Q3 2022 Russel Metals Inc Earnings Call
Okay.
[music].
Good morning, ladies and gentlemen, and welcome to the third quarter 2022 earnings conference call for Russel metals today's call will be hosted by Marty Jurafsky Executive Vice President and Chief Financial Officer, and John Reid, President and Chief Executive Officer of Russel Metals, Inc. Today's presentation will be followed by a question and answer period at that time, if you have a <unk>.
Question. Please press star one on your telephone keypad I'll now turn the meeting over to Marty Jurafsky. Please go ahead.
Terrific. Thank you operator, good morning, everyone I plan on providing an overview of the Q3 2022 results and if you want to follow along they'll be using the Powerpoint slides that are on our website and just go into the Investor Relations section.
If you go to page three you can read our cautionary statement on forward looking information.
Before I go into detail, let me put a little context around the quarter. We're very pleased with how our business segments performed there has obviously been a fair amount of uncertainty in the broader economy of late but our operating units showed tremendous resiliency as they navigated through the quarter. Another way that I would describe our results is balanced.
Our broad geographic platform across our three business segments. We are pleased the breath of the strong operating performance across the various segments.
So, let's turn to page five.
You discussed the macro market environment.
Market conditions.
Steel prices have come down but remain at very healthy levels.
Can see on the left chart, even though theres been price moderation for sheet and plate the price levels that were experienced in Q3 remain well above historical norms.
The right chart illustrates the recent movements in service center inventories for the industry inventory.
Levels in Canada on the top right chart and U S. On the bottom right chart remained in a normal range compared to pre pandemic levels.
As we look at takeaways from our customer base demand for metal service centers customers, which includes industrial manufacturers fabricators nonresidential construction agriculture shipbuilding infrastructure and energy remains active in their respective markets.
As a result of seasonality we did lose some operating days in Q3 due to the Canada day fourth of July and Quebec construction holiday periods.
Looking forward the broader economy has some uncertainty because of higher inflation and increasing interest rates. While these factors typically impact sectors, such as homebuilding and retailing more than our customer base. We do expect to see some caution in terms of near term buying activity amongst our industrial customer base in the coming months in.
We do expect to see some seasonal slowdown in Q4 due to the normal vacation schedules around U S Thanksgiving and the December holidays.
Going to our financial results on page six starting at the top from an income statement perspective.
Revenues of $1 3 billion in Q3 was the highest level that we've ever achieved.
Overall gross margins declined to 21, 5%, but remained strong.
Our Q3 results were impacted by a few items.
One a positive pick up from the <unk> joint venture in the quarter. It had a P&L impact of $50 million being combination of $13 million equity earnings and $2 million of preferred share dividends.
From a cash flow perspective, dry mark paid dividends in the quarter, which included the $2 million of preferreds that I, just mentioned plus $12 million of dividends on the common shares for total cash received a $14 million.
Going forward try Marc has already declared and we received $7 million of dividends in Q4, and we expect to receive additional dividends in Q1.
If we look back at the series of initiatives to monetize our Octu G line pipe businesses, including the 2021 liquidation of the U S businesses. The cash that was pulled out of Tri market. The time that the joint venture was created in 2021 in combination with the recent and expected dividends from trademark.
We will realize a very profitable exit from our OSB TG line pipe businesses.
In the quarter stock based comp had no impact on the P&L for Q3 versus a $4 million recovery. In Q2 also there was an increase in the in our <unk> reserves on inventory, which had a $6 million impact for the quarter.
From a cash flow perspective, we had a $41 million increase in working capital, which was driven by the lag effect between accounts payable versus inventory and AAR.
More specifically, we had an increase in accounts payable while inventory it.
We're relatively flat.
Inventory being flat was a combination of a small increase in tonnage offset with a small decline in average unit cost for inventory expect both tonnage and unit costs to come down in the months ahead as we see working capital converted to cash in Q4 and into Q1 of next year.
Opex of $10 million has picked up a bit as we are continuing to advance a series of our value added equipment projects.
From a balance sheet perspective towards the bottom of page.
Our net debt declined from $108 million at the end of June to $92 million at the end of September as we continue to generate good cash flow, our liquidity is greater than $500 million and our credit metrics are strong.
One item of note in the quarter is that we have newer ties about $35 million of assets and corresponding liabilities from our nonunion defined benefit pension plan. The counterparty is a highly rated insurance company. This will close in Q4.
As Youll see in our financial statement footnotes, we have a very nice surplus of over $30 million in our pension plans and that surplus can be used to reduce the company's future contributions into various retirement plans. This any utilization reduce risk for all parties, while providing a strong credit counterparty for the benefit of our retirees.
For share buybacks, so far we picked up a little under $19 million of which around $16 million was accounted for in Q3 at an average cost below $28.
Our capital base grew in the quarter with our book value per share up another dollar 81 per share and is now at $24 70 per share to put that in context, we acquired shares under in CIB at around one one times book value.
Lastly, we have declared a quarterly dividend of 38 cents per share.
We've added a new slide on page seven if we go to that for a second to provide a variance analysis between last quarter and this current quarter.
Looking at service centers the decline in volumes impacted EBITDA by around $11 million as I mentioned earlier, we lost some operating days due to the normal seasonal vacation schedules to.
The $51 million decline in margins was due to lower prices, while we have not yet seen the offsetting impact of lower cost of goods sold due to lag effect, we do expect cost of goods cost of goods sold to come down in Q4.
Offsetting this was a $9 million favorable variance in service centers due to lower fuel costs and lower variable compensation for that segment.
Energy improved by $1 million in the quarter in steel distributors declined by $15 million due to the moderation of steel prices that particularly impacted our U S distributors business.
There was an $18 million favorable variance in other which included the pickup from try Marc and the reduction in variable compensation expense somewhat of an offset is the mark to market on our stock based comp that was neutral for the quarter, but digital recovery in Q2.
On page eight we have our segmented P&L information.
The service centers is continuing to do well amidst the market volatility revenues were down versus Q2, but still represented one of our top three quarters.
Shipped was down 5% versus Q2 due to the summer holiday effect that I previously mentioned, but was up 9% versus Q3 of 2021 due to the impact from the Boyd acquisition.
One disclosure item of note is that starting last quarter. We included in our MD&A tonnage information.
On a period over period comparison, if you go to page 14 of our materials that show a five year period, including quarterly information. We've also included for this quarter, our historical tonnage going back for those five years on a quarterly basis, if you want that for reference.
Continuing to service centers average prices were down 6% versus Q2, but up 4% versus Q3 of 2021 gross margins were just over 20%, which translates to about $547 per ton. The gross margin per ton in EBIT of $67 million our strong by historical.
Frame of reference and also in the context of the recent steel price declines in.
In energy, we are continuing to see positive market sentiment our energy revenues were up 9% versus Q2 gross margins came in at 27% and operating profit of $30 million, which are very nice levels compared to the periods before we monetize the Oc TG line pipe businesses.
Distributors revenues and operating results came down as they are impacted by the moderation of steel steel markets that being said the bottom line operating profit of $13 million was pretty good compared to historical periods.
On page nine we have illustrated our inventory turns.
This chart those inventory turns by quarter for each segment with energy and Red service centers in Green and steel distributors in yellow. In addition, the black line is the average for the entire company.
A few observations.
Overall, our inventory turns remained strong at around four turns by sector, our energy and service centers were consistent in that four to four five turns range for steel distributors in yellow the inventory turns were around the same level of two three in Q2 and Q3.
On page nine excuse me on page 10, you will see the impact of the inventory turns on dollars total inventory remained at around $1 billion as of September 30, which is small increase versus June 30.
The changes within the segments weren't significant versus June , but we do expect to see some inventory tonnage drawdowns and average cost reductions flowing from both distributors and service centers over the next several quarters.
On page 11, you can see the overall impact on capital utilization and returns our capital deployment is up to around $1 6 billion.
And our LTM returns of 41% remained very strong by both historical comparisons comparisons as wells versus our competitors.
If we go to page 12 want to frame up how we see our capital priorities going forward.
For investment opportunities, we seek average returns of over 15% on average through the cycle and we've delivered well above that over multiple cycles. The ongoing opportunities for us are threefold one.
Value added projects, which we've talked about a lot in the past are continuing and they are multi year initiatives for us we move forward with several projects in this past quarter and expect to invest around $30 million per year on these discretionary capital projects for several more years.
As a reminder, these projects typically have better than three year paybacks.
Second item is facility modernization.
In several cities, we have legacy locations that can be upgraded and consolidated into newer and more modern facilities.
These products will allow for volume growth increased operating efficiencies and improved health and safety conditions in a number of these situations. We will also be able to monetize the real estate from our existing locations and thereby reduce the net capital cost for those type of projects.
We recently approved a $7 million net investment related to our SaaS continuing operations. This project is underway and should be finished in early 2024 in total we expect around $50 million to $75 million of these type of investments over the next five or so years.
In terms of acquisitions, we remain committed to our financial and operating criteria as we look at acquisitions that being said, we expect to remain disciplined to get active in seeking out growth opportunities that fit into our existing business units.
In terms of returning capital to shareholders.
<unk> adopted a more balanced approach to returning capital to shareholders over the last number of months for dividends. We have maintained our 38 cents per share per quarter dividend, which equates to about $24 million per quarter. In addition, during August and September and into early October we purchased around 600.
<unk> thousand shares under our NCI be for just under $19 million in total.
In closing on behalf of John and other members of the management team I would like to express our appreciation to everyone within the Russell family. It has been a really tremendous.
Nine months in 2022, so far and is really a direct result of some very strong contributions bar by our 3000 plus member teams.
Operator that concludes my introductory remarks, you can now open the line for for any questions. Thank you. Thank.
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 with retail and prompt acknowledging our request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two.
If you are using a speaker phone please lift the handset before pressing any keith.
One moment. Please for your first question.
Your first question comes from Michael Jamais Scotiabank, Michael Please go ahead.
Hey, good morning, guys.
Hey, Michael.
This is the seventh quarter in a row that Russell beats consensus just in case, you guys werent already tracking that.
Obviously incremental strength.
The energy side this quarter, but yes metal service center profitability, it's down.
Versus last year, but still better than any other quarter or before 2021.
Can you give us a sense, maybe just break out how much value add is help a year just in terms of maintaining margins.
Yes, thanks for the question Michael.
And we have noticed but I appreciate you pointing it out there on the seven straight quarters, but it is helping.
It's an incremental would you see that every time, we add equipment and machinery as Marty said, you've seen less than three year paybacks on that so we continue to add that continues to ramp up so we're seeing that margin impact.
Again, we think that will raise the bar I think we've mentioned this before probably around two points.
Over time, and so we're moving that direction and I think you see that as a reflection now in our margin performance.
And John just on that two points.
Presumably you're comparing that with <unk>.
<unk> pre pandemic, how much of those that two points do you think you've achieved already.
I would say, we're halfway to maybe a little over halfway there.
Again this is probably another two to three year window before we Max.
<unk> the opportunities that are in this value added at the current.
Projects were looking at we may expand that further into areas that were not.
Currently we are evaluating notes that on a day by day basis.
And the only thing to supplement is what's interesting is as we have done some acquisitions over the last couple of years and probably as we continue to look at those they also come with embedded opportunities within them. So we're halfway along within our existing portfolio, but with an incremental pieces that come with new acquisitions. There is also.
New opportunities that often come with them and we have seen that with last couple of acquisitions that we've made so.
It's a moving target in terms of the incremental opportunities that are out there.
Perfect. Thanks.
And maybe just a second question nice to see the multi pronged capital return and capital reinvestment strategy laid out.
On the reinvestment piece are you finding.
M&A today competes a little bit more closely on a return basis versus buybacks.
From an economic perspective, Michael is that what.
What you're referring to.
Yes from a return basis, like which one makes more sense in terms of multiple.
They both can make sense is the way I'd characterize it so in the last quarter.
We mentioned bought back a bunch of our stock as we thought it was.
Fairly cheap and so that was opportunistic.
Have our metrics that apply for.
Acquisitions, as well and if we can buy opportunistically either internally or through acquisition, both makes sense for us so it's not really.
One or the other if we can do both if they both make economic sense, what we have seen over the last little while though probably going back six months to a year ago is a lot of M&A opportunities that just didn't have really good values attached to them.
Our expectation or perhaps our hope is that as we have a moderation of the economic conditions, we will see a more balanced approach to valuation expectations on acquisitions, which kind of lines up for us what we can do both acquisitions and to the extent that opportunistic buybacks makes sense, we can do both.
That's great that's really helpful. Thanks, guys mess it up.
Okay. Thanks, Michael Thank.
Thank you. Your next question comes from Michael to Palm TD Securities. Michael. Please go ahead.
Thank you good morning.
Mike.
Yes.
I was hoping to start with a couple of questions regarding the energy field stores segment.
<unk> performance in the quarter and your near term outlook commentary regarding that.
<unk> remains positive.
I guess the question is as we look forward.
Really to next year can you talk about your expectations for continued growth potential in that segment from a revenue perspective.
Again.
It looks like Theres, a lot of capital to spend and that there is more discipline going on on the E&P side, but they do have a lot of capital.
Backlogs are very strong right now, we're seeing those already well into second quarter.
Past breakup and beyond now so early third quarter. So we feel like the revenue will be steady potential.
<unk> projects are out there that could increase revenue for us in the energy field stores and then we're growing market share on both sides of the border.
Okay. So.
Sorry, just to clarify John when you say steady, you're saying sort of a baseline at least steady but potential for for some increases did I understand that correctly.
That's right I think there again.
Again, I think the energy will remain very steady current price of oil.
There are potential projects that are out there for potential <unk> increases going in both Canada and the U S.
So again, there may be some potential M&A opportunities for us on energy to expand some of our value added processing there but.
So we will continue to look at that but on a same store basis, we think it's right.
Slow steady increase and then with these projects potentially nice pops along the way.
Okay, and then just because of this this segment does not include the.
CTG line pipe anymore, just from a seasonality perspective.
When we when we look out to say next year can you just help us sort of make sure we understand the seasonality properly.
The biggest challenge with seasonality obviously is in Canada.
When we're looking at breakup.
Slow down because they can't get the pipe into the field.
That does impact us as far as what projects are going forward, we will deliver some to the past, but it's still very difficult transportation, so that as an industry as a whole just slows down for that.
Roughly six week period dependent.
Got it on mother nature, whether it's four weeks or eight weeks, but the.
The industry as a whole typically slowdown slowdown some projects. There there are some maintenance projects, but there is limited transportation opportunities. The large majority of our energy, obviously still being in Canada. So we will see that seasonality impact.
Okay. So it is not materially different going forward than we've seen historically.
Given the change in sort of the composition of this segment.
Keep in mind field stores would dip down, but they wouldn't stop where you are.
OCG line pipe will go to.
No revenue or little to no revenue during those periods there is maintaining its more of an even bandwidth.
<unk> bandwidth of earnings during that cycle and revenue for the energy field stores. There is some maintenance component there are some things going on but they don't they don't just have revenue stop like the OCG line pipe.
Got it and then just last one for me on and on.
On energy, it's not not for this segment, but for the Tri Mark JV earnings.
Marty you said it was $13 million of earnings in 2 million of preferred share dividends in the quarter like with with the strength Youre seeing in energy markets is that the sort of level of run rate performance, we should expect.
From that JV.
Quarterly on a quarterly basis, now or how do we think about that going forward.
Near term it remains strong but on average no. This is this is an above average level, it's still well above average level and we're enjoying it while we're having it.
And we're reaping the dividends as a result of it but it's not a sustainable level at this level.
But to the extent that things don't rollover in the sector like I understand that this is a cyclical.
There is still cyclicality here so.
But.
For the foreseeable future, assuming theres no kind of rollover in demand. This is the kind of level, we should be expecting.
So let me put this in the very near term and then machine back to even your your question to John about the seasonality and spring breakup in Canada for the very near term, we're still at a really good clip for that business, but spring breakup will kick in in Q2 of next year and so that's on the horizon, but with.
What we see today it remains strong absolutely remains strong so there will be some seasonality that kicks in next year and then how the cycle evolves it'll be what it'll be but for the Q4 of this year and probably Q1 of next year.
It remains very strong.
Okay.
And then just shifting over to service centers.
You talked about some destocking.
Our customers in the third quarter and some cautionary.
Some cautiousness around buying as well here I think in the fourth quarter. So I guess when we look at same store tons should we be thinking about a sequential change thats consistent.
With what you saw in the third quarter.
There is sort of down 7% sequentially, our third quarter like is that the kind of.
Order of magnitude, we should be thinking in terms of fourth quarter versus third quarter and service.
That's fair, Mike that order of magnitude and it was mentioned on the call. We included some new information in the back now that shows our quarter over quarter shipments.
Going back five years. So you can see that seasonal dynamic that plays out there's been a couple of times. So for example.
The fourth quarter of 2021.
We made an acquisition so the numbers are a little bit apples to oranges, but if you look back over those five years Youll see that order of magnitude between Q4 and Q3, the seasonal impact in year, 7% to 10% is probably on average what its been over an extended period between Q4 volumes in Q3 volumes.
Sorry, 7%, 10% down Q4 versus Q3.
Alright, okay.
Okay, I will get back in the queue. Thank you.
Great. Thanks, Mike.
Your next question comes from Ian Gillies Stifle Ian Please go ahead.
Good morning, everyone.
Hey, good morning.
Yes.
In the metal service segment.
<unk> tend to have a focus on HRC price because it's in our face.
But can you maybe talk about what's happening with some of the other products within that segment, whether it be plate or some of the other upgraded products.
How are they may be performing better or worse than maybe the spot HRC price.
Sure and I think the spot H R. C price has probably been under the most pressure while all the commodities that are out there and so if you are looking at long products be it means bars.
Anything that is not a product of coil.
I think as.
Probably performing a little bit better there, it's more tied to scrap it hasnt had the volatility of the others.
But <unk> had the most volatility again you have the most supply there. So it's a supply and demand issue. When you look on the plate side its performed by far the best It is most metal spread between scrap and the actual finished good prices.
You do have a limitation on the number of producers in North America. There's five they have done a good job of kudos to the mills for sustaining discipline to maintain that price we have seen that drift south.
But it's in a very good very good place right now historically.
All time highs, it's hovering around that area demand for that product.
Seems to be stable when you look at construction. If you look at infrastructure. If you look at heavy equipment.
All of those things are energy all of those things are going really well into next year. So those all should bode very well for plate.
So pretty bullish on where plates headed.
The challenge product, we think will be the HRC.
And the product of HRC again, just due to the supply and demand dynamic, but there's a lot of supply out there in North America.
Yes, no I would agree with that sentiment.
If we switch over to the energy supply side, given the strength of that market.
Is there any intention to add moorefield stores organically over the next 12 months to capture markets youre, not an or and maybe geographies that youre not out yet.
I guess along those same lines is there any intent for any major expansion at your existing field stores to maybe increase revenue per store.
So.
We're always looking at M&A, we think there'll be opportunities, we're looking at maybe going out into more of a value add component and the field stores as well. So we're exploring some of those options on both sides of the border.
Growing with our existing stores will move as the rigs and the work moves but also may be looking at different products that go into different product lines, such as solar wind are there opportunities where in the same fields can we supply of new product lines. There. So we're exploring those opportunities now as well.
Okay.
Last one for me.
The dividend is obviously a board decision, but is there any are you real fright any update around how you're thinking about that given the strength of the cash flow position and the strength of the balance sheet.
So another nice way to return cash to shareholders and you obviously have capacity to do so.
Yes.
Good question and the way we look at it is.
It's sort of that last slide that I went through which is a balanced approach and we do have a healthy dividend currently.
For the last quarter was the first time that we've returned capital to shareholders through our share buyback and the numbers were almost the same $24 million with the dividends, but $19 million with the share buyback, so kind of having a balanced approach and having the ability to flex where it makes the most sense, we revisit the dividend with the board.
Pre quarter.
I can't predict what the future is going to hold but for purposes of where we are right now we view it as a very healthy dividend and we have capital that we can deploy in a very balanced way across other areas, including the share buyback that we did last quarter for a little bit as well as some internal investments as well as probably some M&A opportunities that will continue to emerge in the period ahead.
Okay. Thanks, very much I'll turn the call back over.
Thanks, Dan. Thank you. Your next question comes from Frederic Bastien Raymond James Frederick Please go ahead.
Good morning, I, just wanted to build off your comment made about plate and the limited numbers of producers out there there is new capacity coming on stream I understand so just wondering how that might impact pricing on a go forward basis.
Again with a number of producers number of mills will change with the new Brandenburg mill coming on with number of producers that will actually still be the same with nucor being one of those producers.
I don't know what the benefit for them as they need.
Producers that are in North America to drop the price because if they are not going to get another ton. So again they have a very disciplined approach, which is the first time in my 32 years seen this much discipline against so upload the mills there so.
So I don't know what it is.
By dropping the price there could be some volatility as you bring on a new mill if they don't have the supply.
Don't have a customer.
Buying and the capacity that they want to.
Some of that in the first quarter, maybe second quarter of next year.
Don't perceive it right now again with just the limited number of producers out there.
Okay, and then with the midterm elections.
The past is there any.
Risk to the section 232 tariffs being removed.
What are your views there.
As the general consensus.
Starters, I'm still not sure exactly who want okay.
To get all that sorted out, but I don't see either side, making a change there.
Again, I think it becomes a real.
Some political upheaval there.
Key states, especially Pennsylvania.
With the steelworkers in so I don't see there being a change there may be some things that move around from the 232 from tariffs to quotas or vice versa. So there may be some objectivity that moves around from the government to alleviate some pressures in certain products that we have in North America.
I don't see a whole lot of change in that going forward.
Okay cool.
A question for Marty you are targeting upwards of 75 million box in that facility Modernizations, which should allow you to sell real estate at legacy locations.
How much of value to reckon is tied up in these locations.
Well theres value tied up in locations that were potentially going to modernize the new locations as well as legacy locations that are in reasonable locations is probably.
$150 million to $200 million, if not more in off balance sheet value attached to current market values for our real estate versus what's on the books I mean, we've had some real estate in our portfolio for 50 years and obviously.
Completely undervalued in the context of the current market so orders.
Orders of magnitude call it $200 million plus of off balance sheet value attached to that real estate.
Alright, and then that that $75 million in investments is that net of.
Monetization and you might do.
Yes. It is so huge.
Using SaaS attune as an example, where we announced it at $7 million net and Thats net of the realizations that we're going to have of the existing real estate yes.
Okay. So it will be quite active in terms of.
Upgrading facilities.
Yes, upgrading the facilities is going to be a big focus item for a number of years and sometimes it will involve legacy locations, sometimes it won't but.
So the starting point of your question, we have a fair amount of legacy real estate, some of which we're going to continue to operate under.
They have pretty significant inherent value in it.
Okay awesome. Thank you.
Thanks, Rick.
Thank you. Your next question comes from Alex Jackson RBC capital Alex. Please go ahead.
Yes. Thanks, guys. Most of my questions have been asked but as you think about acquisition opportunities I was just curious if theres been any changes in terms of.
Geographic location, our focus on service centers.
As well as kind of where we're at in the cycle with maybe some weaker steel prices and demand at least in the near term. Thanks.
Again.
We've said this for years, but we continue to use obviously being a big footprint for us in steel service centers.
We will look at energy on both sides and the opportunities we feel stores, but our emphasis would be on service centers in the U S. Obviously with the value added component to build off of our network. There is our largest opportunity we think for growth.
We have a pretty strong network across Canada now so it's more of a niche place similar to our color still acquisition that we did that we have to put it.
Plug in in the right place and the right opportunities, but there are some of those out there in Canada as well.
So those are the types of things, we're looking at for that growth regarding your comment too.
Valuations, we think some of that expectation might be resetting again economy does come off it slows a little bit in the future that may bring some valuation expectations of the sellers into a more reasonable.
Arena, we've seen some expectations of just been too where deals were not transacted at all.
Just with us, but with the broader markets that have been out there and so again, that's where we shifted back to.
<unk> and looking at Opportunistically buy our stock being cheap versus evaluation of buying something at a peak. So we're hopeful that we will see some valuations change, we think theres going to be a fair amount of opportunities over the next two years out there looking.
Great. Thanks for the color.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone.
Question comes from Michael <unk> TD Securities Michael. Please go ahead.
Thank you.
Marty can you provide some more detail on the inventory reserve provision taken in the quarter and what area that was in an.
Where that where that occurred.
It's it's a really granular bottom up calculation that we do on reserves every quarter and so.
Russ.
It's not so much.
At a macro level, it's really done at a micro level buildup is within primarily within the service centers.
Obviously, given the robustness of energy right now things are in really good shape from that perspective, but.
As.
The analysis is done every quarter and again has done product by product SKU by SKU. So it's literally thousands of line items that build up to that and it just so happens no surprised that given the environment. We've been in for the last little bit there are some products in some areas.
That are under that are underwater, it's not a very significant number of the $6 million in terms of the change quarter over quarter and sometimes Mike as you know youll see that reserve that we have sometimes it goes up and sometimes it goes down.
In terms of specific.
Specific areas.
Yeah.
It's a little bit in a few different areas. So it's not isolated to one specific area or one specific product.
Is the way I would kind of characterize it.
Michael also just to add a little more color. There if you looked at US historically, when there were downturns or changes in that.
Large majority of those write offs would come from <unk> and line pipe long lead time nature for their items within six to nine months out. So we've now exited that side of the business and so that that risk has come off the table for us.
Yes.
All very helpful. Thank you and part of the reason I wanted to ask can understand where that was and I appreciate all the detail Marty.
And John I guess, just wanted to initially be clear on.
Which segment that was impacting so I guess the next question is just around margins in service centers.
Margin of 21% in the quarter.
If you normalize for that $6 million, if we assume that's all in service centers Europe sort of.
Mid 20% range.
How do we think about margins going forward like there was some modest pressure on HRC prices during the quarter and then I guess, we've continued to see some pressure here recently so.
Is it sort of.
Our situation, where we should assume that level carries on going forward or is there more downside from what you saw in the third quarter.
Yes.
Wed characterize it there is obviously two moving pieces in terms of margin.
One revenues into cost of goods sold as I mentioned earlier, our cost of goods sold per ton were actually flat Q2 versus Q3 and that is really a function of the timing lag of when stuff comes in and it's heading out the door cost control.
Cost of goods sold all other things being equal probably going to start moderating down.
So there is some some benefit flowing through in Q4 as a result of that that being said our price realizations are probably off a little bit as well. So when you put the two things together, we're probably going to be from a margin perspective, if you do $1 per ton, probably down a little bit quarter over quarter from a percentage perspective, if you look at that little over 20% gross margin.
In Q3.
Flat to down a little bit is what I would characterize Q4.
Okay. That's great. Thank you.
And then I guess, just shifting over to steel distributors, which we haven't talked about yet revenues held in pretty well in the third quarter.
Look at where you were in Q3 versus Q2.
Given the changes in steel prices, we have seen.
And some of your comments around customer.
Cautious behavior I know that was.
For more for service centers, but nevertheless.
Just wondering if you can help us think about steel distributors going forward, both from a revenue and margin perspective.
Hum.
So again.
Have your normal seasonality of Q4.
And obviously there was some lag effect.
Revenue realization from timing getting things through the port, especially in their Canadian.
Canadian distribution.
So that will start to normalize out as.
As well in the U S. You will see a little bit of a pullback, especially in the Texas market Houston base due to their tax that they have at the end of every year the customer try to go down to zero and then bring everything in January one prototypes perspective.
But thats a more of a historical pattern you would always see from US. So we think that Q4 revenue will lighten up earnings will lighten up although the.
Distribution.
Revenue and earnings is pretty locked in in Canada with a back to back sales.
I think that will pick up again in Q1 as people reversed course things start to pick back up but we feel like the economy is going to.
Probably gained some momentum in Q1.
I think they will gain momentum as well so we will have inventory ready to go to service that market when it bounces back.
Okay. That's helpful. Thank you and then.
Lastly, we don't talk about this.
We often if ever but the Thunder Bay terminals.
Terminals.
Piece I noticed the EBIT this quarter was a little higher than than usual $3 8 million.
That high ever.
What is the driver there and is that some kind of a new normal or is that.
Elevated versus what we should expect.
It's a good level, it's a high level and it's driven by.
<unk>.
Volume activity through the terminal.
And as we talked about seasonality earlier earlier as well there is seasonality attached to that business as well, obviously with with ports open and close.
But it's a pretty high level and we're pleased with how their results have been <unk> last couple of quarters.
But that'll moderate off as we go through the winter period, and the canal pulls back in terms of its activity.
Got it okay. Thanks for the time.
Thanks, Mike Thank.
Thank you there are no further questions at this time. Please proceed.
Great. Thank you operator will look I appreciate everyone for joining the call. If you have any follow up questions.
Please feel free to reach out at any time, otherwise, we look forward to staying in touch.
And having conversations during the balance of the quarter. Thanks, everyone.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.