels, along with weather delays in western Canada coming out of breakup.
That said, we have two distinct sub segments within our energy business with different results. The field stores Canco segment continue to hold a better in the quarter as it actually posted an operating profit of $4 million that operational supported by infrastructure activity related to the Trans Mountain project.
By contrast, the CTG in line pipe part of the energy segment incurred a loss, we're very focused on inventory management across all of our business units, but in this segment in particular.
The distribution segment managed really well and it's very tough environment led by the Canadian business, which typically structures, it's buying and selling activities on a back to back basis. So there is relatively little risk and fairly stable margins.
On page eight we have segment to balance sheet information provide a frame of reference for some of our recent capital allocation shifts.
Our segment to net identifiable assets declined by $129 million since year end.
Most of the shift was on the energy side.
We lowered the energy segments identifiable assets in both absolute dollars as wells on a relative basis.
As an example metal services was 40% of net identifiable assets at year end and is now 45%.
On the energy side, most of that segments identifiable assets are working capital with very little six assets more specifically of the $612 million of identifiable assets within the energy segment at June Thirtyth almost half is those CTG in line pipe working capital as I said earlier inventory management.
With that segment is a key focus.
Now I know outlook is probably about a big question for lot of people. So let me just say this in terms of overall outlook for our business.
We aren't very good at predicting the future, but we are really good at adapting to at.
This quarter demonstrated that so from my perspective, regardless of how economic conditions evolve we are really well positioned from both an operational and capital structure perspective to take advantage.
In closing on behalf of John and other members of the management team really like to express our appreciation everyone within the Russell family.
This quarter presented some really unique.
Challenges and we couldn't be more pleased with the teamwork and resourcefulness of our colleagues.
So operator that concludes my introductory remarks remarks, if you now open the line for any questions. Please.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone.
You will hear three tone prompt acknowledging our request and your questions will be pulled in the order their received.
If you are using a speakerphone please lift your handset before pressing any keys.
Your first question comes from Michael Jumei Scotiabank, Michael Please go ahead.
Yes, Hey, good morning, guys.
So first question.
Just wanted to know if you guys could provide some specifics on on the way subsidy in the quarter and its contribution.
Thanks.
As far as there.
Just as it relates.
Margin progression given your expectations for the way subsidy and how sustainable.
EBIT margins are answer the second half.
Sure so what I tackle that Michael.
So in terms of waste subsidy, we havent disclosed the specific number but what I'd say in part of the reason is because we look at our.
Staffing cost in totality and there's multiple elements attached to it we think the government's initiatives to actually supported employments made an awful lot of sense to be getting companies through this period of time.
And we we reacted to that appropriately.
What we've included some disclosure of the nature of the Beast in terms of how the methodology works so in the quarter we qualified.
For the subsidy benefited for 12 weeks of it.
The maximum per employees $847 per employee.
Not everybody yet the maximum so on average we are less than the maximum which is nature of the beast.
And in Canada, we have roughly 8100 1900 employees.
In terms of the go.
Sorry in terms of in terms of the go forward. The way we look at our business model is really simple in some way is back to what we talked about before we look at constant in totality in.
And in margins in their totality and.
In many cases, when we see what's in front of US, we're just going to have to adapt to to varying circumstance. So as the way subsidies start to fall off towards the end of year, we'll make other operational decisions and try and work towards getting the appropriate bottom line in appropriate return for our shareholders. So we think that that was the.
A good incentive in terms of keeping employment at an appropriate level. During this past quarter and as that starts to roll off we'll continue to receive revisit all of our various cost line items overhead head count in the like.
Okay. Thanks.
Really good color.
Hey, just turning to the energy products.
You should process.
Sorry terms is really really drop there so maybe given some of the softness in the FCC pricing what is it fair to expect continued margin pressure through the second half until say.
Tories are adjusted Hey, how should we think about mix between LCD Genie oil shale source in the second half as well.
Yes, so well that wasn't sure.
If you like more to go ahead go ahead.
Go ahead, John sorry.
Yes look so the line pipe to nail CTG is definitely we're having there are issues with the turns and again just a volume slowdown you fell to the rig count levels linger and breakup, we are the low point 13.
And as we felt most bounce back.
45 as of this morning.
Again that still off 67, 68% from last year. The us is down to 51. So there's just not a lot of demand out there for that product.
And so we'll continue to work through that determines are much lower than we want in that segment.
Flipping over to the feel store side.
Returns or are down slightly but they're still in there in a pretty good spot for us we continue to turn inventory, we adjust quicker there because that.
Part of the business again is there for the life of the will maintain and the maintenance fees.
Below the projects like the Trans mountain that we're participating in phase one in phase two throughout the end of this year.
So the terms there.
Separable level although.
Acceptable levels, our focus point as Marty alluded to earlier really below CTG.
Again this just demand issue right now, it's very challenging plus you have an overstock from all distribution.
Okay, Great and maybe just a solid Johnny.
Hi that inventory discussion what your expectations on working capital requirements for the second nationally.
Again things can change obviously in this market presumably even.
Your businesses are seeing different trends, but I'm interested to hear and how much excess inventory you guys. Thank you have.
Again, particularly ASG or anywhere else in your business.
Yes, so right now no CTG pipe.
We're carrying probably have turned in a half to two turns of inventory versus what we would like to have.
We will continue to try to bleed at all.
Really watching our.
In the orders coming in right now so with exception of one operations is operated at a profitable level may continue to.
A program that goes forward that is locked in its just not sold upon arrival.
So, but we basically changed all of our purchasing to reflect.
Only items that are so slimming in until we center inventory down for the appropriate level. So I think we'll continue to throw off working capital there.
Again, it will be based on what volumes are available in the market at the low rig count it slow slow grind to get that inventory.
Okay, great guys. Thanks, yes.
Thanks, Michael. Thank you. Your next question comes from Devon, Dodge BMO capital markets Devon. Please go ahead.
Hey, Good morning, This is Jim Shaw, calling in for Devon.
Can you can netwise name. Thanks can you guys, maybe give us little more color on some of the demand trends in your service centers across here regions and end markets.
And are John you want to him.
Yeah, I'm, sorry, you broke up just a little bit I'm, assuming you said demand trends is that right Jim.
Yes.
Yes, so if you look across our service Center segment.
Nonres construction held up really well compared to what's going on in the world right now with the pandemic.
And so we have seen we saw slight pullback early on in April with that.
As everybody adjusted to the.
Central versus non essential came back pretty quickly in May and June as all are demanded.
So.
What we're starting to see as construction the solid those jobs that were put on hold are starting to move forward and that's really the bright spot thats out there other segments that we've seen in.
Heavy equipment bag those slowdown.
An impact 2025, 30%.
We are seeing other factoring end use market slowdown as well.
So the biggest thing we watch when we look at construction for the go forward is how much of this detailed project versus how much is in the architectural billing index going forward, which represents nine to 10 months out.
And that that index in the construction world.
Next is.
Actually improving still below 50, which is a sign of the growth, but it's actually improved.
Quite a bit in the last two months. So we're hopeful that tail will carry on into next year.
The other end markets, obviously that we serve for energy related those are down dramatically.
50, 60, 70% based on the fall in the rig count and the.
Depending on where you are what part of the country. We are seeing some projects in the energy go forward Trans Mountain as we look at Western Canada, there isn't.
But they're going forward.
But overall it most of our in new segments are down right.
Within just just for you Jim we don't participate in automotive.
And so thats something that we again, we watch it but as it relates to our competition that could frequent our market, but we don't participate in automotive other than maintenance.
That's great. Thanks.
Second question can you guys expect industry M&A to pick up and as there have been an increase and seller interest.
Yes, so so we've actually seen a fair amount of deals coming across.
And.
Especially relative to first quarter and ended the year.
Some of those deals are obviously.
More liquidation type deals where people are looking to get out.
We are seeing some reasonable things to look at right. So we think there are some opportunities in M&A for us in this market that we will explore what was super they go.
Todd.
And one last question I have you guys been seeing any increased competitive pricing pressures in the market.
Oh, yes across the board in every segment.
The strongest is obviously LCD Jay line pipe were centered in service centers and again I want to commend our services to the tremendous job maintaining margin.
Typically if you look back at our historical performance in a falling price environment, you would see margins drop as a gross margin percentage they've not done so and that's that's a nod to our value added processing. That's out there as we continue to grow that segment of our business as a percentage of our sales.
It's holding that margin steady.
And so we're we're very pleased with a performance there and with our services overall financial performance, Yes, there's margin pressure in all three segments.
Got it thanks, guys I'll turn it over.
Thank you. Your next question comes from Frederic Bastien Raymond James Frederic. Please go ahead.
Hi, Thanks, and good morning.
Yes, I'm just wondering how much cash you can reasonably expect to raise from working capital in the second half and.
Is it fair to expect that most of that will allow will come from inventories.
Hey for it Yeah, I think you to answer your latter question, Yes, I think it's fair to say, it's mostly going to come from inventories.
As I mentioned earlier on the receivable side of it we had a really really strong collection quarter and our receivable levels to have been brought down in really good shape from that perspective, theres more work to be done on the inventory side of it it's a little stickier interim reserve ability to move it.
But it does move over a period of time Thats, where the the focus is right now. So I think if you kind of stand back and say where are we going to be for the back half the year. Some of it is going to be a function of overall economic activities, particularly on the service center side of it but notwithstanding that I think the biggest focus in terms of.
Inventories coming down is on the energy side of it so almost perspective of economic conditions will be bringing inventories down on the on the energy side over the course of the next few quarters and even beyond the next few quarters orders of magnitude.
Probably got another 10% to go as Mike is Mike order of magnitude guests.
Thanks, Thanks, Marty now tied for us where they don't make sense of the margins on a one we have no clear idea of what time the subsidies were.
Is there way for you to provide a bit more call on down or at least.
He said provide us with some goalposts or some I am estimation of what these might have been.
Yes, so suffer.
The building blocks to get there.
On the Canadian side of it which is really where the subsidies are is really related to staffing levels and theres a maximum amount per person and the Max amount per person is $847 per employee per week.
12 weeks of benefit in the quarter.
And we have in Canada around 1800, 1900 employees and not everybody gets the maximum because that's driven off of where everybody's individual salary or wages are so off of their you get orders of magnitude for for that math.
Okay, that's going to be a uninteresting exercise.
John just switching gears here are you seeing green shoes coming out of energy.
Either on both sides outside of the border.
Right now, we just don't see a lot of pickup for energy for the balance of the year.
I think inventories hopefully we'll start to come in line from the.
Distributor side in People's inventories will start to come down to reasonable levels, but we're not again when does not saying a whole lot other than in Canada is benefiting.
From a heavy oil and the US is basically shut in or capped off their heavy oil production, which is primarily the Dakotas, Pennsylvania area.
Due to the costs to produce that heavy oil.
And they're primarily running rigs in the Permian the locals basins, where we do operate with our field stores. So there is a benefit for Canada, because there's a need for the heavy old come across the border to run the refineries and do the appropriate mix for.
Gasoline to be Houston's different grades of gasoline that's out there. So we've seen some lift there I think that we'll continue to happen as long as old as range bound in this 40 to $45.
As that starts to creep back up and sustained above 50, and 60 than I think you'll see.
You asked to start open back up more of that heavy oil play.
Awesome My last question John.
What's the most important lessons you are taking away from this dynamic.
Okay.
I guess is lessons and things that you reflect on that you really proud of your feet long for first and foremost was the safety and the way that our people responded to it through our decentralized model.
We had to take the approach really centralized to get the combination of information get a disseminated up to the teams.
And how they reacted because it's very.
Just as the pandemic.
Tax different places in different regions of the world differently.
In terms of number of cases positive cases.
Our safety team has reacted appropriately in our case count is extremely low we've had I just a handful of interruptions and so just very proud of our people for how they've handled safety.
I would take on the welfare everyone within the Russell family their suppliers in there.
Our customers to make sure we're operating safely.
And so some of the lessons we've learned obviously as you go through any downturn you can.
Look through your operation, there's an opportunity to go back tied your belt.
We do around what are the lowest operating cost on a percentage basis in the industry.
What we're looking at ways to do that better it's really challenging our people and we continue to find ways to do that better through technology.
Through a different operating inefficiencies with a new equipment that we have out there and then really afraid we're learning that our value added processing a growth initiative in service centers.
It's really just a stronger growth opportunity in a downturn than we anticipated.
There are lot more customers are looking to us now do that.
Give you reference point, we're bringing on into two pleasure in flat laser Vectoring, Georgia facility.
We'll be shifting workover, but we've been developing that customer base from another facility. We're already booked out at one full shift in well into the second shift and we get started operation. We're still probably 30 days out from started operation. So we're seeing that stickiness of those customers willingness to do more and more value added processing they've had to pull back as well.
So we're very we're very pleased with that some of the lessons learned on the energy side.
We're looking at our purchasing trends specifically in those CTG in line pipe are important trends, where you get caught with material on the water and trying to evaluate our buying patterns to make sure that we can maintain it turn level, it's reasonable to ultimately get some level, we want to have returned to our shareholders.
And so we're really working through that.
Closely and we're really happy with their feel stores and we continue to see.
Even in this low low rig count there continues to provide that maintenance component. Although there is not the project piece of their businesses out there. The maintenance component is there and we can adjust scale and size very quickly so very pleased with that.
Awesome, that's something that's very good color John Thank you very much guys.
Thank you. Your next question comes from Michael to foam TD Securities. Michael. Please go ahead.
Thanks, Good morning.
First question just pointing a thanks first question just relates to service center or demand in volume trends volumes are down 19% year over year in the quarter I apologize if I missed this but I'm. Just wondering if you can provide a bit of a snapshot as to how that looked at the end of the quarter just to get a sense for the progress.
As the quarter a quarter evolved and then and then further to that any indication as to sort of where things sit now on a year over year basis here.
In in early August.
Yeah, John you want to handle or do you want me to.
Good morning off about coal.
Sure. So Mike your premise is spot on which is you know the the entry to the quarter to look an awful lot different than the exit from the quarter.
And.
April was obviously down a lot from March may picked up from April and June picked up from May and so when we look into quarter as a whole the June activity on a run rate basis was higher than the quarter average.
But that being said the June activity was still below pre cove at levels and it was probably below pre covert levels by I'd say about 5%.
June activities, continuing on and a comparable paced where things were at in June the you've got some noise in July though.
Holidays in different regions go back.
In Canada today fourth of July. So July is an interesting inflect inflection point, just because of some some seasonal dynamics I think the ultimate test is going to be how things evolve into August where we're in and September but if you look at the step at the second quarter in its totality, though there were really two different stories of things dropping off.
Pretty hard into April and then picking up at a reasonable level, but still slightly below pre cobot levels by time, we got digital my time, we got to June.
Okay. That's helpful <unk> down 5% year over year, Oh by the time, you got to June sounds actually quite quite good in the context of or the environment. We're in.
I'm just wondering did do you think there was some some sort of pent up demand that maybe.
Helped a help those numbers a little bit as you got into June and maybe July or is that.
Do you think indicative of kind of sort of a a reasonable run rate for the next little while absent further acceleration reopening.
Yes, so I think what we really saw pent up demand is really jumped in the last half of May and as we came out of April.
So much thing so many things being to shut down.
We really saw it in May Oh, it was a little nervous going into June to see what Hill June actually performed a little bit better again as Marty mentioned, you got a lot of noise and ER in July with all the extended holidays Qubec taken the two weeks makes it a little difficult, but what we're seeing is it looks like July basically flat with June with all the noise.
Oh.
August seems to be coming out at flat to slightly up from that.
I think we're going to move incident, our press release, I think we're going to move in concert pandemic and so you're going to have an uneven recovery. So we'll take two steps forward, maybe one step back is the pandemic surges.
And it causes people to move back and forth in different phases of opening obviously children going back to school others. So.
One belief that's out there that that may cause the pandemic to search for a period of time. So we'll watch that closely but right now we're operating that even or slightly above what we saw in June.
So far in core.
Okay. That's helpful. John It and I suspect there are a some regional differences, but but just from a high level perspective is what you're suggesting in terms of the volume trend is that I mean is that generally applicable across most markets or is this really a mixture of of wildly different things going on in different drew.
Restrictions.
Hi, it's typically applicable across and it again youre going to see different market trends with but again, where you have an area. This not.
Intensely impacted by the a pandemic typically is a low population area. That's not an intense still user because the population is just not a lot of demand there. So.
Larger cities have a larger issues to deal with the U.S. is obviously not dealing with it.
As well as Canada, So we're very.
Please with what's going on in Canada, right now so we're seeing some rebound there our U.S. operations actually were extremely strong and the service center sides in the demand.
We were only down 2%. So we were very very pleased with what happened in the U.S. side, Canada is making strides to come back very strongly as well so.
I think it applies across the board again borrowing that large large outbreak.
Fortunately, we're not in some of the states that have been it impacted dramatically other than Texas.
And so.
But right now we haven't had to deal with that.
Again, Canada's handle on it so much better than the U.S. today. So we'll see we'll just see how it goes forward as we continue to come and open up the economies.
Okay. Thanks.
Next question relates to steel prices, we've seen hot roll coil under some pressure, maybe leveling off here and potentially some.
Possibility of maybe having kind of bottom heading higher but wondering if you provide any thoughts on that I know, it's difficult, but but secondly, what does what does the pricing you've seen.
Thus far through the second quarter imply for for margins in service centers or should we be thinking about service center margins potentially being down a little bit relative to the second quarter because of what we've seen with prices.
Sales first part of your question, Yeah, you're right it appears that.
A few using the hot roll call as a proxy appears is found the bottom for 40 range. It's bouncing off the bottom slightly spreads which is the main driver for hot roll coil steel pricing now.
Actually in the last few days has solidified and we're seeing some potential lifts there. We're very on even though are you see that come out if you're looking in the Midwest to scrap pricing for the U.S., that's down a little more than the southeast yeah, primarily driven by exports Oh, there's been a big drive from the export.
Market from Turkey, Dubai, scraps, what's driven that price up so again I think we'll follow scrap as it moves it looks like it is for me.
If you look at demand steel mills running at 59%.
So there's plenty of room to bring on capacity that could add extra capacity will likely keep it range bound.
However, if you look at the North American price right now we're always prices on the world market. So that would mean imports are probably not going to be a big.
Factor into Q3, and so really we're fighting against yourself to some degree there on pricing in the North American market. So.
As long as we balance capacity.
With demand then there should be room to run on pricing, but again I think it will remain range bound for the balance at year.
Okay, and any other but I'm not sure <unk> margins I think.
Turns are strong and service centers were north of four continue to climb there with the again, we've talked about before turning to or just a little slower in our Canadian service centers compared to our U.S. service centers, just due to geography and the time in transit to get material into the states. It's not made in Canada.
I think our margins will hold in fact, we may see some slight margin increases throughout the quarter as we get the rebalancing what materials left will be flushed out that may be carrying any higher cost and we.
We replaced with lower cost material and again as we continue to press forward trying to grow our value added initiative that should help margins as well.
Okay. Thank you for that just turning to the energy products segments. If you had not had the a the at rvs looks like that would have been sort of breakeven on an EBIT basis.
Recognizing that field stores were [noise].
You'll stores were profitable.
Just wondering though as we as we look forward or any sort of indications on how we can think about the the margin profile or profitability of that business as a whole.
Would be would be helpful. If there's any comments there.
Yeah, So as Marty alluded to you really got to subsets within the energy for US you feel store margins, although they saw some pressure they seem to normalize now maybe a couple of points below where they were generally on gross margin percentage.
It's really L.C.T.J. line pipe and there's just the margin challenges. So there's just the order counts so low and people doing projects due to the nature of one there.
Their ability to borrow money for project right now is very limited. So there are only a handful of projects are going and.
And that's just create an intense margin pressure in that environment for so I think any any lift that we get from the thrill stores, maybe offset from mostly TG in line pipe. We'll continue to watch all CTG looks like is leveling off price, it's holding up a little bit better than line pipe line pipe is continue to drift with flat roll starting to.
So the bottom.
And they had been the main substrate for both products.
I think that we should see that usually two to three month lag. So we should start see that bottoming as well.
But there's so many mills that are idled or or.
Short term or indefinitely right now.
In both Canada, and the US I think we'll have capacity to an up capacity coming offline rebalance inventories there over time.
So we're hopeful going into Q4 Q1 next year that we'll see the inventory start to rebalance throughout the industry as a whole.
No provide some room for margin expansion at that point.
Okay. That's helpful. Thanks, John and then lastly, Ah I got I apologize if I missed anything on this but the.
The renewal of tariffs against aluminum by the U.S.
Canadian aluminum by the U.S. or just yesterday, no aluminum is not a or something you deal and but.
Can you talk about what what the potential reintroduction of steel tariffs if that would happen what what you think that would mean a boat overall as well as for Russell.
You want to talk about steel and aluminum Americas again, so really we know it I'm just I mean, we don't talk about aluminum <unk>. So just using looking at what happened with the reintroduction of a renewal up those tariffs and thinking about the possibility that they could also bring back tariffs are under 232 against Canadian steel.
So just wondering up more specifically about what what you think that would mean if that happened steel side.
Oh, Yes first of all of these highly unlikely course, I thought it somehow in like the first time, so I'm sorry, but if it does happen. It's you know we do so look across the border and and all of our products that I think it would be it would be healthy for Russell and for the service Center industry.
Holes were all the Mark on business plus you're right you had a component so.
It would cost prices rise office about 25% very quickly and it would be helpful for us in that regard with demand levels being where they are right now again I see it being the challenge to get that in for steel, but anything that's going to cause that price increase would be helpful for us it could be harmful for some work.
Or base and how they would have to adapt to it so it could hurt demand but.
Again, we we would have to look at it you can you can tell what it did course work when that implemented I was early on it.
So.
Right. So it sounds like you wouldn't expect it if it were to happen or you wouldn't expect or the reaction to be much different than it was last time around this is what I'm hearing.
That's right. It's just it's just on a relative basis to demand where demand is today versus where it was at that time, so that would be the only difference isn't.
Okay. That's helpful I'll turn it over thank you.
Thank you. Your next question comes from a new pretty hard stifle GMP a new please go ahead.
Hi, Good morning, Marty just with respect to the government subsidies that you guys received in Q2 is that something that will be repeated in Q3 to four or is it a one off deals and do you have to repay those funds or is it an outright grants.
As to the second question first it's an outright grant and tends to your first question. So the government has done this in phases in the introduce the the revised rules for the renewal phases.
Post Q2, and effectively they go to the fourth quarter, but the impacts of them start to get tapered off as you get back into the Q3 in it and then into Q4. So the way we look at it in a seemed way the government looked at it as well as it was a stop cap measure to us.
Support employment in the Canadian economy as it was going through transition, we think that work than it was helpful and it was impactful.
When it's running its course, so as they said earlier one of the things that we're always doing is revisiting.
<unk> costs are totality, so to the extent that we are going to see some papering off of those we subsidies towards the fourth quarter, sorry into the fourth quarter, we'll be making other adjustments along the way dependent upon what or otherwise going on in the broader economic condition. So there were.
The benefits in Q2, they'll continue to be some benefit in Q3. The way. The program is set up and then the taper off pretty substantially in Q4.
Okay, and you think it just.
No no just to follow on that Theyre, obviously, just a tremendous amount of cost related to cope with and the.
Rapid pace when we had to implement this across all of Canada, and the U.S. and so.
The subsidies actually afforded us time as we we were able to incur costs that were obviously unexpected a.
Large degree.
Some of these large calls we had some offset with that with the wage subsidy. It gave us time to make adjustments to get things and we needed to appropriately protect our people to get through the disruption and we continue on to keep as Marty mentioned employment levels.
Appropriate with our revenue.
We now have been afforded that time that we can go ahead and make the adjustments necessary continual.
Well actually just on that one can can you give us a rough estimate of what you think your onetime costs have been today with respect to dealing with <unk>.
To quantify in a specific number I would be guessing if I gave you that but I would say there they're not materially off of what we actually received in the subsidy. So.
Yeah, I think there's more of a neutralizing effect there than anything.
Okay, well that's helpful. Thank you.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star One. Your next question comes from John Novak CCL. John. Please go ahead.
Hi, John can you talk about your thoughts with respect to right size for the Rightsizing of repositioning of your energy business.
Oh, Yeah, as we look at a as we look at that John obviously, we like the field store business canco or apex.
We've rebranded apex in states under a lead supply we liked that side of the business. It's very much like our service centers somewhere in turn similar margin profile high service business.
And so it's something that we see as a platform to continue on we looked at O. CTG Atlanta.
Just becoming more and more structurally Chuck.
And so we're taking different avenues in different looks at how to reduce our capital exposure there.
And we May end up shrinking the size of the business under long term.
Floor Russell I'm, just wondering what it represents as far as our total portfolio.
Okay. Thank you and.
Marty was did you defer any payments with respect to.
Settle all state provincial taxes that will fall into the second half a year.
Okay.
Yeah, Yeah, Yeah, we paid if it will flow through in the second quarter.
I mean, when we did areas I think like last year, you had a large tax payment in the first half. It doesn't appear that you had one this year does that happened in Q3 or Q4.
No no no not with the level of profit profitability.
Okay, I'm thinking of last year's taxes that were due this year right.
No material issues there no no okay, no big stuff.
And Marty I'm still confused why there's the unwillingness to disclose what the government subsidies are every other company is doing at summer, including it in their footnotes, it's really hard to make sense of your margins and it seems that you just you're introducing unnecessary volatility and forward estimates without giving some sense of what those were.
I will let John we've seen.
Variety companies frankly, all over the map in terms of their disclosure on this topic.
We've included the disclosure on the building blocks associated with it and you know as we said before a couple times in different ways. You know the subsidies were meant to provide some incentives to retain employment. So we view that is a component of our overall employment costs and it's a single component it's not the.
It's not.
It's not it's been in its entirety. So the building blocks are all there in terms of did the disclosure associated with what the subsidies are.
Okay. Thanks.
Thank you there are no further questions at this time. Please proceed.
Great. Thanks, Operator, we'll look we appreciate everyone's interest and a discussion for a for Russell on the second quarter Conference call. If you have any further questions or fall please feel free to give.
Myself for John a call again appreciate it and we look forward to watch staying in touch and I'm talking in at the end of the third quarter.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating in NAFTA you. Please disconnect your lines.
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