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Good morning, ladies and gentlemen, and welcome to the 2020 Second Quarter Results Conference Call for Russel Metals. Today's call will be hosted by Martin Juravsky, Executive Vice President and Chief Financial Officer; and John Reid, President and Chief Executive Officer of Russel Metals. [Operator Instructions] I will now turn the meeting over to Martin Juravsky. Please go ahead.
Thank you, Chris. Good morning, everyone. I plan on providing a brief overview of the Q2 highlights to give a context for the key developments that we have seen. If you want to follow along, I'll be using the PowerPoint slides that are on our website. Just go to the Investor Relations, Conference Calls part of the website, and you'll be able to find it. On Page 3, you can read our cautionary statement on forward-looking information. So let me start on Page 5 with a few summary observations. One, it was obviously a very unusual quarter with the developments related to the COVID-19 challenges. In fact, the quarter involved really 2 distinct segments: one, the decline that we saw coming into the quarter; and two, the pickup that we saw coming out of the quarter. With this backdrop, we are really very proud of our various businesses in proactively adapting and adjusting to the quickly changing market situations. First and foremost, we put in place the right protocols to focus on safety. Even though we were deemed an essential service and we continued to operate, the overall economic conditions impacted activity, particularly the front part of the quarter. In order to adapt, we made a series of rapid changes throughout the quarter relating to staffing, which is down around 15%; cost containment discretionary spending, which is also down a fair amount; and inventories as we pulled back on our procurement activities. I think the results for the quarter show the flexibility of our business model. I think as most of you are aware, variable costs are a big part of our business. They represent around 85% to 90% of our total cash costs, when we include cost materials, employee expenses, other operating expenses. And it's just one example. Our variable employee expenses are down over 25% versus Q1 of this year and down over 50% as compared to the 2019 average. Countercyclical cash flows. We talk about this a lot. In the quarter, we generated $95 million from noncash working capital this quarter. Diversification across North America. Just as COVID-19 impacted the global economy in very different ways, we have seen that our risk has been reduced by having a broad geographic platform and very diverse customer base. We do not have all of our eggs in one basket. Lastly, our capital structure is in great shape, with our net debt coming down and our liquidity going up substantially in the quarter. If you go back to our Q1 conference call, we talked a lot about the ability to generate cash flow in this part of the cycle. And I think our Q2 results provided that illustration. If you go to our financial results on Page 6. From an income statement perspective, the gross margin percentage remained around 19%, but the dollars came down with lower sales activity. As compared to Q1, our sales in Q2 declined by about $227 million and gross margin declined by about $42 million. But our EBIT and our EBITDA only declined by about $4 million. As mentioned earlier, we quickly adapted to the environment, and we were able to bring down our net cash costs on almost a dollar-for-dollar basis with the decline in gross margins. This bottom line was achieved despite a couple of notable items. One, with our share price increasing in Q2 versus a decline in Q1, the mark-to-market on our stock-based compensation was a $3 million expense in Q2 versus a $4 million recovery in Q1. This is noncash, but it flowed into our EBITDA. Also, we took an additional $5 million provision related to the potential risk in our inventories, energy, in particular. This is also a noncash item, but it flowed into our EBITDA. Overall, given the strong financial profile of our company, we are pleased to once again declare a dividend of $0.38 a share for our shareholders. From a cash flow perspective, $95 million reduction in working capital, with the biggest shift being from accounts receivable. Our credit team did an absolutely terrific job, and our pace of collections was well above normal. We also lowered our inventories. And I believe that dependent upon the future economic conditions, we'll make further progress on inventories in the months and quarters ahead. CapEx at $5 million is pretty modest, and there are no large commitments on to come. From a balance sheet perspective, net debt declined from $443 million last quarter to $368 million at the end of June or a $75 million reduction. As a result, we're sitting on a net cash position of about $77 million, excluding our term debt, and this gives us a lot of dry powder and operational flexibility. For shareholders' equity, there's an accounting adjustment because of the FX shift at quarter end -- second quarter versus quarter end, quarter 1. The bottom line is that we made really good progress in driving free cash flow, and I believe we still have more on to come. If you go to Page 7, we have some segmented P&L information. The service centers did well under some really tough market conditions. Despite revenues coming down to $373 million, our gross margins held in at around 21%. And in fact, we generated a higher operating profit in Q2 than we did in Q1. Tons shipped were down 14% versus Q1, which is better than the industry data that we have seen among our competitors. The stability of our gross margins in a declining market in many respects was due to the value-added processing and the investments that we've made over the last number of years. As mentioned earlier, the team's ability to adapt quickly to the evolving market was a big factor in driving down costs. In energy, there were several macro factors on top of COVID, including low energy prices and drilling activity levels, along with weather delays in Western Canada coming out of breakup. That said, we have 2 distinct subsegments within our energy business with different results. The field stores/Comco segment continued to hold up better in the quarter as it actually posted an operating profit of $4 million. That operation was supported by infrastructure activity related to the Trans Mountain project. By contrast, the OCTG and line pipe part of the energy segment incurred a loss. We are very focused on inventory management across all of our business units, but in this segment, in particular. The distribution segment managed really well in a very tough environment, led by the Canadian business, which typically structures its buying and selling activities on a back-to-back basis. So there's relatively little risk and fairly stable margins. On Page 8, we have segmented balance sheet information to provide a frame of reference for some of our recent capital allocations shifts. Our segmented net identifiable assets declined by $129 million since year-end. Most of the shift was on the energy side. We lowered the energy segment's identifiable assets in both absolute dollars as well as on a relative basis. As an example, metal services was 48% of net identifiable assets at year-end, and it's now 45%. On the energy side, most of that segment's identifiable assets are working capital with very little fixed assets. More specifically, of the $612 million of identifiable assets within the energy segment at June 30, almost half is OCTG and line pipe working capital. As I said earlier, inventory management of that segment is a key focus. Now I know outlook is probably a big question for a lot of people, so let me just say this in terms of overall outlook for our business. We aren't very good at predicting the future, but we are really good at adapting to it. This quarter demonstrated that. So from my perspective, regardless of how economic conditions evolve, we are really well positioned from both an operational and a capital structure perspective to take advantage. In closing, on behalf of John and other members of the management team, I'd really like to express our appreciation to everyone within the Russel family. This quarter presented some really unique challenges, and we couldn't be more pleased with the teamwork and resourcefulness of our colleagues. So operator, that concludes my introductory remarks. If you'd now open the line for any questions, please.
[Operator Instructions] Your first question comes from Michael Doumet, Scotiabank.
So first question, I just want to know if you guys could provide some specifics on the wage subsidy in the quarter and its contribution to each segment. And further, just as it relates to the SG&A and margin progression, given your expectations for the wage subsidy, and how sustainable do you think [ the level of ] EBIT margins are into the second half?
Sure. So why don't I tackle that, Michael? So in terms of wage subsidy, we haven't disclosed the specific number. But what I'd say -- and part of the reason is because we look at our staffing costs in totality, and there's multiple elements attached to it. We think the government's initiatives to actually support employment made an awful lot of sense to be getting companies through this period of time, and we reacted to that appropriately. What we've included is some disclosure of the nature of the beast in terms of how the methodology worked. So in the quarter, we qualified for the subsidy. We benefited for all 12 weeks of it. The maximum per employee is $847 per employee. Not everybody gets the maximum. So on average, we're less than the maximum, which is the nature of the beast. And in Canada, we have roughly 1,800, 1,900 employees. In terms of the go-forward, the way we look at our business model is really simple. And in some ways, it's back to what we talked about before. We look at cost in its totality and margins in their totality. And in many cases, when we see what's in front of us, we're just going to have to adapt to varying circumstances. So as the way subsidies start to fall off towards the end of the year, we will make other operational decisions and try and work towards getting the appropriate bottom line and appropriate return for our shareholders. So we think that, that was a good incentive in terms of keeping employment at an appropriate level during this past quarter. And as that starts to roll off, we'll continue to revisit all of our various cost line items, overhead, head count and the like.
Okay. That's really good color. And maybe just turning to the energy products. It's not a huge surprise, but the inventory turns has really dropped there. So maybe given some of the softness in the OCTG pricing, I mean, is it fair to expect continued margin pressure through the second half until, say, I mean, inventories are adjusted? And maybe how should we think about the mix between OCTG and oil field stores in the second half as well?
Thanks. So I'll take that one. If you like, Martin, go ahead. Go ahead, Martin.
No. Go ahead, John, sorry.
Yes. So the line pipe and the OCTG is definitely where we're having our issues with the turns and, again, just the volume slowdown. When you fell to the rig count levels, I think, during breakup, we were at a low point of 13. As we talked about, it bounced back. It was at 45 as of this morning. Again, that's still off 67%, 68% from last year, and the U.S. is down to 51. So there's just not a lot of demand out there for that product. And so we'll continue to work through that, but the turns are much lower than we want in that segment. Flipping over to the field store side, our returns are down slightly, but they're still in there in a pretty good spot for us. We continue to turn the inventory. We adjust quicker there because that part of the business, again, is there for the life of the well and the maintenance fees, along with the projects like the Trans Mountain that we're participating in Phase 1 and Phase 2 throughout the end of this year. So the turns there are at an acceptable level, although on the low end, but they are at acceptable levels. Our focus point, as Marty alluded to earlier, will really be on those OCTG and line pipe. And again, this is a demand issue right now. It's very challenging, plus you get an overstock from all distribution.
Okay. Great. And then maybe just a follow-up, John, I mean, to tie that inventory discussion, what's your expectations on working capital requirements for the second half? I mean again, things can change, obviously, with the market. And presumably, even each of your businesses are seeing different trends. But I'm interested to hear in how much maybe excess inventory you guys think you have, again, particularly in OCTG or anywhere else in your business.
Yes. So right now in OCTG and line pipe, we're carrying probably 1.5 turns to 2 turns of inventory versus what we would like to have. We'll continue to try to bleed that off. We're really watching our -- any orders coming in right now are sold with the exception of one operation that is operating at a profitable level, and they continue to have a program that goes forward that is locked in. It's just not sold upon arrival. So -- but we basically have changed all of our purchasing to reflect only items that are sold coming in until we thin our inventory down to an appropriate level. So I think we'll continue to throw off working capital there. Again, it will be based on what volumes are available in the market. With the low rig count, it will be a slow grind to get that inventory down.
Your next question comes from Devin Dodge, BMO Capital Markets.
This is Jun Chuah calling in for Devin. Can you guys maybe give us a little more color on some of the demand trends in your service centers across your regions and end markets?
John, do you want to?
Yes. I'm sorry, you broke up just a little bit. I'm assuming you said demand trends. Is that right, Jun?
Yes.
Yes. So if you look across our service centers segment, nonres construction held up really well compared to what's going on in the world right now with the pandemic. And so we've seen -- we saw a slight pullback early on in April with that, as everybody adjusted to the essential versus nonessential. That came back pretty quickly in May and June as all our demand did. And so what we're starting to see is construction is solid. Those jobs that were put on hold are starting to move forward, and that's really the bright spot that's out there. Other segments that we've seen in the heavy equipment, ag, those have slowed down with an impact of 20%, 25%, 30%. And we're seeing other manufacturing, end use markets slow down as well. So the biggest thing we watch when we look at construction for the go-forward is how much of this is a tail on a project versus how much is in the Architectural Billing Index going forward, which represents 9 to 10 months out. And that index in the construction world, the ABI index, is actually improving. It's still below 50, which is a sign of growth, but it actually improved quite a bit in the last 2 months. So we're hopeful that, that tail will carry on into next year. The other end markets, obviously, we serve are energy-related. Those are down dramatically, 50%, 60%, 70% based on the fall in the rig count and the -- depending on where you are and what part of the country. We are seeing some projects in the energy go forward like in Trans Mountain. As we look at Western Canada, there is some movement there going forward. But overall, most of our end use segments are down right now. And just for you, Jun, we don't participate in automotive. And so that's something -- again, we watch it. But as it relates to our competition, that could creep into our market, but we don't participate in automotive other than maintenance.
That's great. Second question, do you guys expect industry M&A to pick up? And has there been an increase in seller interest?
Yes. So we've actually seen a fair amount of deals coming across. And especially relative to first quarter and end of the year, some of those deals are obviously more liquidation-type deals where people are looking to get out. We are seeing some reasonable things to look at right now. So we think there are some opportunities in M&A for us in this market that we will explore, and we'll just see where they go.
Got it. And one last question. Have you guys been seeing any increased competitive pricing pressures in the market?
Yes. Across the board in every segment. The strongest is obviously OCTG and line pipe. We're seeing it in service centers. And again, I want to commend our service centers. They did tremendous job maintaining margin. Typically, if you look back at our historical performance, in a falling price environment, you would see margins drop as a gross margin percentage. They've not done so. And that's a nod to our value-added processing that's out there as we continue to grow that segment of our business as a percentage of our sales. It's holding that margin steady. And so we're very pleased with the performance there and with our service centers' overall financial performance. But yes, there's margin pressure in all 3 segments.
Your next question comes from Frederic Bastien, Raymond James.
Guys, I'm just wondering how much cash you can reasonably expect to release from working capital in the second half. And is it fair to expect that most of that will come from inventories?
Fred, yes, I think to answer your latter question, yes, I think it's fair to say it's mostly going to come from inventories. As I mentioned earlier, on the receivable side of it, we had a really, really strong collection quarter, and our receivable levels have been brought down in really good shape from that perspective. There's more work to be done on the inventory side of it. It's a little stickier in terms of ability to move it, but it does move over a period of time. And that's where the focus is right now. So I think if you kind of stand back and say, where are we going to be for the back half of the year, some of it is going to be a function of overall economic activities, particularly on the service centers side of it. But notwithstanding that, I think the biggest focus in terms of inventories coming down is on the energy side of it. So almost irrespective of economic conditions, we'll be bringing inventories down on the energy side over the course of the next few quarters and even beyond the next few quarters. Orders of magnitude, we've probably got another 10% to go is my order of magnitude guess.
Now it's hard for us really to make sense of the margins when we have no clear idea of what the subsidies were. Is there a way for you to provide a bit more color on that or at least provide us with some goalposts or some -- an estimation of what these might have been?
Yes. So for -- the building blocks to get there, on the Canadian side of it, which is really where the subsidies are, is really related to staffing levels, and there's a maximum amount per person. And the maximum amount per person is $847 per employee per week, 12 weeks of benefit in the quarter. And we have in Canada around 1,800 or 1,900 employees, and not everybody gets the maximum because that's driven off of where everybody's individual salary or wages are. So off of there, you get orders of magnitude for that math.
Okay. That's going to be an interesting exercise. John, just switching gears here. Are you seeing any green shoots coming out of energy, either on both sides of the border?
Right now, we just don't see a lot of pickup for energy for the balance of the year. I think inventories hopefully will start to come in line from the distributor side, and people's inventories will start to come down to reasonable levels. But we're not -- again, we're just not seeing a whole lot other than in Canada, it's benefiting from heavy oil. And the U.S. has basically shut in or capped off their heavy oil production, which is primarily the Dakotas and Pennsylvania area due to the costs to produce that heavy oil. And they're primarily running rigs in the Permian and the low-cost basins where we do operate with our field stores. So there is a benefit for Canada because there's a need for the heavy oil to come across the border to run the refineries and do the appropriate mix for gasoline and then to be used in the different grades of gasoline that's out there. So we've seen some lift there. I think that will continue to happen as long as the oil is range bound in this $40 to $45. As that starts to creep back up and sustain above $50 and $60, then I think you'll see the U.S. to start opening back up more of that heavy oil play.
Awesome. My last question, John, what's the most important lesson you're taking away from this pandemic?
I guess there's lessons and things that you reflect on is you're really proud of your people. First and foremost is the safety and the way that our people responded to it through our decentralized model. We had to take the approach of really centralized to get the combination of information, get it disseminated out to the teams and how they reacted because it's very -- just as the pandemic attacks different places and different regions of the world differently, in terms of the number of cases, positive cases, our safety team has reacted appropriately, and our case count is extremely low. We've had just a handful of interruptions. And so I'm just very proud of our people for how they've handled the safety, how they've taken the welfare of everyone within the Russel family, their suppliers and their customers to make sure we're operating safely. And so some of the lessons that we've learned, obviously, as you go through any downturn, you can look through your operation. There's an opportunity to go back and tighten your belt. We do run it with the lowest operating cost on a percentage basis in the industry, but we're looking at ways to do that better. It's really challenging our people, and we continue to find ways to do that better through technology, through different operating efficiencies with the new equipment that we have out there. And then really, I feel we're learning with our value-added process and growth initiative in service centers, it's really a stronger growth opportunity in the downturn than we anticipated. So there are a lot more customers that are looking to us now to do that. To give you a reference point, we're bringing on a new tube laser and flat laser to our Trenton, Georgia facility. We'll be shifting work over where we've been developing that customer base from another facility. We're already booked out at one full shift and well into the second shift, and we've got to start operation. We're still probably 30 days out from starting the operations. So we're seeing that stickiness of those customers that want us to do more and more value-added processing as they've had to pull back as well. So we're very pleased with that. Some of the lessons learned on the energy side. We're looking at our purchasing trends, specifically in OCTG and line pipe, our import trends where you get caught with material on the water and trying to evaluate our buying patterns to make sure that we can maintain a turn level that's reasonable to ultimately get to the level we want to return to our shareholder. And so we're really working through that closely, and we're really happy with our field stores. And we continue to see even in this low, low rig count that they're continuing to provide that maintenance component. Although that's not the project piece of their business that's out there, the maintenance component is there. And we can adjust scale and size very quickly. So we're very pleased with that.
Your next question comes from Michael Tupholme, TD Securities.
First question just relates to the service center demand and volume trends. Volumes were down 19% year-over-year in the quarter. I apologize if I missed this, but I'm just wondering if you can provide a bit of a snapshot as to how that looked at the end of the quarter just to get a sense for the progress as the quarter evolved. And then further to that, any indication as to sort of where things sit now on a year-over-year basis here in early August?
Yes. John, do you want to handle that? Or do you want me to?
Go ahead, Martin. I'll provide color at the end.
Sure. So Mike, your premise is spot on, which is the entry to the quarter looked an awful lot different than the exit from the quarter. And April was obviously down a lot from March. May picked up from April, and June picked up from May. And so when we look at the quarter as a whole, the June activity on a run rate basis was higher than the quarter average. But that being said, the June activity was still below pre-COVID levels, and it was probably below pre-COVID levels by, I'd say, about 5%. June activity is continuing on at a comparable pace to where things were at in June. You got some noise in July, though, holidays in different regions, Québec, Canada Day, Fourth of July. So July is an interesting inflection point just because of some seasonal dynamics. I think the ultimate test is going to be how things evolve into August, where we're in, and September. But if you look at the second quarter in its totality, though, there were really 2 different stories of things dropping off pretty hard into April and then picking up at a reasonable level but still slightly below pre-COVID levels by the time we got to June.
Okay. That's helpful. Down 5% year-over-year by the time you got to June sounds actually quite good in the context of the environment we're in. Just wondering, do you think there was some sort of pent-up demand that maybe helped those numbers a little bit as you got into June and maybe July? Or is that, do you think, indicative of kind of sort of a reasonable run rate for the next little while, absent further acceleration in reopening?
Yes. So I think what we really saw, pent-up demand had really jumped in the last half of May and as we came out of April with so much -- many things being just shut down. So we really saw something it in May. It was a little nervous going into June to see what -- June actually performed a little bit better. Again, as Marty mentioned, you got a lot of noise in July with all the extended holidays, and Québec taking the 2 weeks makes it a little difficult. But what we're seeing is it looks like July is basically flat with June with all the noise. August seems to be coming out flat to slightly up from that. But I think we're going to move -- as I said in our press release, I think we're going to move in concert with the pandemic. And so you're going to have an uneven recovery. So we'll take 2 steps forward, maybe 1 step back as the pandemic surges, and it causes people to move back and forth in different phases of opening, obviously, children going back-to-school. There's one belief that's out there that, that may cause the pandemic to surge for a period of time. So we'll watch that closely. But right now, we're operating at even or slightly above what we saw in June so far in the quarter.
Okay. That's helpful, John. And I suspect there are some regional differences. But just from a high-level perspective, is what you're suggesting in terms of the volume trends, is that -- I mean is that generally applicable across most markets? Or is this really a mixture of wildly different things going on in different jurisdictions?
It's typically applicable across. And again, you're going to see different market trends with -- again, where you have an area that's not intensely impacted by the pandemic, typically, is a low population area that's not an intense steel user. Because of the population, there's just not a lot of demand there. So the larger cities have a lot larger issues to deal with. The U.S. is obviously not dealing with it near as well as Canada. So we're very pleased with what's going on in Canada right now. So we're seeing some rebound there. Our U.S. operations actually were extremely strong. On the service center side and the demand, we were only down 2%. So we were very, very pleased with what happened in our U.S. side. Canada is making strides to come back very strongly as well. So I think it applies across the board. Again, barring a large, large outbreak, we -- fortunately, we're not in some of the states that have been impacted dramatically other than Texas. And so right now, we haven't had to deal with that. Again, Canada is handling it so much better than the U.S. to date. So we'll just see how it goes forward as we continue to kind of open up the economies.
Okay. Next question relates to steel prices. We've seen hot-rolled coil under some pressure, maybe leveling off here and potentially, since the possibility of it maybe having found of the bottom, heading higher. But wondering if you can provide any thoughts on that? I know it's difficult. But secondly, what does the pricing you've seen thus far through the second quarter imply for margins in service centers? Should we be thinking about service center margins potentially being down a little bit relative to the second quarter because of what we've seen with prices?
So the first part of your question, you're right. It appears that if you're using the hot-rolled coil as a proxy, it appears it's found the bottom in the $440 range. It's bouncing off the bottom slightly. Scrap, which is the main driver for hot-rolled coil, are all steel pricing now. Actually, in the last few days, it's solidified, and we're seeing some potential lifts there, very uneven, though, where you see that come out. If you're looking in the Midwest just scrap pricing for the U.S., that's down a little more than the Southeast and primarily driven by exports. There's been a big drive from the export market from Turkey to buy scrap. So that's driven that price up. So again, I think we'll follow scrap as it moves. It looks like it is firming. If you look at demand, steel mills are running at 59%. So there's plenty of room to bring up on capacity that could add extra capacity that will likely keep it range bound. However, if you look at the North American price right now, we're the lowest prices on the world market. So that would mean imports are probably not going to be a big factor in Q3. And so really, we're fighting against ourself to some degree there on pricing in the North American market. So as long as we balance capacity with demand, then there should be room to run on pricing. But again, I think it will remain range bound for the balance of the year.In terms of margins, I think turns are fairly strong in service centers. We're north of 4, continue to climb there with -- again, we've talked about before, turns are just a little slower in our Canadian service centers compared to our U.S. service centers just due to geography and the timing trends to get material into the States. It's not made in Canada. So I think our margins will hold. And in fact, we may see some slight margin increases throughout the quarter. And as we get the rebalancing, what materials left will be flushed out that may be carrying any higher cost. And as we replace with lower-cost material and, again, as we continue to press forward trying to grow our value-added initiatives, that should help the margins as well.
Okay. Just turning to the energy products segment. If you had not had the NRVs, it looks like that would have been sort of breakeven on an EBIT basis, recognizing that field stores were profitable. Just wondering, though, as we look forward, any sort of indications on how we can think about the margin profile or profitability of that business as a whole? It would be helpful for some comments there.
Yes. So as Marty alluded to, you really got 2 subsets within the energy for us. You've got field store margins. Although they saw some pressure, they've seemed to normalize now. It may be a couple of points below where they were generally on gross margin percentage. It's really in OCTG and line pipe. And there's just -- the margin challenges are there. It's just the order count is so low and people doing projects due to the nature of when -- their ability to borrow money for a project right now is very limited. So there are only a handful of projects that are going, and that's just creating an intense margin pressure in that environment for us. So I think any lift that we get from the field stores, it may be to offset from OCTG and line pipe. We'll continue to watch OCTG. It looks like it's leveling on price, and it's holding up a little bit better than line pipe. Line pipe is continuing to drift with flat-rolled starting to set a bottom, and they've been the main substrate for both products. I think that we should see that -- it's usually a 2 to 3-month lag. So we should start to see that bottoming as well. But there's so many mills that are idled short-term or indefinitely right now in both Canada and the U.S. So I think we'll have capacity and enough capacity coming off-line to rebalance the inventories there over time. So we're hopeful going into Q4 or Q1 of next year that we'll see the inventory start to rebalance throughout the industry as a whole and provide some room for margin expansion at that point.
Okay. That's helpful. And then lastly, again, I apologize if I missed anything on this. But the renewal of tariffs against aluminum by -- Canadian aluminum by the U.S. just yesterday, I know aluminum is not something you deal in. But can you talk about what the potential reintroduction of steel tariffs, if that were to happen, what do you think that would mean both overall as well as for Russel?
And you want to talk about steel and aluminum there. Once again, is that right?
No. And I'm just -- I mean we don't have to talk about aluminum. So just using -- looking at what happened with the reintroduction of renewal of those tariffs and thinking about the possibility that they could also bring back tariffs under 232 against Canadian steel. So just wondering more specifically about what you think that would mean if that happened on the steel side.
Yes. First of all, I mean, it's highly unlikely. Of course, I thought it was highly unlikely the first time. So -- but if it does happen, it's -- we do so little across the border in all of our products that I think it would be healthy for Russel and for the service center industry as a whole, because we're all [ embarking ] on the business, plus your value-added component, so it would cause prices to raise obviously about 25% very quickly. And that would be helpful for us in that regard. With demand levels being where they are right now, again, I see it being a challenge to get that in for steel. But anything that's going to cause that price to increase would be helpful for us. It could be harmful for some of our customer base and how they would have to adapt to it. So it could hurt demand. But again, we would have to look at it. You can tell what it did for us back when they implemented, that was early on. It wouldn't be to drive us out.
Right. So it sounds like you wouldn't expect -- if it were to happen, you wouldn't expect the reaction to be much different than it was last time around, is what I'm hearing.
That's right. It's just on a relative basis to demand, where demand is today versus where it was at that time, so that would be the only difference, I think.
Your next question comes from Anoop Prihar, Stifel GMP.
Marty, just with respect to the government subsidies that you guys received in Q2. Is that something that will be repeated in Q3 and Q4? Or is it a one-off deal? And do you have to repay those funds? Or is it an outright grant?
So the second question first, it's an outright grant. And to answer your first question, so the government has done this in phases. And they introduced the revised rules for the renewal phases post-Q2. And effectively, they go to the fourth quarter, but the impact of them start to get tapered off as you get to the back end of Q3 and then into Q4. So the way we look at it, and I assume the way the government looked at it as well, is it was a stopgap measure to support employment in the Canadian economy as it was going through a transition. We think that worked, and it was helpful and it was impactful. But it's running its course. So as I said earlier, one of the things that we're always doing is revisiting cost totality. So to the extent that we are going to see some tapering off of those wage subsidies towards the fourth quarter -- sorry, into the fourth quarter, we'll be making other adjustments along the way, dependent upon what's otherwise going on in the broader economic conditions. So there were some benefits in Q2. There'll continue to be some benefits in Q3 the way the program is set up, and then they taper off pretty substantially in Q4.
And just -- and Anoop, just to follow on that there's obviously just a tremendous amount of cost related to COVID and the rapid pace when we had to implement this across all of Canada and the U.S. And so the subsidies actually afforded us time as we were able to -- we had these incurred costs that were obviously unexpected. To a large degree, we had assumed these large costs. We had some offset with that with the wage subsidy. It gave us time to make adjustments to get the things that we needed to appropriately protect our people, to get through the disruption, and we can continue on to keep, as Marty mentioned, employment levels appropriate with our revenue. And we now have been afforded that time that we can go ahead and make the adjustments necessary to continue on.
Well, just on that point, can you give us a rough estimate of what you think your onetime costs have been to date with respect to -- given the COVID?
To quantify in a specific number, I would be guessing if I gave you that. But I would say they're not materially off what we actually received in the subsidy. So yes, I think it was more of a neutralizing effect there than anything.
[Operator Instructions] Your next question comes from John Novak, CCL.
John, can you talk about your thoughts with respect to further rightsizing and repositioning of your energy business?
Yes. As we look at that, John, obviously, we like the field store business, Comco and our Apex, and now we've rebranded Apex in the States under Elite Supply, we like that side of the business. It's very much like our service centers, similar in turns, similar in margin profile, high service business. And so it's something that we see as a platform to continue on. We look at OCTG and line pipe, it's just becoming more and more structurally challenged. And so we're taking different avenues and different looks at how to reduce our capital exposure there. And we may end up shrinking that size of the business long term for Russel as to what it represents as far as our total portfolio.
Okay. And Marty, was -- did you defer any payments with respect to federal, state, provincial taxes that will fall into the second half of the year?
Yes. Yes, I would say it will flow through in the second quarter.
I mean -- because I think last year, you had a large tax payment in the first half. It doesn't appear that you had one this year. Does that happen in Q3 or Q4?
No. No. No, not with the level of profitability.
Okay. I'm thinking of last year's taxes that were due this year, right?
No material issues there. No. No, no big shifts [ on them ].
And Marty, I'm still confused why there's the unwillingness to disclose what the government subsidies are. Every other company is doing it. Some are including it in their footnotes. It's really hard to make sense of your margins. And it seems that you just -- you're introducing unnecessary volatility in the forward estimates without giving some sense of what those were.
Well, look, John, we've seen variety of companies, frankly, all over the map in terms of their disclosure on this topic. We've included the disclosure on the building blocks associated with it. And as we've said before a couple of times in different ways, the subsidies were meant to provide some incentives to retain employment. So we view that as a component of our overall employment costs, and it's a single component. It's not the -- it's not in its entirety. So the building blocks are all there in terms of the disclosure associated with what the subsidies are.
There are no further questions at this time. Please proceed.
Great. Thanks, operator. Well, look, we appreciate everyone's interest and discussion for Russel on the second quarter conference call. If you have any further questions or follow-up, please feel free to give myself or John a call. Again, appreciate it, and we look forward to staying in touch and talking again at the end of the third quarter.
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.