Q2 2024 Russel Metals Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to our 2024 second quarter results call for Russel Metals.

Operator: All of our second quarter results call for Russel Metals. Today's call will be hosted by Marty Juravsky, Executive Vice President and Chief Financial Officer, and John Reid, President and Chief Executive Officer, Russel Metals Inc.

Operator: Second-quarter results call for Russel Metals.

Operator: Today's call will be hosted by Marty Juravsky, Executive Vice-President and Chief Financial Officer, and John Reid, President and Chief Executive Officer at Russel Metals Inc.

Operator: Today's presentation will be followed by a question-and-answer period. At that time, if you have a question, please press star one on your telephone heat pad.

Today's presentation will be followed by a question and answer period. At that time, if you have a question, please press star 1 on your telephone keypad. And I would like to turn the meeting over to Marty Juravsky. Please go ahead, sir.

Operator: And I would like to turn the meeting over to Marty Juravsky. Please like.

Marty Juravsky: Great. Thanks very much, Operator. I appreciate it. Good morning, everyone.

Marty Juravsky: Thanks very much, Operator. Appreciate it.

Marty Juravsky: Good morning, everyone. I'll provide an overview of the Q2-2024 results. And if you want to follow along, we'll be using the PowerPoint slides that are posted to our website. And all you just need to do is go to the Investor Relations section, and it's located in the Conference Call submenu. If you go to page three, you can read our cautionary statements on forward-looking information. So let me start with a little bit of perspective on Q2. As I think that there's just probably three or four summary observations that I'd like to start off with. One, we perform exceptionally well, not just this quarter, but relatively consistently over the past several quarters, even though there's been a lot of steel price volatility.

Speaker Change: All you need to do is go to the Investor Relations section, and it's located in the Conference Call submenu. If you go to page 3, you can read our cautionary statement on forward-looking information.

Marty Juravsky: I'll provide an overview of the Q2 2024 results, and if you want to follow along, I'll be using the PowerPoint slides that are posted on our website. All you just need to do is go to the Investor Relations section, and it's located in the Conference Call submenu. If you go to page 3, you can read our cautionary statement on forward-looking information. So let me start with a little bit of perspective on Q2, as I think that there are just probably three or four summary observations that I'd like to start off with.

Marty Juravsky: One, we performed exceptionally well, not just this quarter, but relatively consistently over the past several quarters, even though there's been a lot of steel price volatility. For example, over the past quarter alone, the benchmarks for sheet and plate have come off by 17% and 12%, respectively, compared to Q1, but our consolidated revenues are, in fact, up. I think this is the latest example of how we've taken a lot of volatility out of the business.

Marty Juravsky: Over the past quarter alone, the benchmarks for sheet and plight have come off by 17 percent and 12 percent, respectively, compared to Q1. But our consolidated revenues are, in fact, up. I think this is the most recent example of how we've taken a lot of volatility out of the business. Second, there's been a lot of behind-the-scenes work by the company in preparing for the Samuel acquisition, which is expected to close in mid-August, and I'll discuss that in more detail in a few minutes. But a big thank you to the internal team who've worked exceptionally hard to get us through the Competition Bureau process, as well as some heavy lifting in terms of integration planning.

Speaker Change: Second, there's been a lot of behind-the-scenes work by the company in preparing for the Samuel Acquisition, which is expected to close in mid-August, and I'll discuss that in more detail in a few minutes, but a big thank you to the internal team who've worked exceptionally hard to get us through the Competition Bureau process.

Marty Juravsky: Third item. There have been a lot of behind-the-scenes initiatives in addition to the Samuel acquisition that provide us with a springboard for our other initiatives. One, we've got a whole bunch of CAPEX and facility modernizations underway, and I'll go through those later in the discussion as well. We've also made a bunch of changes to our capital structure, our debt structure, with the new secured bank deal and the redemption of our legacy notes. So again, puts us in a very good position going forward. Lastly, we are fairly active in the quarter on our shared buyback program, as we have the capital structure flexibility to both invest in the business as well as opportunistically return capital to shareholders.

as well as some heavy lifting in terms of integration planning.

Marty Juravsky: Lastly, we were fairly active in the quarter on our share buyback program as we have the capital structure flexibility to both invest in the business as well as opportunistically return capital to shareholders. As said earlier, we've seen a lot of underlying steel price volatility over the past few months, as both sheet and plate prices came down during the quarter. That said, there appears to be a floor for sheet metal with the recent price hike in the past day or so.

Speaker Change: So, again, puts us in a very good position going forward.

Marty Juravsky: So, with that being said, let me start with the details of the materials here, and we can start on page five. As said earlier, we've seen a lot of underlying steel price volatility over the past while, as both sheet and plate prices came down during the quarter. That said, there appears to be a floor for sheet with the recent price hike in the past day or so, and when we take the price environment into account with our business, it appears that Q3 will be a bit of a transitionary quarter as the price and margin compression that occurred in the early part of Q3, along with having fewer operating days in Q3 due to summer holidays, will negatively impact our Q3 margins and bottom line results. But with margin recovery expected into early Q4 and then into 2025.

So with that being said, let me start with the details of the materials here and we can start on page five.

Marty Juravsky: And when we take the price environment into account with our business, it appears that Q3 will be a bit of a transitionary quarter, as the price and margin compression that occurred in the early part of Q3, along with having fewer operating days in Q3 due to the summer holidays, will negatively impact our Q3 margins and bottom line results, but with margin recovery expected into early Q4 and then into 2025. On supply chain inventories, they bounced around a bit but remain in a similar zone over the past few months. In addition, there are a number of producers who have scheduled maintenance coming up over the next couple of months, and that should moderate production for the industry.

Speaker Change: And when we take the price environment into account with our business.

Speaker Change: As the price and margin compression that occurred in the early part of Q3, along with having fewer operating days in Q3 due to summer holidays, will negatively impact our Q3 margins and bottom line results, but with margin recovery expected into early Q4 and then into 2025.

Marty Juravsky: On the supply chain inventories, they bounced around a bit but remain in a similar zone over the past few months. In addition, there are a number of producers who have scheduled maintenance is coming up over the next couple of months, and that should moderate production for the industry. Lastly, demand has been steady across our businesses.

Marty Juravsky: Lastly, demand has been steady across our business. On page six, we have a snapshot of our historical results. The key takeaway for all these charts and these metrics is that over the past few quarters, we've generated pretty steady results. Our Q2 results were impacted by a few non-operating items. Stock-based comp was an $8 million recovery versus nil in Q1. The Samuel acquisition integration cost, legal costs, were another $1 million

Marty Juravsky: On page six, we have a snapshot of our historical results. The key takeaway for all these charts and these metrics is that, over the past few quarters, we've generated pretty steady results. If we look across some of the various charts going from the top left, revenues were up a bit versus Q1. I've been running it around that $1.1 billion per quarter mark for several quarters. EBITDA was $86 million. EBITDA margin was 8% and EPS was 84 cents a share. All of these were similar to up slightly versus Q1. Our annualized return on invested capital came in at 19% again. In looking at the public comps that have already reported.

Speaker Change: On page 6, we have a snapshot of our historical results. The key takeaway for all these charts and these metrics is that over the past few quarters, we've generated pretty steady results.

Speaker Change: If we look across some of the various charts going from the top left, revenues were up a bit versus Q1. They've been running at around that $1.1 billion per quarter mark for several quarters.

Speaker Change: Our annualized return on invested capital came in at 19% again. In looking at the public comps that have already reported, we remain an industry leader on that metric.

Marty Juravsky: We remain an industry leader on that metric. Lastly, in terms of capital structure, we have net cash of 237 million versus net debt of almost 500 million at the end of 2019. So plenty of dry powder as we look at continuing with our various initiatives. Going into more detail with our financial results on page seven, from an income statement perspective, I covered several high-level items on the previous page, but a few other items. Revenues of $1.1 billion was up 1% from Q1. This was in spite of the downward pressure on steel prices. Gross margins both in dollars and percent were down 1% from Q1, but EBITDA and earnings were all up slightly as it reflects the variable cost nature of our expense profile.

Speaker Change: Going into more detail with our financial results on page 7.

Speaker Change: From an income statement perspective, I covered several high-level items on the previous page, but a few other items to note. Revenues of $1.1 billion was up 1% from Q1. This was in spite of the downward pressure on steel prices.

Marty Juravsky: Our Q2 results were impacted by a few non-operational items. Stock-based comp was an $8 million recovery versus nilling Q1. The Samuel acquisition integration costs, legal costs were another million dollars, and we had a million dollars a non-recurring cash charge for the right off of the deferred financing costs on the redeemed 6% notes. From a cash flow perspective in Q2, we generated $6 million from working capital. We had an increase in inventory, which is mostly a timing issue with an inventory pickup in our steel distributor segment, and I'll look through that in a little bit more detail in a few minutes, and that was offset by a decline in AR and an increase in accounts payable.

Marty Juravsky: And we had $1 million of non-recurring, non-cash charges for the write-off of the deferred financing costs on the redeemed 6% note. We increased our dividend in June to $0.42 per share, and that equated to $25 million for Q2, and we've just declared the next quarterly dividend to remain at $0.42 and is payable in mid-September. CapEx of $24 million was in line with our tracking to be around $100 million for 2024 as our key discretionary projects continue to advance. On page 13, we have the overall impact on capital utilization and returns. Our capital deployment remained at just over one point four billion dollars.

Marty Juravsky: Share buybacks were active with 1.5 million shares for $56 million before tax. That being said, this was the first quarter where the federal government's buyback tax came into effect, and that cost was a little over a million dollars. We increased our dividend in June to 42 cents per share, and that equated to $25 million for Q2, and we've just declared the next quarterly dividend to remain at 42 cents, in its payable in mid-September. CapEx of $24 million was in line with our tracking to be around $100 million for 2024, as our key discretionary projects continue to advance.

Speaker Change: Share buybacks were active with 1.5 million shares for $56 million before tax. That being said, this was the first quarter where the federal government's buyback tax came into effect and that cost was a little over a million dollars.

Speaker Change: We increased our dividend in June to $0.42 per share, and that equated to $25 million for Q2. And we've just declared the next quarterly dividend to remain at $0.42, and it's payable in mid-September.

Speaker Change: CAPEX of $24 million was in line with our tracking to be around $100 million for 2024, as our key discretionary projects continue to advance.

Marty Juravsky: From a balance sheet perspective, we earned in that cash position of $237 million. In the quarter, we redeemed $150 million of the 6% notes. In July, we put in place a new, unsecured bank facility with no boring base restrictions and investment grade financial covenants. The remaining $150 million of notes, the five and three-quarter percent notes, become par-collable in October. Our liquidity is $768 million for the end of June, which is before the completion of the new bank deal in July, which added another $150 million to our available liquidity. Our book value per share continue to go up, in spite of the share buyback program, and is now $28.22 per share.

Speaker Change: From a balance sheet perspective, we are in a net cash position of $237 million.

Speaker Change: In the quarter, we redeemed $150 million of the 6% notes. In July , we put in place a new unsecured bank facility with no borrowing-based restrictions and investment-grade financial covenants.

Speaker Change: The remaining $150 million of notes, the 5.75% notes, become par callable in October .

Marty Juravsky: at the end of June.

Marty Juravsky: On page 8, we show our EBITDA variance analysis between last quarter and this quarter. For the service centers, the volumes were up from Q1, but our margins were down. There was also a $5 million reduction in operating costs, which is a function of our variable compensation that toggles up and down with our financial results. Energy field stores was down slightly, as was steel distributors. In the other bucket, there was an $8 million favorable impact from lower market on stock-based compensation, and also the seasonal recovery at our Thunder Bay terminal operation.

Speaker Change: At the end of June .

Speaker Change: from Q1, but our margins were down. There was also a $5 million reduction in operating costs, which is a function of our variable compensation that toggles up and down with our financial results.

Speaker Change: Energy field stores was down slightly, as was steel distributors. In the other bucket, there was an $8 million favorable impact from lower mark-to-market on stock-based compensation and also the seasonal recovery at our Thunder Bay terminal operation.

Marty Juravsky: If we go to page 9, there's our segmented P&L information. For service centers, revenues declined slightly as prices were down, but volumes were up, and I'll go through some of these metrics in a little bit more detail on the next page. In our energy field stores, we are continuing to see really solid performance; Q2 revenues were up. Margins came down slightly, resulting in earnings being down slightly, but the business remains pretty steady. As you can see, and as the margins have remained at around that 25 percent level. Distributors revenues were up; the margins and operating profit were down.

Speaker Change: If we go to page 9, there's our segmented P&L information.

Marty Juravsky: The logistics improved for product coming in from overseas suppliers, which led to higher volumes and revenues in the quarter, but that higher activity was offset by lower margins in parts of that business.

Marty Juravsky: On page 10, we are showing a deeper dive on the metrics specifically related to our mental service center business. The top right graph is the past five years of tons shipped, and in Q2, our volumes were up 2 percent versus Q1, reflecting pretty steady takeaway. As we benchmark ourselves against the volume from our other publicly traded comps on a same store basis, our 2 percent growth in volume demonstrates market gain in the quarter. On the bottom left graph, we have the revenue and cost goods sold per ton. On revenue per ton, our price realizations decreased by 4 percent, while cost the goods sold decreased by 1 percent, which resulted in a decline in margins that are showing on the bottom right chart.

Speaker Change: On page 10, we are showing a deeper dive on the metrics specifically related to our metal service center business.

Speaker Change: And as we benchmark ourselves against the volume from our other publicly traded comps on a same-store basis, our 2% growth in volume demonstrates market gain in the quarter.

Speaker Change: On the bottom left graph, we have the revenue and cost of goods sold per ton. On revenue per ton, our price realizations decreased by 4%, while cost of goods sold decreased by 1%, which resulted in a decline in margins that is showing on the bottom right chart.

Marty Juravsky: Going into Q3, as I mentioned earlier, we expect average margins to be down versus Q2, as the margins at the end of the quarter were lower than the average for Q2, and this should self-adjust as we get that price stabilization, as I was talking about earlier.

Speaker Change: Going into Q3, as I mentioned earlier, we expect average margins to be down versus Q2, as the margins at the end of the quarter were lower than the average for Q2, and this should self-adjust as we get that price stabilization as I was talking about earlier.

Marty Juravsky: On page 11, we have illustrated our inventory turns. This chart shows the inventory turns by quarter for each segment: energy in red, service centers in green, and steel distributors in yellow, and the black line at the average for the whole company. Overall, our inventory turns remain pretty steady at the 3.9. By sector, our service centers remain strong at 4.6. Our energy field stores came up to 3.6, from 3.2. While steel distributors declined slightly to 2.3 from 2.4.

Speaker Change: By sector, our service centers remained strong at 4.6. Our energy field stores came up to 3.6 from 3.2, while steel distributors declined slightly to 2.3 from 2.4.

Marty Juravsky: On page 12, we have the impact of inventory turns on inventory dollars. Total inventory was up slightly compared to Marches. There was a pickup in our distributors segment due to overseas logistic issues that I previously mentioned. This should continue to streamline through the early part of Q3 as product arrives into Canadian ports and then moves on to our customers.

Speaker Change: On page 12, we have the impact of inventory terms on inventory dollars.

Speaker Change: Total inventory was up slightly compared to March as there was a pickup in our distributors segment due to overseas logistic issues that I previously mentioned. This should continue to streamline through the early part of Q3 as product arrives into Canadian ports and then moves on to our customers.

Marty Juravsky: On page 13, we have the overall impact on capital utilization and returns. Our capital deployment remained at just over $1.4 billion. More importantly, our returns continue to be industry leading, with last 12 months return on invested capital of 19%.

Speaker Change: On page 13, we have the overall impact on capital utilization and returns. Our capital deployment remained at just over $1.4 billion.

Marty Juravsky: More importantly, our returns continue to be industry leading, with the last 12 month return on invested capital of 19 percent. From an investment perspective, we're seeking average returns over the cycle of greater than 15%, as already discussed, and we've delivered well above that target. On the bottom left chart, that's where we have the quarterly NCIB activity since we put it in place in mid-2022. It does illustrate that we don't have a hardwired or fixed approach to the program but view it as an opportunistic way to buy back shares, and we've been more aggressive at certain price points than others, including this past quarter.

Marty Juravsky: On page 14, just probably an update on our capital structure, and there have been a number of changes during Q2 and also subsequent quarter-it. In July, we closed on our revamped bank deal. Our bank group has recognized the significant evolution in our credit profile, and we now have a more traditional investment grade type bank structure that has no borrowing base formula, is unsecured and has flexible financial covenants. The new bank deal was upsized by $150 million from the previous deal, and this gives us ample liquidity to call $150 million of five and three-quarter percent notes that become part-callable in October.

Marty Juravsky: With the redemption of those notes, the already completed redemption of 150 of six percent notes in Q2, and the modernization of our bank structure, will remove all the legacy elements of our former debt structure, and we now have a very clean slate going forward, which gives us significantly more flexibility. Lastly, our equity-based per share continues to grow, as you see on the right-hand chart, in spite of our share buybacks. This chart on the right shows our book value per share of $20 and 22 cents, which is a $1.81 per share increase since this time last year.

Speaker Change: With the redemption of those notes, the already completed redemption of 150 of 6% notes in Q2, and the modernization of our bank structure, we'll have removed all the legacy elements of our former debt structure, and we now have a very clean slate going forward, which gives us significantly more flexibility.

Marty Juravsky: On page 15, we have an update on our capital allocation priorities going forward, and some of these I'll dive into in more detail in a second. But given our strong balance sheet, it really remains a multi-pronged approach to do a variety of things that make good common sense and good economic sense. From an investment perspective, we're seeking average returns over the cycle of greater than 15 percent, as I already discussed, and we've delivered well above that target. The ongoing opportunities are threefold. We are continuing to identify the value-added project opportunities, facility modernizations. We have five underway that are tracking for completion at various times towards the end of this year, and I'll go through a bit of an update on this front in a few minutes.

Speaker Change: From an investment perspective, we're seeking average returns over the cycle greater than 15%, as already discussed, and we've delivered well above that target.

Marty Juravsky: And then, in terms of acquisitions, we are targeting to close the Samuel acquisition on August 12th, and we are continuing to explore other growth opportunities from acquisitions. For returning capital to shareholders, we adopted a flexible approach. In May, we announced the 5 percent increase in our quarterly dividend to take it to 42 cents per share, and we have declared another 42 cents per share for the dividend that will be payable in September. For the NCIV, we are very active in the quarter with 1.5 million shares acquired for $56 million. That equates to $38.8 per share for this quarter.

Speaker Change: And then in terms of acquisitions, we are targeting to close the Samuel acquisition on August 12th and we are continuing to explore other growth opportunities from acquisitions.

Speaker Change: per share for the dividend that will be payable in September .

Speaker Change: For the NCIB, we are very active in the quarter with 1.5 million shares acquired for $56 million. That equates to $38.08 per share for this quarter. And if we roll back to August of 2022, when we first put our share NCIB in place,

Marty Juravsky: And if we roll back to August of 2022, when we first put our NCIV in place, since that time, we've acquired about 5 million shares, which equates to about 8 percent of our shares outstanding at an average price of $36.30. We expect to continue to utilize the NCIV on an opportunity.

Marty Juravsky: On page 16, just given a longer-term context around some of those topics returning capital shareholders, top left graph you can see the dividend profile over an extended period of time, with a just-balanced 42 cents per share per quarter that will be payable in Q3 and will continue to regularly revisit the appropriate dividend level to take into account our capital structure earnings profile as was done when we lifted the dividend in both May of 2023 and in May of 2024. On the bottom left chart, that's where we have the quarterly NCI activity since we put it in place in mid-2022.

Speaker Change: On page 16, just given a longer-term context around some of those topics, returning capital to shareholders.

Speaker Change: Top left graph you can see the dividend profile over an extended period of time with the just announced.

Marty Juravsky: It does illustrate that we don't have a hard-wired or fixed approach to the program, but view it as an opportunistic way to buy back shares, and we've been more aggressive at certain price points than others, including this past quarter. On the bottom right chart, the impact of the NCIB has been a gradual reduction of our shares outstanding over the past two years, that has resulted in that 8 percent reduction in our share accounts. On the top right chart, the aggregation of the dividends versus the NCIB over the past year shows a relatively balanced approach, not the same quarter to quarter, but over an extended period of time it's been relatively balanced.

Marty Juravsky: On the bottom right chart, the impact of the NCIB has been a gradual reduction of our shares outstanding over the past two years that has resulted in that 8% reduction in our share count. For administrative simplicity, we also elected not to assume most of the accounts payable component of working capital.

Speaker Change: On the bottom right chart, the impact of the NCIB has been a gradual reduction of our shares outstanding over the past two years. That has resulted in that 8% reduction in our share count.

Marty Juravsky: Over the past 12 months, we've acquired a little over $100 million of our shares, and the current run rate for our dividends tracks to around $99 million per year. Note that also what's interesting is the cash outflow for our dividends has remained consistent around $24, $25 million per quarter, as our share buybacks have offset the per share increase in our dividends.

Marty Juravsky: On page 17, have a bit of an update on the Samuel's acquisition. As I said earlier, we have a targeted close date of August 12th, so that's not too far away. Again, I just really like to repeat my appreciation, John, and my appreciation to all the folks internally and, frankly, the coordination with the folks at Samuel as well in getting ready for this transaction closing. It's a complicated transaction in terms of transitional planning, and there's been an awful lot of effort from a whole series of folks at Russell in getting ready for this position. So the deal structure itself has remained unchanged, but there are two updates.

John: I just want to repeat my appreciation, John , and my appreciation to all the folks internally and frankly the coordination with the folks at Samuel as well in getting ready for this transaction closing. It's a complicated transaction in terms of transitional planning, and there's been an awful lot of effort from a whole series of folks.

Speaker Change: at Russell and getting ready for this position.

Marty Juravsky: Once we announced the deal, Samuel's inventory has come down by about $40 million, and you can see that into the chart below where it went from $154 million at September 23 to $114 million, which was the latest balance sheet at June 30th of this year. And the deal structure was set up so that the purchase price moved up or down on a dollar-for-dollar basis with any changes in working capital. As a result of a sizable reduction in inventory, there will be a direct reduction in that element of the purchase price and moves us forward in terms of our goal of trying to right-size the capital invested in this business.

Speaker Change: One, since we announced the deal, Samuel's inventory has come down by about $40 million, and you can see that under the chart below, where it went from $154 million at September 23 to $114 million, which was the latest balance sheet at June .

Speaker Change: As a result of the sizable reduction in inventory, there will be a direct reduction in that element of the purchase price and moves us forward in terms of our goal of trying to right-size the capital invested in this business.

Marty Juravsky: For administrative simplicity, we also elected to not assume most of the accounts payable component of working capital. Again, it's really an administrative and not an economic impact, as illustrated on the chart. At September 30th of 2023, that represents about $46 million. Therefore, a closing will not take over that liability, and it will be in a position to then just rebuild that accounts payable in normal course, which will be a source of casual for us in the first few months. Again, it's really an administrative reason that we've done that, and it really doesn't have any impact from an economic standpoint.

Marty Juravsky: Again, it's really an administrative and not an economic impact. As illustrated in the chart, at September 30th, 2023, that represents about $46 million. Therefore, a closing will not take over that liability, and it will be in a position to then just rebuild that accounts payable in the normal course, which will be a source of cash flow for us in the first few months.

Speaker Change: Therefore, a closing will not take over that liability, and it will be in a position to then just rebuild that liability.

Speaker Change: accounts payable in normal course, which will be a source of cash flow for us in the first few months. Again, it's really an administrative reason that we've done that, and it really doesn't have any impact from an economic standpoint.

Marty Juravsky: Again, it's really an administrative reason that we did that, and it really doesn't have any impact from an economic standpoint. On page 19, there are four facility modernizations in our U.S. operations. Each example is taking an existing footprint and adding a sizable expansion to accommodate the growth in volumes as well as the opportunity to add some of the value-added equipment. It's also interesting to note that two of these four projects are locations that came about through the Boyd acquisition.

Marty Juravsky: On pages 18 and 19, I want to provide an update of our facility modernization CAPEX projects. And we've historically talked a lot about the value-added projects that we're doing, but a big part of our CAPEX investments is also related to these facility modernizations. And in some ways, not only are they going to be facility modernizations that enhance our product flow, improve logistics, provide health and safety benefits, but they also give us the space as we want to put in more and more value added equipment into some of these facilities that were space constrained in the past.

Speaker Change: Facility Modernizations. And in some ways, not are they only going to be facility modernizations that enhance our product flow, improve logistics, provide health and safety benefits, but they also give us the space

Marty Juravsky: On page 18, there's some recent pictures of the Greenfield Project in Saskatoon. It's well underway, and we expect to be moving in later this summer. The project involves relocating our business to a new industrial park in Saskatoon that is much better logistics, improving our improved facility layout than our previous locations in the city. But equally important, it'll also be freeing up some value from the real estate at our legacy location. And this type of scenario is sort of ill strut of some of the other alternatives that we are considering with our legacy real estate in other locations.

Speaker Change: The project involves relocating our business to a new industrial park in Saskatoon that has much better logistics, improved facility layout than our previous locations in the city.

Speaker Change: But equally important, it'll also be freeing up some value from the real estate at our legacy location. And this type of scenario is sort of illustrative of some of the other alternatives we are considering with our legacy real estate in other locations.

Marty Juravsky: On page 19, there are four facility modernizations in our U.S. operations. Each example is taken in existing footprint and adding a sizable expansion to accommodate the growth in volumes as well as accommodate the opportunity to add some of the value added equipment. It's also interesting to note that two of these four projects are locations that came by the Boyd acquisition. And one of the important things that we look for in acquisitions is the opportunity to strategically deploy incremental capital to growing those acquired businesses, and the example in Joplin and Little Rock are perfect examples of growth that came through those acquisitions.

Speaker Change: On page 19, there are four facility modernizations in our U.S. operations. Each example is taking an existing footprint and adding a sizable expansion to accommodate the growth in volumes as well as accommodate the opportunity to add some of the value-added equipment.

Marty Juravsky: And one of the important things that we look for in acquisitions is the opportunity to strategically deploy incremental capital to grow those acquired businesses. And the examples in Joplin and Little Rock are perfect examples of growth that came through those acquisitions. And what's also interesting is that 2020 was a very difficult year from an economic perspective, being at the front end of COVID. So it was a really great year to test how businesses can perform.

Speaker Change: are locations that came by the Boyd acquisition.

Speaker Change: And one of the important things that we look for in acquisitions is the opportunity to strategically deploy incremental capital to growing those acquired businesses.

Speaker Change: and the example in Joplin and Little Rock.

Speaker Change: are perfect examples of growth that came through those acquisitions.

Marty Juravsky: Page 20 is a chart that we've not shown before. But I think it illustrates the significant change in our portfolio over the last couple of years. And we've discussed in the past how our actions have reduced the volatility of our operating results and have raised the floor through the cycle. In the top graph, it's a little bit busy. So let me walk you through it in a second. And it's a snapshot from 2020. And each of those dots represents its each of our business units that we had at that point, with one access being gross margin and the other access being returned on that assets.

Speaker Change: Page 20 is a chart that we've not shown before, but I think it illustrates the significant change in our portfolio over the last couple of years. And we've discussed in the past how our actions have reduced the volatility of our operating results and have raised the floor through the cycle.

Speaker Change: And each of those dots represents, represented each of our business units that we had at that point, with one axis being gross margin and the other axis being return on net assets.

Marty Juravsky: And what's also interesting is 2020 was a very difficult year from an economic perspective when you get the front end of COVID. So it was a really great year to test how businesses can perform. All businesses do reasonably well in up years. It's really a question of how they're doing in a down year. So that's why, when we look at stuff from 2020, it provided a frame of reference for how challenging some of our businesses were. The red dots represent the business units that had experienced challenges. And we're frankly a drag on our results and where remedial action was required.

Marty Juravsky: All businesses do reasonably well in up years. It's really a question of how they do in a down year. So that's why when we look at stuff from 2020, it provides us a frame of reference for how challenging some of our businesses were. The impact of all those initiatives is somewhat illustrated in the bottom chart, where this past cycle has resulted in stronger earnings during the up cycle, modest use of working capital during the up cycle, and lower earnings downside in situations where steel prices encountered the volatility that they've encountered over the past few quarters.

Speaker Change: All businesses do reasonably well in up years, it's really a question of how they're doing in a down year. So that's why when we look at stuff from 2020, it provided us a frame of reference for how challenging some of our businesses were.

Marty Juravsky: And all of those business units, those underperforming business units, have been fixed or monetized in one way or another. So there was an awful lot of lifting attached to it. But when we talked about the changes in our business, it was a whole series of actions. And again, using the snapshot back to 2020, you can see the impact of what those did to drag our results in 2020 and have since been course-correct. In addition, we've invested in our core operations through acquisitions like Sam Bourne, Boyd, Alliance, and shortly Samuels, as well as the CAPEX initiative that we've talked about many times in the past.

Speaker Change: And all of those business.

Speaker Change: units, those underperforming business units, have been fixed or monetized in one way or another. So there was an awful lot of lifting attached to it. But when we talk about the changes in our business...

Speaker Change: It was a whole series of actions, and again, using this snapshot back to 2020, you can see the impact of what those did to drag our results in 2020 and have since been course-corrected.

Speaker Change: In addition, we've invested in our core operations through acquisitions like Sanborn Boyd, Alliance, and shortly Samuels, as well as the CAPEX initiatives that we've talked about many times in the past.

Marty Juravsky: And so it's continuing to reinvest in those opportunities that add to our green dots, at the same time that we've dealt with those problematic business units as ill-stried by the red dots. The impact of all those initiatives is somewhat ill-stried in the bottom chart where this past cycle has resulted in stronger earnings during the up cycle, modest use of working capital during the up cycle, and lower earnings downside in situations where steel prices encountered the volatility that they've encountered over the past few quarters.

Speaker Change: And so, it's continuing to reinvest in those opportunities that add to our green dots at the same time that we've dealt with those problematic business units as illustrated by the red dots.

Marty Juravsky: So, in closing, on behalf of John and other members of the management team, I'd like to express appreciation to everyone within the Russel family for your contributions. In particular, many people have really stepped up and provided significant leadership and demonstrated the commitment and teamwork as we continue to make inroads in advancing the business.

Speaker Change: So, in closing, on behalf of John and other members of the management team, I'd like to express our appreciation to everyone within the Russel family for your contributions.

Speaker Change: In particular, many people have really stepped up and provided significant leadership and demonstrated the commitment and teamwork as we continue to make inroads in advancing the business.

Marty Juravsky: So operator, that concludes my introductory remarks.

Operator: If you'd now please open the line up for questions. Certainly, sir. Ladies and gentlemen, as stated, if you would like to ask a question, please press star followed by one on your touched-on phone. Also, should you decide to withdraw from the question queue, you will need to press star followed by two. And if you're using a speaker phone, please lift the handset before pressing any keys. Please go ahead and press star one now if you do have any questions.

Speaker Change: So, operator, that concludes my introductory remarks. If you'd now please open the line up for questions.

James McGarragle: And your first question will be from James McGarregor at RBC Capital Markets. Please go ahead.

Operator: And your first question will be from James McGarragle at RBC Capital Markets. Please go ahead.

James McGarragle: Thank you. Good morning, and appreciate you having me on.

Marty Juravsky: Thanks, James.

James McGarragle: Did you just look at the results sequentially at your service center? I mean, you talked about some potential pressure on margins, given the real price environment. You gave us some good color on the volumes. But that seems to imply potentially some pressure on earnings in the Q3, but then we also have the familial deal posing in the quarter. So just kind of like given all those moving parts, can you just give us some color on how we should be thinking about, you know, sequential earnings trends in the Q3? Yeah, well, it's a fair observation, James, because there are a series of moving pieces.

James McGarragle: But, you know, that seems to imply potentially some pressure on, you know, earnings in the Q3, but then we also have the same deal posing in the quarter. So just kind of like, given all those moving parts, can you give us some color on how we should be thinking about, you know, sequential earnings trends in the Q3?

Speaker Change: But, you know, that seems to imply potentially some pressure on, you know, earnings in the Q3. But then we also have the same deal posing in the quarter. So just kind of like given all those moving parts, can you give us some color on how we should be thinking about, you know, sequential earnings trends in the Q3?

Marty Juravsky: And maybe it's easier to start with the Samuel's acquisition. So it's going to close halfway through the quarter. But, as is typically the case, there's always lots of noise and transitional costs associated with it. So even though it'll probably add a half a quarter's worth of revenues and a half a quarter's worth of volumes, there's always noise in some of those operating costs and how that flows through and accounting for acquisitions. So, for all intents and purposes, it shouldn't show much impact from a bottom line result because of the relatively short contribution period for Q3.

Speaker Change: So, for all intents and purposes, it shouldn't show much impact from a bottom-line result because of the relatively short contribution period for Q3.

Marty Juravsky: The more impactful item will be, as I talked about, you mentioned in your questions, is some of the margin dynamic that was evolving through Q2 and into the early part of Q3, which appears to be self-correcting over the next little bit and then into Q4. So sequentially Q3 margins and Q3 results for the service centers are expected to be down versus Q2.

Speaker Change: The more impactful item will be, as I talked about and you mentioned in your questions,

Speaker Change: and Q3 results for the service centers are expected to be down versus Q2.

James McGarragle: Thank you.

James McGarragle: And just a longer term question on how you're thinking about, you know, 2025. I'm not asking for guidance because I understand; you know, lots of things can happen between now and then, especially with the year industry. But, you know, it seems like the price is starting to pick up potentially, you know. For a lot of likely, a lot more, you know, some positives from these modernization programs, Samuel Integration could be a big positive.

Marty Juravsky: Thank you. You know, some positives from these modernization programs; Samuel integration could be a big positive. So, you know, we have three things that could drive some significant growth in 2025. So, can you just maybe help frame the opportunity around each of those and how we should be thinking about that in 2025?

Speaker Change: Some positives from these big modernization programs. Staminal integration could be a big positive. We have three things that could drive some significant growth in 2025.

Marty Juravsky: So, you know, if three things that could drive some significant growth in 2025, so can you just, you know, maybe perfect, help frame the opportunity around each of those, and, you know, how we should be thinking about that in 2025? Yeah, well, look, it's a great question, James and Frank. I think you framed it up probably better than I could, because, you know, all of the stuff that's going on right now, it provides a really nice springboard into 2025. You know, we already talked about Q3, and it's a transitionary quarter, and then when we get into Q4, there's just a seasonal slowdown that occurs because of holidays around US Thanksgiving, Canadian Thanksgiving, and the Christmas holidays, so you lose some operating days.

Speaker Change: Maybe help frame the opportunity around each of those and how we should be thinking about that into 2025.

Speaker Change: Yeah well look it's a great question James and frankly I think you framed it up probably better than I could because you know all of the stuff that's going on right now it provides a really nice

Speaker Change: You know, we already talked about Q3, and it's a sort of transitionary quarter, and then when we get into Q4, there's just the seasonal slowdown that occurs because of holidays around U.S. Thanksgiving, Canadian Thanksgiving, and the Christmas holidays, so you lose some operating days. But all the stuff that has happened and we're continuing to work on provides a really nice springboard. So, at a macro level, conditions within the industry are set up for improvement.

Marty Juravsky: But all the stuff that has happened, and we're continuing to work on, provides a really nice springboard. So, at a macro level, conditions within the industry are set up for improvement because I think we've hit a floor, and then with recovery, bouncing back from there, and again, that usually takes a couple of months to work itself through the system, and so it bodes well for 2025. And then the things that are within our control, we're really excited about. The Samuel's acquisition is a meaningful part of what we're trying to do. It is a significant opportunity for us to both grow in the Northeast US, as well as integrate what we're doing within the Western Canadian business.

Speaker Change: because I think we've hit a floor, and then with recovery bouncing back from there. And again, that usually takes a couple months to work itself through the system. And so it bodes well for 2025.

John Reid: And then the things that are within our control. The Samuels acquisition is a meaningful part of what we're trying to do.

Speaker Change: It is a significant opportunity for us to both grow in the Northeast U.S. as well as integrate.

Marty Juravsky: That being said, there's a lot of heavy lifting that our team is going to be doing to be putting their business together with our business. There's a lot of really unsexy stuff related to systems, and back-off is being organized so that we can be efficient as a platform. But it really is going set up very well for 2025, and as those things start coming to the table, the good news is on Samuels, we've already seen a sizable reduction in their capital deployment, which was part of our game plan. But we inherit a lower invested capital based coming in, given what's happened with the business over the last little bit.

Speaker Change: What we're doing within the Western Canadian business.

Speaker Change: There's a lot of really unsexy stuff related to systems.

Speaker Change: But it really is going to set up very well for 2025.

Speaker Change: A lower invested capital base coming in, given what's happened with the business over the last little bit. And then our other internal initiatives that we're working on, when I went through those couple pages on the facility modernizations.

Marty Juravsky: And then our other internal issues that we're working on, when I went through those couple of pages on the facility modernizations, those are all slated to get done in 2024. So going into the new year, those are operational, so that capacity-flexibility that we have, they will be in place. The new equipment projects that we talk about, we're constantly green lighting new opportunities, but we'll have made really good progress on a bunch of the stuff in 2024 that will start having recognizable impact on top line and bottom line in 2025. So it's a long-winded way to say, I think your question was really spot on on all the things that are out there for us, which is why it's interesting for us, with all the initiatives that we have underway on the springboard effect that it should play out for 2025.

Speaker Change: Those are all slated to get done in 2024, so going into the new year.

Speaker Change: But we'll have made really good progress on a bunch of the stuff in 2024 that'll start having recognizable impact on top line and bottom line in 2025. So it's, it's a long winded way to say, I think your question was really spot on on all the things that are out there for us, which is why it's interesting for us.

Speaker Change: With all the initiatives that we have underway, and the springboard effect that it should play out for 2025.

James McGarragle: Now, appreciate the color, and I'll turn the line over. Thank you.

Marty Juravsky: Thanks, James.

Speaker Change: I appreciate the call, Aaron. I'll turn the line over. Thank you. Thanks, James.

Michael Topholm: Next question will be from Michael Topholm at PD Cowan.

Michael Topholm: Please go ahead. Good morning.

Michael Topholm: First question is just regarding steel prices. You noted, and you're out looking in the release in the comments today that you expect to see steel prices stabilize. And again, as you mentioned, it looks like we may be seeing some stabilization in HRC, but did see plate or have seen plate continue to trend a little bit lower here? I think down again, yesterday.

Speaker Change: Thank you, Mike.

Speaker Change: First question is regarding steel prices. You noted in your outlook in the release and the comments today that you expect to see steel prices stabilize. As you mentioned, it looks like we may be seeing some stabilization in HRC.

Speaker Change: I have seen Plate continue to trend a little bit lower here, I think down again yesterday. I'm wondering if you could just talk about the differences you're seeing in those two markets.

Marty Juravsky: What are you just talking about the differences you're seeing in those two markets? Well, thanks, Michael. And you're exactly right. We've seen increases come out from two significant mill players in North America. We've also seen the index come up this week on HRC. So we're starting to see that market move back up. It does appear to have stabilized. Marty mentioned in his comments. We also will see some mill closures for typical maintenance during the quarter. So several mills will take the supply out of the market. So we think that will further help cement that supply-demand relationship.

John Reid: Thanks, Michael. And you're exactly right. We've seen increases come out from two significant mill players in North America. We've also seen the index go up this week on HRC. So we're starting to see that market move back up. It does appear to have stabilized. As Marty mentioned in his comments, we also will see some mill closures for typical maintenance during the quarter. Thus, several mills will take the supply out of the market. So we think that will further help cement that supply and demand relationship. Plate typically follows, maybe about 30 days later. HRC, it's not always like that.

Speaker Change: Thanks, Michael. And you're exactly right. We've seen increases come out from two significant mill players in North America. We've also seen the index come up this week on HRC. So we're starting to see that market move back up. It does appear to have stabilized, as Marty mentioned in his comments. We also will see some mill closures for typical maintenance.

Speaker Change: during the quarter, so several mills will take the supply out of the market. So we think that will further help cement that supply-demand relationship.

John Reid: There'll be some intermittent moments, but it typically will follow. So it may drift just a little bit further, but we think it's coming to a bottom. The typical spread historically had been $180 to $200 a ton. With the inflationary pressures that the market's seen at the steel mill level, my understanding is that it's now moved up about $100, so call it $280 or $300 a ton. HRC coming up, plate coming down a little, as you referenced yesterday. We're starting to get close to that number again. So it feels like we're getting to that point as well with plate, probably very shortly.

Marty Juravsky: Plate typically follows maybe about 30 days. HRC is not always there'll be some intermittent moments, but it typically will follow. So it may drift just a little bit further, but we think it's coming to a bottom. The typical spread historically had been 180 to $200 a ton, with the inflationary pressures at the market seen at the steel mill level. My understanding that's now moved up about $100. So call it $283 a ton. HRC coming up, plate coming down a little as you referenced yesterday. We're starting to get close to that number again. So feels like we're getting to getting to that point as well with plate probably very shortly.

Speaker Change: Plate typically follows maybe about 30 days. HRC, it's not always, there'll be some intermittent moments, but it typically will follow. So it may drift just a little bit further, but we think it's coming to a bottom.

Speaker Change: The typical spread, historically, had been $180 to $200 a ton, with the inflationary pressures that the market's seen at the steel mill level. My understanding, that's now moved up about $100, so call it $280, $300 a ton.

Speaker Change: HRC coming up, plate coming down a little, as you referenced yesterday. We're starting to get close to that number again. So feels like we're getting to that point as well with plate probably very shortly. Thank you.

Michael Topholm: Okay, that's certainly helpful. Thank you.

Michael Topholm: Switching over to the margins, he noted that we should expect to see some a little bit of margin deterioration in Q3 versus Q2 on a sequential basis before recovery begins to set in later in the quarter and in Q4. It sounded like that was quite a specific comment around service center. So I guess the question would be just to confirm that.

Michael Doumet: It sounded like that was quite a specific comment around Service Centre, so I guess the question would be just to confirm that, and then if there's any way to kind of help us understand how we should be thinking about Q3 margins, you know, in terms of actual levels, given the various moving pieces here.

Speaker Change: It sounded like that was quite a specific comment around Service Centre, so I guess the question would be just to confirm that, and then if there's any way to kind of help us understand how we should be thinking about Q3 margins, you know, in terms of actual levels, given the various moving pieces here.

Marty Juravsky: And then if there's any way to kind of help us understand how we should be thinking about Q3 margins in terms of our actual levels given the various moving pieces here. Yeah, so you're right, Mike. It was specifically related to the service centers, but it also spills a little bit over into steel distributors as they have similar cycles.

John Reid: Yeah, so you're right, Mike, it was specifically related to the service centers, but it also spills a little bit over into steel distributors as they have similar cycles, a couple of nuanced differences in our case, but I'll come to that in a second. But as it specifically relates to the service centers, the way it characterizes probably the end of quarter margins versus the beginning of the quarter and Q2 quarter gross margins were about 75 basis points difference.

Marty Juravsky: A couple of nuances differences in our case, but I'll come to that in a second. But as it specifically relates to the service centers, the way it characterizes probably the end of quarter margins versus the beginning of quarter Q2 and Q2 quarter gross margins were about 75 basis points difference. So kind of gives you a frame of reference of what happened during the quarter and the orders of magnitude going into Q3. If I flip it over to energy, it's more of the same. Not a lot of variation of what we're seeing. Pretty good study. So don't expect to see a whole lot of change in terms of our activity level or margin on the energy side of it.

Speaker Change: A couple of nuanced differences in our case, but I'll come to that in a second. But as it specifically relates to the service centers, the way it characterizes probably the end of quarter margins versus the beginning of quarter

John Reid: So it kind of gives you a frame of reference for what happened during the quarter and the orders of magnitude going into Q3, in late Q1, early Q2, and some of that will spill over into the end of Q2 and into Q3. So we should be okay on the top line perspective for steel distributors in Q3, but the margins will flow similarly to what happens in the broader steel market.

Speaker Change: If I flip it over to energy, it's more of the same.

Marty Juravsky: The third segment steel distributors, as I said earlier, there is a dynamic where directionally the margins will follow what's going on in the broader steel market. We do have, though, the dynamic of some top line the bottlenecking that occurred at the end of Q2 and it's continuing to Q3 for our Canadian business that brings product in from overseas markets. It was a little bit of log jamming going on on the overseas logistics. in late Q1, early Q2, and some of that will spill over into the end of Q2 and into Q3. So we should be okay on the top line perspective and steel distributors in Q3, but the margins will flow similarly to what happens in the broader steel market.

Speaker Change: The margins will follow what's going on in the broader steel market. We do have, though, the dynamic of some top-line de-bottlenecking that occurred at the end of Q2 and is continuing to Q3 for our Canadian business that brings product in from overseas markets.

Speaker Change: It was a little bit of log jamming going on on the overseas logistics.

Michael Topholm: Okay, that's all helpful. Maybe just two clarifications, I guess. First off, when we're thinking about service centers' margins, it sounds like most of what you're describing in terms of the changes in margins in Q3 versus Q4 and where we go from there is really being driven by, I guess, fluctuations in steel prices and the way they've been trending has opposed to really a discussion around the impact that Samuel is going to have.

Michael Doumet: Okay, that's all helpful. Maybe just two clarifications, I guess. First off, when we're thinking about service center margins, it sounds like most of what you're describing in terms of the changes in margins in Q3 versus Q4 and then where we go from there is really being driven by, I guess, fluctuations in steel prices and the way they've been trending as opposed to really a discussion around the impact that Samuel is going to have. Is that fair to say? Do we need to take what you're suggesting and then sort of layer Samuel in on top of that?

Speaker Change: Okay, that's all helpful. Maybe just two clarifications, I guess. First off, when we're thinking about service centers' margins,

Speaker Change: It sounds like most of what you're describing in terms of the changes in margins in Q3 versus Q4 and where we go from there is really being driven by...

Speaker Change: I guess fluctuations in steel prices and the way they've been trending as opposed to

Marty Juravsky: Is that fair to say, like, do we need to take what you're suggesting and then sort of layer Samuel in on top of that? Correct, yeah, exactly. That's a spot on.

Speaker Change: Really a discussion around the impact that Samuel is going to have. Is that fair to say? Like, do we need to take what you're suggesting and then sort of layer Samuel in on top of that? Correct. Yeah, exactly. That's a spot on. I was I was my comment was more on a same store equivalent basis.

Michael Topholm: I was; my comment was more on the same store equivalent basis, and then the Samuels is a layer on. And then just on energy, to your point, I mean, quite stable in that business, the margin performance, but we did see margins sort of dip down a little bit below the 25% level in the second quarter. What is the driver for that? I mean, I guess, again, fairly stable, but just a little bit lower than we've seen in recent quarters. Just wondering what caused that. Yeah, it didn't move by that much, Mike, and I think, I mean, at the end of the day, there's always a bit of a range, and it's still operating within that range, plus or minus 25%. Maybe it's a shade higher, maybe it's a shade lower, but that is sort of you ever take the range.

Michael Doumet: We did see margins dip down a little bit below the 25% level in the second quarter. What is the driver for that? I guess, again, fairly stable, but just a little bit lower than we've seen in recent quarters. I'm just wondering what caused that.

Speaker Change: We did see margins dip down a little bit below the 25% level in the second quarter. What is the driver for that? I mean, I guess, again, fairly stable, but just a little bit lower than we've seen in recent quarters. Just wondering what caused that?

John Reid: Yeah, it didn't move by that much, Mike, and I think, I mean, at the end of the day, there's always a bit of a range, and it's still operating within that range, plus or minus 25 percent. Maybe it's a shade higher, maybe it's a shade lower, but that is sort of give or take within that range. So there wasn't any big driver in and of itself, other than it still operated within that normal zone.

Speaker Change: Yeah, it didn't move by that much, Mike, and I think…

Speaker Change: I mean, at the end of the day, there's always a bit of a range.

Marty Juravsky: So there wasn't any big driver in and of itself, other than it's still operated within that normal, normal zone.

Michael Topholm: Okay, so I will leave it there. Thank you. Great, thanks Mike.

Marty Juravsky: Great. Thanks, Mike.

Speaker Change: Okay, got it. Makes sense. I will leave it there. Thank you. Great. Thanks, Mike.

Operator: The next question will be from Frédéric Bastien at Raymond James. Please go ahead.

Friedrich Bastien: Next question will be from Friedrich Bastier at Raymond James. Please go ahead. Good morning. Apologies, you have touched on this before because I just topped in here.

Speaker Change: Next question will be from Frédéric Bastien at Raymond James. Please go ahead.

Frederic Bastien: Good morning. Apologies if you have touched on this before, but I just jumped in here. Marty or John, are you in a position to comment on your expectations for the Samuel assets once you integrate them into your operations? Are they any different from what they were in December when you first announced the transaction?

Marty Juravsky: Marty or John, are you in a position to comment on your expectations for the Samuel assets once you integrate them into your operations? Are they any different from what they were in December when you first announced a transaction? At a really high level for it's exactly as we expected. You know, the benefit of the only benefit of the passage of time and how long it's taken to get through the regulatory process is we've had the opportunity to do more planning, being more thoughtful, working especially over the last couple of months with our counterparts over at Samuels, and it's exactly as we are expecting it to be.

Speaker Change: Marty or John , are you in a position to comment on your expectations for the Samuel assets once you integrate them into your operations? Are they any different from what they were in December when you first announced the transaction?

Marty Juravsky: At a really high level, Fred, it's exactly as we expected, to focus on the reduction of working capital, specifically inventory, but most of that has already taken place with the passage of time and what Samuels has done on his own over the past number of months. But beyond that, and, you know, John, I'm not sure if you have anything current, we're pretty excited about the opportunity because it's exactly what we thought it would be.

Speaker Change: At a really high level, Fred, it's exactly as we expected.

Speaker Change: You know, the benefit of, the only benefit of the passage of time and how long it's taken to get through the regulatory process.

Speaker Change: is we've had the opportunity to do more planning, being more thoughtful, working, especially over the last couple of months with our counterparts over at Samuels, and it's exactly as we were expecting it to be. The opportunities are exactly as we expected them to be. The specific game plans are pretty much tracking to what we were expecting them to be. So, as advertised is the way I'd characterize it. And the only real change, as I mentioned earlier, is...

John Reid: The opportunities are exactly as we expected them to be. The specific game plans are pretty much tracking through what we were expecting them to be, so as advertised is the way I'd characterize it. And the only real change that I mentioned earlier is we benefited from the fact that we're inheriting a lower investor capital base going in, and that's an adjustment to our purchase price down. And so one of the things that we had expected coming out of the gate. is to focus on reduction of working capital, specifically inventory, but most of that is already taking place with the passage of time and what Samuels has done on their own over the past number of months.

Speaker Change: is to focus on reduction of...

Speaker Change: Working capital, specifically inventory.

Speaker Change: But most of that has already taken place with the passage of time and what Samuels has done on their own.

John Reid: But beyond that, John, I'm not sure if you have anything parental. We're pretty excited about the opportunity because it's exactly what we thought it was going to be.

Speaker Change: Over the past number of months, but beyond that, and you know, John .

Carental: I'm not sure if you have anything, Carental, we're pretty excited about the opportunity because it's exactly what we thought it was going to be.

John Reid: And I agree with Marty Fredman, it's as advertised. A lot of work has gone on both sides, and it's been very pleasant to work with. As Marty mentioned, a lot of the lifting was done by Samuelskip, bringing the inventory in line. It's still not quite to our level of turn, so there's still some room to go there, but a lot of that's been done up front.

John Reid: And I agree with Marty Fred, it's as advertised. A lot of work has gone on both sides, and it's been very pleasant to work with. As Marty mentioned, a lot of the liftings done by Samuels get bringing the inventory in line. It's still not quite our level of terms, so there's just room to go there, but a lot of that's been done up front.

Speaker Change: And I agree with Marty Fredman, it's as advertised.

John: A lot of work has gone on both sides, and it's been very pleasant to work with. As Marty mentioned, a lot of the lifting was done by Samuels bringing the inventory in line. It's still not quite to our level of turn, so there's still some room to go there, but a lot of that's been done up front.

Friedrich Bastien: Cool.

John Reid: And are you, like key customers in Western Canada, happy to hear that you're emerging? Are there any issues that you brought up, or anything like that? Yeah, so far, we're hearing overall from everyone that we've talked to is they look at this as something that will be good for the market, maybe a little more stabilizing for the market long term, and so they seem to be very positive to that.

Speaker Change: Cool. And are your key customers in Western Canada happy to hear that you're emerging? Are there any issues that they have brought up or anything like that?

John Reid: So far, what we're hearing overall from everyone that we've talked to is that they look at this as something that will be good for the market, maybe a little more stabilizing for the market long term, and so they seem to be very positive about that.

Speaker Change: So far, what we're hearing overall from everyone that we've talked to is they look at this as something that will be good for the market, maybe a little more stabilizing for the market long term, and so they seem to be very positive to that.

John Reid: That's great to hear.

Frederic Bastien: That's great to hear. Okay, that's all I have. Thanks.

Friedrich Bastien: Okay, that's all I have.

Operator: Thanks. Great.

Ian Gillies: Thank you.

Speaker Change: That's great to hear. Okay, that's all I have. Thanks.

Ian Gillies: As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one.

Operator: As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by 1. And your next question will be from Ian Gillies at STFL. Please go ahead.

Speaker Change: Thank you.

Speaker Change: As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one. And your next question will be from Ian Gillies at STFL. Please go ahead.

Ian Gillies: And your next question will be from Ian Gillies. That's T-Full.

Marty Juravsky: Please go ahead.

Marty Juravsky: Morning, everyone. When I look at the Q2 results and the relative performance of your average selling price versus HSC in play, I'm just curious whether you would attribute that to some of the United Processing investment you've done over the last few years. And whether we could expect to see further stability in that number with more investment as time passes. Ian, I really astute observation there, and interestingly enough, we were touring one of our facilities yesterday with the board, and we were showing the difference in the value I had in the ads as material there, and as that continues to grow on a percentage basis, how that does create that stability.

Speaker Change: Good morning, everyone.

Speaker Change: Morning, Ian.

Ian Gillies: When I look at the Q2 results and the relative outperformance of your average selling price versus HRC and plate, I'm just curious whether you would attribute that to some of the value-added processing investment you've done over the last few years.

Speaker Change: And whether we could expect to see further stability in that number with more investment as time passes.

Ian Gillies: [inaudible] We have a really astute observation there, and interestingly enough, we were touring one of our facilities yesterday with the board, and we were showing the difference between the value-add and the as-is material there, and as that continues to grow on a percentage basis, how that does create that stability. And so you will still see prices go up and down, but again, that margin component of the value-add does not.

Speaker Change: [inaudible]

Speaker Change: We have a really astute observation there. Interestingly enough, we were touring one of our facilities yesterday with the board, and we were showing the difference in the value-add and the as-is material there. As that continues to grow on a percentage basis,

Marty Juravsky: And so, you will see still prices go up and down, but again, that margin component of the value add does not. And so, it's a real opportunity for us, and we just continue to add to that incrementally. I think we've talked about this in the baseball references; a lot of singles are chipping away, and it just continues to get better. We should have a lot of those initiatives on the go; some will come to fruition through the last half of this year, first part of next year, so we'll continue to chip away and grow that portion of our business.

Speaker Change: How that does create that stability, and so you will see steel prices go up and down, but again, that margin component of the value add does not.

John Reid: And so it's a real opportunity for us, and we just continue to add to that incrementally. I think we've talked about this in the baseball references, a lot of singles are chipping away, and it just continues to get better. We still have a lot of those initiatives on the go. Some will come to fruition during the last half of this year and the first part of next year. So we'll continue to chip away and grow that portion of our business, and it will add to that stability and take out some of the earnings, up and down, and have a more normalized band.

Marty Juravsky: And it will add to that stability and take out some of the earnings up and down and have a more normalized bandwidth.

Speaker Change: Up and down, and have a more normalized bandwidth.

Ian Gillies: That's helpful.

Ian Gillies: That's helpful. Maybe switching gears a little bit, we've obviously seen this DLM&A cycle heat up on the producer side. You did the Samuel deal earlier this year. Are you getting any sense that, maybe, on the distributor side, it's going to get perhaps a little easier, a little looser to get deals done over the next 12 to 18 months?

Ian Gillies: Maybe switching gears a little bit, we've obviously seen the steel M&A cycle heat up on the producer side. You've done the same you will deal earlier this year. Are you getting any sense that maybe on the distributor side that it's going to get perhaps a little easier, a little looser, to get deals done over the next 12 to 18 months? You know, it's hard to handicap getting things over the finish line, but we are seeing a lot of fair amount of activity. And, you know, we have; it's not like there's been a shortage of things that we've looked at over the last year, two years, three years.

Speaker Change: That's helpful.

Speaker Change: Maybe switching gears a little bit, we've obviously seen

Speaker Change: The steel M&A cycle heat up on the producer's side.

Speaker Change: You've done the Samuel deal earlier this year. Are you getting any sense that maybe on the distributor side that it's going to get perhaps a little easier, a little looser to get deals done over the next 12 to 18 months?

John Reid: You know, it's hard to handicap getting things over the finish line, but we're seeing a fair amount of activity. And, you know, we have – it's not like there's been a shortage of things that we've looked at over the last year, two years, three years, and we're continuing to see that deal flow. I think what is helpful, though, as there was sort of a period of time where there wasn't a lot of stuff that was transacted because I think there were probably a fair amount of disconnects between buyer expectations and vendor reality.

Speaker Change: You know, it's hard to handicap getting things over the finish line, but we're seeing a fair amount of activity.

Speaker Change: And, you know, we have...

Marty Juravsky: And we're continuing to see that deal flow. I think what is helpful though, as there, you know, there was sort of a period of time where there wasn't a lot of stuff that was transacted because I think there were probably a fair amount of disconnects between buyer expectations and vendor reality. Excuse me, there was just a value disconnect. And so there wasn't an awful lot of transactions, but there's been a couple of things that have come over the finish line in the industry as there are some broader things that are occurring within the industry. I think that just bodes well for having buyer and seller expectations becoming more in line.

Speaker Change: I think what is helpful, though, as there was sort of a period of time where there wasn't a lot of stuff that was transacted because I think there were probably a fair amount of disconnects between buyer expectations and vendor reality.

John Reid: And so there weren't an awful lot of transactions, but there were a couple of things that have come over the finish line in the industry as there are some broader things that are happening within the industry. I think that just bodes well for buyer and seller expectations becoming more in line, and we're pretty value conscious, so we care a lot about what we pay for stuff, whether through internal investments or through acquisitions.

Speaker Change: There's just a value disconnect.

Marty Juravsky: And we're, we're pretty value conscious. So like we care a lot about what we pay for stuff with our internal investments or through acquisitions. So I would expect there's going to be more opportunities that fall into the criteria that works to us, both from an operational perspective, but also from a value perspective. And, yeah, so we're optimistic that over the next little bit, there'll be more opportunities.

John Reid: So I would expect there's going to be more opportunities that fall into the criteria that works for us, both from an operational perspective and also from a value perspective. And yeah, so we're optimistic that over the next little bit, there'll be more opportunities.

Speaker Change: So I would expect there's going to be more opportunities that fall into the criteria that works to us, both from an operational perspective, but also from a value perspective. And yeah, so we're optimistic that over the next little bit, there'll be more opportunities.

Marty Juravsky: And then lastly, if you look at the presentation, there's obviously been a natural decline in the return on capital employed as steel prices rolled off. But as Russell thinks about where they'd like to see the return on capital employed stabilized, do you have a range you'd be willing to put out there of where you'd like to see that or something you'd be comfortable with? Well, we still use 15% as our target return over the cycle. Now, again, that's over the cycle. In some years, it will be better and some years worse, but overall we're trying to get to the 15%.

Ian Gillies: Lastly, if you look at the presentation, there's obviously been a natural decline in the return on capital employed as steel prices have rolled off, but as Russel thinks about where they'd like to see the return on capital employed stabilized, do you have a range you'd be willing to put out there of where you'd like to see that or something you'd be comfortable with?

Speaker Change: Lastly, if you look at the presentation, there's obviously been a natural decline in the return on capital employed as steel prices have rolled off.

John Reid: Well, we still use 15% as our target return over the cycle.

Marty Juravsky: So the target for us remains the same. We've generally generated more than that on average over the last couple of years, and obviously a lot of that has been driven by the very favorable market, but it's still the way we look at internal investments is the same way we look at acquisitions. So that remains the target we look for. That being said, there'll be some things that some initiatives might have a two or three or pay back attached to them, and some might be longer. On average, though, that's what we're trying to achieve. Is that 15%-ish type return over the cycle?

Speaker Change: We've generally generated more than that on average over the last couple of years, and obviously a lot of that has been driven by the very favorable market, but it's still the way we look at internal investments. It's the same way we look at acquisitions.

Speaker Change: So that remains the target we look for. That being said, there'll be some things that, you know, some initiatives might have a 2 or 3 or payback attached to them, and some might be longer. On average though, that's what we're trying to achieve is that 15%-ish type return over the cycle.

Ian Gillies: Understood. Thanks very much.

Michael Pepple: I'll turn the call back over. Thanks, Ian.

Speaker Change: Understood. Thanks very much. I'll turn the call back over.

Michael Pepple: Next, please, a follow-up from Michael Pepple at PD Cowan. Please go ahead.

Ian Gillies: Thanks, Ian.

Speaker Change: Next is a follow-up from Michael Tupholme at TD Cowen. Please go ahead.

John Reid: Thanks. Marty, can you provide an update on intended plans for integration activities, say over the balance of 2024, once you close on the Samuel acquisition? Lots is, I guess, the short answer, and maybe I'll turn that over to John because John is in the crosshairs of that in a lot of ways. But it really, it's across board, it's operational, it's systems, it's a whole series of initiatives. Michael, again, we'll look at the systems and bring those over very systematically. They're on two separate systems, both in Canada and the US, so we'll bring those over. They'll operate within our regions that we have already established with Williams-Bacall. Would handle the United States.

Ian Gillies: Thanks.

Speaker Change: Michael, again, we'll look at the systems and bringing those over very systematically. They're on two separate systems, both in Canada and the U.S.

Ian Gillies: So we'll bring those over. They'll operate within our regions that we have already established. Williams-McGaugh would handle the United States that's coming over for Samuels on a separate computer system.

John Reid: It's coming over for Samuel's on a separate computer system. versus what we'll have in Western Canada under the Russell Metals and Browell that's already there provincially. So those individual divisions will go under those regions. And so there'll be a lot of integration there, again with two separate systems, obviously with payroll systems and HR systems coming over to ours initially. So those will be put in place. Then we will start to look at operational opportunities that are out there between the two businesses and how we can maximize what's out there, and it's our capacity utilization on equipment.

John Reid: versus what we'll have in Western Canada under the Russel Metals umbrella that's already there provincially. So those individual divisions will go under those regions. And so there'll be a lot of integration there, again, with two separate systems, obviously with payroll systems and HR systems coming over to ours initially. So those will be put in place. Then we will start to look at operational opportunities that are out there between

John Reid: Then some of that homework now will continue to do that. Ideally, that works better when you're on the same computer system. So there will be a lot of moving parts in the first year. As Marty mentioned, there'll be some costs associated with that, but we see that we see that moving fairly quickly over the first 12 months. And in some ways, John and Mike, this goes back, if you recall, to the maps that we have shown in the past related to their footprint and our footprint. Every facility sort of has a different story of what the opportunity is in the Northeast US.

Ian Gillies: And in some ways, John and Mike, this goes back, if you recall the maps that we have shown in the past related to their footprint and our footprint, every facility sort of has a different story of what the opportunity is.

John Reid: In the Northeast U.S., it's an extension of our platform into Buffalo and Pittsburgh, where we don't have current operations in that region. So the integration planning in that region is different than it is

John Reid: It's an extension of our platform into Buffalo and Pittsburgh where we don't have current operations in that region. So the integration planning in that region is different than it is in Manitoba or Alberta or BC where we have different locations, different products, different equipment. So it really is highly tailored.

Ian Gillies: in Manitoba or Alberta or B.C. where we have different locations, different products, different equipment. So, it really is highly tailored.

Michael Pepple: And there are very specific game plans in each particular location, and each particular location has a very, very different game plan of how to achieve those benefits. And that's helpful, and I appreciate there's a lot going on. And so do appreciate the color there from both of you.

Ian Gillies: And there are very specific game plans in each particular location, and each particular location has a very, very different game plan of how to achieve those benefits.

Speaker Change: I know that's helpful and I appreciate there's a lot going on and so I do appreciate the colour there from both of you. Maybe just one other question on Samuel.

Marty Juravsky: Maybe just one other question on Samuel. Marty, you called out some of the changes in non-cash work and capital accounts that have occurred. But if we just think about the expected purchase price on closing that you will actually be paying, if I'm understanding this correctly, to me, it seems like it's similar to what you'd originally announced, but if you can just clarify that. Yeah, that's so cash out the door on closing will be similar, but it's a little bit of an artificial number because we're not inheriting any accounts payable. That would be the normal course part of working capital.

Marty: Marty, you called out some of the changes in non-cash working capital accounts that have occurred.

John Reid: Yeah, so cash out the door on closing will be similar, but it's a little bit of an artificial number because we're not inheriting any accounts payable, which would be the normal course part of working capital.

John Reid: So for the next two months, we'll be rebuilding it. So on closing, it'll be around that $225 million mark, but we won't have any cash going out the door to pay trade payables for the first two months. So it's the economic equivalent of more like $180 million.

Marty Juravsky: So, for the next two months, will be rebuilding it. So, on closing, it'll be around that $225 million mark, but we won't have any cash going out the door to pay trade payables for the first two months. So it's the economic equivalent of more like $180 million. Okay, I was just going to ask the you intended to bring investment in working capital down, but the payables number that you're not inheriting, we should assume you will ramp it back up to a similar level to what it was when you announced the deal. Yeah, like well, yes and no, it ebbs and flows. A big part of a pound's payable is trade payables, which have also been driven off of steel prices that have been flow.

Marty: Yeah, like, well, yes and no. It ebbs and flows. A big part of a pounds payable is trade payables, which is also driven off of steel prices that ebb and flow. But directionally, if it was September 30th all over again, it would be close to that 45 million dollar number. Yeah.

Marty Juravsky: But directly, if it was September 30th all over again, it would be close to that $45 million number. Yeah. Okay. Another way, Mike, another way, Mike, you know that that $45 million equivalency will be a cash benefit in the first two months as it as that accounts payable bill builds back to a normal level, as opposed to having to deal with trade payables and cash going out the door day one, day two, day three. There's no cash going out the door for those first, call it, two months as we rebuild that level. Thank you.

John Reid: That $45 million equivalency will be a cash benefit in the first two months as that accounts payable builds back to a normal level as opposed to having to deal with trade payables and cash going out the door day one, day two, day three. There's no cash going out the door for those first, call it, two months as we rebuild that level. Okay, okay. That makes sense. All right, thank you.

Ian Gillies: You know, that $45 million equivalency will be a cash benefit in the first two months.

Ian Gillies: as that accounts payable builds back to a normal level as opposed to having to deal with trade payables and cash going out the door day one, day two, day three. There's no cash going out the door for those first, call it, two months as we rebuild that level.

Operator: And at this time, gentlemen, we have no other questions registered. Please proceed. Great. Thanks, operator.

Marty Juravsky: Great. Thanks, operator. Look, everybody, really appreciate joining our call. I know it's really busy this time of year, in particular yesterday and today, with a variety of things going on. If you have any follow-up questions, please feel free to reach out at any time. Otherwise, we look forward to staying in touch during the quarter and into Q3. Thanks very much. Bye-bye.

Marty Juravsky: Look, everybody, I really appreciate joining our call. I know it's really busy this time of year, in particular yesterday and today, with a variety of things going on. If you have any follow-up questions, please feel free to reach out at any time. Otherwise, we look forward to staying in touch during the quarter and into Q3. Thanks very much.

Speaker Change: Great, thanks operator. Look, everybody, really appreciate joining our call. I know it's really busy this time of year in particular, yesterday and today with a variety of things going on. If you have any follow-up questions, please feel free to reach out at any time. Otherwise, we look forward to staying in touch during the quarter and into Q3. Thanks very much. Bye-bye.

Operator: Bye-bye.

Operator: Thank you, sir.

Operator: Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask you to please disconnect your lines.

Speaker Change: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines.