Russel Metals Inc

TSX:RUS

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to our Second Quarter 2023 Earnings 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 Inc. Today's presentation will be followed by a question-and-answer period. [Operator Instructions]

I will now turn the meeting over to Martin Juravsky. Please go ahead.

[Martin Juravsky]

Great, thank you, operator, and good morning, everyone. I plan on providing an overview of the Q2 2023 results. And if you want to follow along, I'll be using the PowerPoint slides that are on our Web site. Just go into the Investor Relations section. If you go to page three, you can read our cautionary statements on forward-looking information.

Let me start with a little perspective on the quarter. In Q2, we are pleased with the financial results, not just on an absolute basis, but also on a relative basis against our publicly traded peers. As you know, we're always trying to achieve first decile performance on key metrics, with key focus on return on capital. Once again, we have shown industry-leading performance on that benchmark as we outperformed our comps. Also, this quarter puts into context the initiatives of the past few years that serve to reduce the volatility of our business, raise our cycle floor, and raise our cycle ceiling. I think we have demonstrated great progress on this journey so far, and we expect more on to come.

Let's turn to market conditions on page five. Steel prices picked up in the early part of Q2, but came off somewhat towards the end of the quarter. In particular, sheet prices have adjusted down, while plate prices have come off a small amount, but remain at good and healthy levels. As you can see from the charts on the right, supply chain inventories were modest, so the industry appears to be well-positioned from a supply and demand perspective. From the demand side, we are seeing solid demand from our customer base, notwithstanding that we do encounter some seasonal dynamics in parts of North America in Q3 due to Canada Day, 4th of July, and the Construction Holiday, in Quebec during late July and early August.

If we go to page six, there is a snapshot of Q2. We saw consistent revenue in Q2 versus the past few quarters, but a sequential pickup in EBITDA margins and returns. If we look across the various charts on the bottom of the page, starting at the top-left, revenues were $1.2 billion, versus $1.2 billion in Q1. EBITDA was $131 million versus $116 million in Q1 due to a pickup in margins at our service centers. Overall, we saw an approximately 100 basis point pickup in EBITDA margins and solid results from each of our business segments. From the a bottom line perspective, EPS and return on invested capital also improved, with earnings per share at $1.37 per share, and Q2 2023 annualized return on invested capital of 31%.

In terms of capital structure, we have net cash of over $150 million, versus net debt of almost $500 million at the end of 2019. This $650 million increase from free cash flow gives us a lot of financial flexibility going forward. It will also be further strengthened in Q3 with the closing of the TriMark transaction that will realize approximately $61 million in the quarter. I'll provide more details on that transaction in a few minutes. Going forward, we are seeing some interesting opportunities to continue to grow the business, and I'll also talk about that in a few minutes.

So, if we go to our more detailed financial results, on page seven, from an income statement perspective, I covered a number of the high-level items already on the previous page, but a few other items to note. On margins, Service Centers and Steel Distributors improved, while Energy Field Stores were stable in what is typically a seasonally weaker quarter in Canada. That being said, we did see margins pull back towards the end of Q2 for the Service Centers as a result of shifts in steel prices that I mentioned earlier. Interest expense came down to $3 million, and the increased interest rate is allowing us to generate interest income on our cash reserves.

Overall, we generated earnings of $85 million, earnings per share of $1.37 per share. Our Q2 results were impacted by a few non-operating items. TriMark, we picked up $7 million of equity earnings from that joint venture. And on the cash flow statement side, we picked up $10 million in cash flow from dividends that we received in Q2. Stock-based comp had a $2 million negative impact versus a $4 million impact in Q1. And we had a small, approximately $3 million, decrease in our inventory NRV reserves in the quarter. From a cash flow perspective, in Q2, we generated $27 million from working capital. There were a number of moving pieces with accounts receivable going down, accounts payable coming up, and a small increase in inventory.

CapEx, of $16 million, was up a bit from Q1, and trending higher as we continue executing on our discretionary projects. As previously discussed, our annual CapEx should pick up to around $75 million per year on average for the next few years. From a balance sheet perspective, we're in a net cash position of around $154 million, which is made up of our term notes of $300 million that are more than offset by a cash position of around $450 million. Our liquidity is over $800 million. Foreign exchange did move a fair amount from the end of Q1 to the end of Q2, which had an impact on our OCI account. Our book value moved up again, and is now over $26 a share, notwithstanding that we were active on our share buybacks in the quarter. Lastly, we've declared a quarterly dividend of $0.40 per share.

On page eight, I've included a summary of the TriMark transaction that we announced a short while ago. As a starting point, this is the final step in what has been a three-year process to monetize our legacy OCTG/ line pipe businesses in both Canada and the U.S. We considered the TriMark investment to be non-core from day 1, and we were waiting for the right time to work with our JV partner to undertake the sale. As I mentioned earlier, our goal in making the portfolio changes over the last couple years was to reduce the volatility of our earnings, lower the risk profile, enhance our margins and returns over a cycle. And this transaction is another piece to that shift.

If we go to the chart, I want to summarize the cash return evolution from this transaction. We start with $141 million of capital just prior to the joint venture being created. That being said, the amount of capital in the business was higher prior to the closing of the joint venture, but we reduced the invested capital in the three to six months leading up to the joint venture creation. When the JV was first set up, we were able to quickly convert $109 million into cash as the capitalization of the joint venture was through non-recourse debt which provided us with substantial cash payout at that time. Therefore, our net capital at risk, in mid 2021, was only around $32 million, which was the face value of the preferred shares. But we also held a 50% interest in the common shares which at the time had nominal value, but gave us a tool to participate in the upside.

In the two years since the joint venture was created, we received $36 million of dividends through the preferred and common shares. And when combined with the expected proceeds of around $61 million will equal $97 million versus our retained equity interest of $32 million. This equates to over 200% return on that investment. This structure has worked out very well when we take into account our participation the upside from the unusually robust OCTG/Line Pipe upcycle last two years. And the deal just received regulatory approval and we expect it close on September 1.

When we take this transaction and combine it with the other OCTG/Line Pipe liquidations in 2020 and 2021, we will repatriate around $375 million over the last three years. This liquidation and monetization is a large reason why we are in a strong financial position that we are currently in today. If we go Page 9, you could see our EBITDA variance analysis between last quarter and this quarter.

And looking at service centers, the volumes were very similar in Q2 versus Q1. So, the biggest factor was really a pickup in margins that added around $60 million to that segment's EBITDA. Energy field stores were mostly flat quarter over quarter, which is pretty good since we encountered the normal seasonal slowdown for spring break up in Canada but also the impact of the unusual wildfire activity.

Steel distributors were comparable in Q2 versus Q1, which is a pretty good level by historical frames of reference. And there was a $4 million favorable variance in other which included the seasonal pickup in our Thunder Bay terminal operation and a lower mark-to-mark on our stock-based compensation. And this was somewhat offset by lower earnings from the TriMark joint venture in Q2 versus Q1.

If we go to page 10, we have our segmented P&L information. Service centers continue to do well as the market improved. Revenues, margins, and EBIT picked up. We saw a good momentum at the front part of the quarter. But there was some softening as we came off a little bit in June. In energy field stores, we are continuing to see positive market sentiment. As said earlier, Q2 was impacted by some seasonal factors. But we are up in Q2 2023 versus Q2 2022. Overall, market conditions remain upbeat as we look into the back-half of 2023, particularly as we focused on gaining market share from our competitors.

Gross margins came in at 27%, and have remained in that 25% to 30% range since the monetization of the OCTG/Line Pipe businesses in mid 2021. Distributors revenues were down slightly, but margins were up which resulted in similar operating profit in Q2 versus Q1. If we go to Page 11, we have to deeper dive on some of the metrics for our metal service center business. Top right graph is the past five years for tons shipped. And as you can see, Q2 volumes were similar to Q1 as well as the Q2 2022.

Demand continues to look solid into the early part of Q3 although there are some seasonal dynamics for summer holidays that will lower Q3 levels. If we look typically over the last couple of years, Q3 volumes are traditionally down 5% to 10% versus Q2 to take into account some of that seasonal dynamic. On the bottom left chart, we have the revenues and cost of goods sold per ton.

On revenue per ton, our price realization has increased by about $96 per ton versus a $43 increase in cost of goods sold which resulted in a $53 per ton pickup in margin. For the quarter, our margin per ton was $536, which is much higher than the long-term historical average. As we said many times in the past, we expect to realize higher average margins and lower volatility over the cycle as compared to the pre-COVID margins due to our ongoing investment initiatives.

On page 12, 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. The black line is the average for the entire company; a few observations. Overall, our inventory turns were similar versus Q1 at about 3.9 turns. By sector, service centers improved from 4.7 to 4.9 as we proactively managed inventory and reduced risk. When we benchmark versus our publicly trades peers, we are generally the top performer on this metric. Our energy field stores were down to 2.6 from 3.0 due to seasonal factor with spring break up that I previously mentioned. For steel distributors in yellow, the inventory turns were similar in Q2.

On page 13, you'll see the impact of inventory turns on inventory dollars. Total inventory has been pretty steady for the past three quarters. The service center saw a reduction in inventory, which was mostly due to a 4% decline in tonnage, whereas there was a pickup in Energy inventory with the higher expected activity in our field stores going into Q3.

If we go to page 14, you can see the overall impact on capital utilization and returns. Our capital deployment remains right around that $1.5 billion mark. More importantly, our returns continue to be industry-leading and our last 12 months returns stand at 27%. If we go to page 15, I want to update our capital structure.

The continuation of favorable market conditions and our disciplined approach to capital utilization gives us a lot of financial flexibility. On the left table, you can see that our cash position went up to $450 million, which was a $49 million increase over March 31 and a $263 million increase since this time last year. We are realizing a return on our cash balance that substantially offsets the interest cost on our outstanding notes. Our shareholders equity is over $1.6 billion, and the chart on the right shows the continuation of the growth in our equity base.

Book value per share is now over $26 per share, which is a $0.51 per share increase since March 31 and a $3.52 per share increase since this time last year. If we go to page 16, we have an update on our capital allocation priorities going forward.

Given our strong balance sheet, we have a multi-pronged approach to capital allocation. As we've always talked about in the past. For investment opportunities, we seek average returns of over 15% through the cycle, and we have delivered well above that target. The ongoing opportunities are multifaceted. One on value added equipment, we are continuing to identify and pursue new value added projects. In total, we have over 30 equipment projects ongoing throughout North America. Two on facility modernizations, we are moving forward with several expansion and upgrading projects. We just approved two new projects, being an $11 million U.S. Project at Green Bay, Wisconsin, as well as a $9 million U.S. Project at Texas, Arcana, and Texas. These projects should be completed in late 2024. When combined with other projects on the go, we have a robust series of initiatives that should grow our volumes, increase operating efficiencies, generate attractive returns, and improve health and safety conditions.

In terms of acquisitions, the third piece to the initiatives, we remain committed to our financial operating criteria. That being said, we are optimistic about opportunities that are in the pipeline. Yesterday, we signed an agreement to acquire Alliance Supply, which is a small tuck-in to our energy field store business in Western Canada, and we have other potential M&A opportunities on the go that we are continuing to pursue.

In terms of returning capital to shareholders, we have adopted a fairly flexible approach. For dividends, last quarter, we increased our dividend to $0.40 per share, and we'll continue to reevaluate the appropriate level on a go forward basis.

For the NCIB, we acquired 1.2 million shares last quarter, and to date we have acquired 2.2 million shares at an average price of $32.18. Going forward, we'll file a renewed NCIB that will allow us to acquire up to 6.1 million shares over the next 12 months, and we plan to continue using the NCIB on an opportunistic basis.

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. We couldn't be happier with how the Russel team has navigated its way through the evolving markets over the past few years, and we look forward to the new opportunities that are ahead. Thanks to everyone across the company for your contributions.

That concludes my introductory remarks. So, Operator, you can now open the line for any questions, please.

[Operator]

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Okay. And your first question comes from Devin Dodge from BMO Capital Markets. Devin, please go ahead.

[Devin Dodge, BMO Capital Markets]

Yes, thanks. Good morning, guys.

[Martin Juravsky]

Hey, Devin.

[Devin Dodge, BMO Capital Markets]

Good quarter. There's a question on M&A. It felt like there's a little bit more optimism there. So, just trying to get a sense, I think we've seen balance sheet just really strong across the sector, including at Russel, obviously, that you highlighted. But M&A has been a bit slower to materialize. I know you did a tuck-in, but I think just a lot of dialogue but not a lot of action yet. Just why do you think that is, and do you expect the industry consolidation to be a bit more active over the next six to 12 months?

[Martin Juravsky]

Yes, it's a fair point. And maybe dealing with your last point first, I do expect there to be more activity in the next six months than there has been in the last six months, or last year for that matter. And I think, like any market, there's always recalibrations of appropriate value. And to be candid, I think there were a fair number of transactions that were in the market over the last little bit that had fairly unrealistic views of value. And there seems to be, based upon the lens that we're looking through, more of a reality check on things that meet our criteria. So, more optimistic as we look forward for the next six months because of that reality check perhaps kicking in for potential vendors.

[Devin Dodge, BMO Capital Markets]

Okay, interesting. And then we saw that industry volumes, at least based on the [MSCI data] (ph), they were up about 3% to 5%, but Russel was, let's say, flat and maybe down very slightly in the quarter. Do you think that reflects some competitors getting a bit less disciplined in going after market share?

[John Reid, President and Chief Executive Officer]

Devin, this is John. Again, you'll see that from time to time based on peoples' inventory positions or their go-to-market approaches out there. But in the markets we serve, we don't feel like we gave up any share compared to the MSCI statistics for those that were out. We actually gained share in those markets. So, again, I there may be a bit of an anomaly with our footprint, and obviously it's very focused in the U.S., where it's very broad in Canada. So, we think, overall, the market share was fine. But you do see that from time to time, where you have pockets where people will get aggressive or you have an import situation or maybe in that coastal area they get aggressive for a short period of time.

[Martin Juravsky]

And just to supplement. What is also interesting is the MSCI data includes lots of different companies, private, public, all kinds of other data that's in there. If we look at the publicly traded companies, those who have reported already, including the larger player in the sector, their quarter-over-quarter volumes was very similar in terms of change to ours.

[Devin Dodge, BMO Capital Markets]

Okay, good color. Thanks, guys, I'll turn it over.

[Martin Juravsky]

Thanks, Devin.

[Operator]

Your next question comes from Michael Doumet from Scotiabank. Michael, please go ahead.

[Michael Doumet, Scotiabank]

Hey, good morning, guys. On the topic of organic growth, I guess maybe as a follow-up to Devin's question. Can you talk about why you moved up some of the expansion projects? And then, it's related, do you think the combination of these expanded facilities increased reshoring, maybe it's infrastructure that kicks in the second-half in the U.S. Is that going to accelerate organic growth going forward?

[John Reid, President and Chief Executive Officer]

And thanks, Devin. Yes, the projects that we have on the go right now that we're expanding, obviously we're running at capacity. We have an opportunity to move into some more automation to improve our operating cost as well as expand our footprint for products we carry and services we offer. So, obviously, you can grow in those markets. So, all those have that component involved with them. We're seeing it across the board, as we grow our value-added initiative we're having more opportunities to expand that value-added initiative. We've kind of got the hubs initially set up now, as the spokes are needing growth from -- to add that equipment and add more market share.

With the reshoring coming on, you do see that in specific areas, and there are specific opportunities that seem to be a little bit more broad-brush right now. So, I couldn't point the one specific and say, "This was making a huge material impact for all of Russel." But we're seeing an impact across Russel and various opportunities there with reshoring.

[Martin Juravsky]

And, Michael, I guess the other thing is you were also asking about have we moved up expansion projects. And we haven't moved them up. This is just the cadence that they're in. And so, the projects that were announced for Green Bay and Texarkana, for example, those weren't things that were accelerated or decelerated. There is a preparation, there's an organization, there is engineering work, there is prep work that's required. So, the work to get to this point of having them announced started quite some time ago. So, I wouldn't say they've been accelerated, that the preparation started behind the scenes probably a year ago, if not earlier than that, in terms of thinking that these projects could make sense. And it just takes a while for them to come to fruition.

[Michael Doumet, Scotiabank]

Okay. Thanks for the clarification there, Marty. And then maybe, Marty, I think I caught this in your prepared remarks as talking about share gains in energy products. Just curious on what's driving that dynamic there?

[Martin Juravsky]

I'd say that, yes, you picked that up correctly. And we look at both the public data for those folks who operate in the same backyard in energy field stores as we do, and compare it to our data, and we are picking up gain. And I think it's primarily a function of we have a really well-positioned business, particularly in Canada, and they're continuing to do the right things with customers. And we perhaps have competitors who may be less committed to certain markets. So, our folks on the ground are doing an exceptionally good job of taking advantage of the market opportunities that are out there.

[Michael Doumet, Scotiabank]

Great. Thanks a lot, guys.

[Martin Juravsky]

Great. Thanks, Michael.

[Operator]

Your next question comes from James McGarragle from RBC Capital Markets. James, please go ahead.

[James McGarragle, RBC Capital Markets]

Hey, good morning, guys. Congrats on a really good quarter here.

[Martin Juravsky]

Great, thanks, James.

[John Reid, President and Chief Executive Officer]

Thanks.

[James McGarragle, RBC Capital Markets]

So, I was just -- some of your U.S. competitors during reporting were kind of talking about some of the benefit they're seeing, their early benefit from the U.S. infrastructure spending. Is your team seeing a similar benefit, and is that -- are you seeing that in both the Canadian service centers and in the U.S. service centers or primarily concentrated more in the U.S.?

[John Reid, President and Chief Executive Officer]

Yes, the concentration is more in the U.S. Again, we're seeing some benefit, again, across the board, and not one big project or two you could point to that would be material within all of Russel. But we're seeing it across the board. When you look at the infrastructure spending, there's a lot on the come -- it's coming -- that will be coming forward in the next two, three, four quarters, and so that's starting to ramp up. We're seeing that go through the process now, the bid process, whether that be bridge work, whether it be wind tower. So, a lot of plate usage is coming forward. So, very optimistic about what that's doing, again for our U.S. service centers.

On the Canadian side, we're seeing some of that as well. We do win work in Canada, and so that will go cross-border, again, where we can actually ship that across. If you look at the Canadian index, if you look at the Architecture Billing Index, it's actually gone back above 50. Some of that is driven by preparation for infrastructure project. The Purchasing Manager Index has come down below 50, but in Canada it's hovering right just below 50. So, we're actually seeing Canadian manufacturing has been holding up better this year than the U.S. manufacturing has been holding up.

[James McGarragle, RBC Capital Markets]

Appreciate the color. And then on the Q3 outlook, some of the U.S. peers were a little bit more conservative. I know your businesses aren't exactly comparable, but your guiding is obviously a little more optimistic. So, can you just provide some color on some of the end market strength that you're seeing? And what gives you some of that confidence during the remainder of Q3 here?

[John Reid, President and Chief Executive Officer]

Sure. One, keep in mind we don't do automotive, and so automotive is obviously a question mark right now for some of our competitive people that are out there. And I think when they were talking about demand, there is a concern around what's going on with automotive, and potential strikes. But we're not involved in the automotive industry by design. When you look at demand, we're seeing it -- again Marty mentioned the typical seasonal dynamics you have with the holidays -- construction holidays. So, we're seeing steady manufacturing right now. We deal with small-to-medium-size end users, again in a transactional nature. So, we're not contractual.

The OEMs that we deal with, again medium-size to small, all of those have very steady backlogs right now. The construction side of our business, we're seeing the fabricators are very busy. You do have the construction holiday that they take off a week in July, and a week in August, in Quebec, which is normal. But coming back out of that, that backlog is very good right now. So, we have not seen interest rates really impact the construction backlog like we thought we would.

The energy side of the business for our field stores, again very steady, Canada has got a very steady growth, right now a trend for us because we are taking market share. Also, when you look at the rig count was down slightly taking into the consideration all the wildfires that were going on, I don't think there's anything to be concerned about there. So, overall, across the board, we do see our end markets as very steady when we look at them right now.

[James McGarragle, RBC Capital Markets]

And then before I turn the line over here, one more question on returns. Your team had talked about a 2% to 3% lift versus pre-pandemic returns just on the back of some of those investments your teams made during the pandemic. But we've seen a pretty big decline in steel prices, but your returns are well above that 2% to 3% lift that you had previously talked about. Have you changed your view on how you're viewing returns that you can deliver longer-term or do you think it's too early to say that right now just given some of the uncertainty you all are looking at?

[Martin Juravsky]

It's a good question, James. And we haven't changed our point of view. That being said, there is always some elements of cyclicality to the business. So, when we look at that 200 to 300 basis point shift, that's not at a point in time that's through this cycle. And there's going to be ebbs and flows to the cycle. As I said earlier, the thing that I think we've done a really job of is taking some of that volatility out of the cycle from what we have seen in the past. And some of that is by virtue of the businesses we've got out of, some of that is by virtue of the investments we've made, the acquisitions we've made. But no, our point of view hasn't change.

And when we look through the cycle, we're very comfortable that the initiatives that we have completed and are still underway are going to generate that couple 100 basis point pickup over the course of the cycle.

[James McGarragle, RBC Capital Markets]

I appreciate you taking the time, and I'll turn the line over. Thank you.

[Martin Juravsky]

Thanks, James.

[Operator]

[Operator Instructions] Your next question comes from Michael Tupholme from TD Securities. Michael, please go ahead.

[Michael Tupholme, TD Securities]

Thank you. Good morning.

[Martin Juravsky]

Hey, Mike.

[Michael Tupholme, TD Securities]

Hey. I guess the first question is just around one of the comments in the outlook section related to an expectation for some moderation in margins in the third quarter, which I gather is a function of the fact that steel just, as you mentioned, sort of late in the second quarter and into early Q3 have pulled back a little bit. So, I guess the question is if you can just help me understand that, how to think about that moderation? Maybe starting with Service Centers, margins were up a touch sequentially in the second quarter. How should we think about margins as we move into the third quarter? Is this going back to the kind of level we saw in Q1, and is that the run rate normal level to think about Service Centers, absent from bigger moves in the steel prices?

[Martin Juravsky]

Yes, that's a fair frame of reference. So, within the quarter, within Q2, margins did come down in June versus what they were for the average of the quarter. And so, if we look at where things are at right now, they're closer to Q1 levels on average than Q2 levels, on average. So, as a frame of reference, yes, Q3 margins should be down from Q2, something closer to Q1, without trying to be too specific about it. So, the comments that were made about margins was really about Service Centers. We're still -- so, when we look across Energy Field Stores, we don't really see any substantial change in terms of margins in that business. As John talked about earlier, good backlog, good activity, good dynamic in terms of market conditions, our businesses are well-positioned.

So, the comments on margin were more related to Energy Field Stores. Steel Distributors will follow a similar cycle though. And so, there's probably some softening of those margins coming into Q3 as well.

[Michael Tupholme, TD Securities]

Okay.

[John Reid, President and Chief Executive Officer]

Just to add on to that, Michael. From the industry as a whole, again keep in mind Service Centers are turning their inventory at a pretty high level in comparison to historical levels. In addition, there are a lot of mill shutdowns that are scheduled for the third quarter, so you'll take a lot of supply out of the marketplace. Scrap has bottomed, it appears to have gone up maybe $20 a tonne. We think flat rolled is now seeing a bottom in July, early August. So, it's starting to bounce along, may go up. Plate never really came off much, it just dipped marginally. So, we're seeing some things that say, "Okay, this is -- we've hit the bottom." People should flush through their inventories fairly quickly.

You'll have some outliers that are out there that may be in a bad position. But overall, the industry is in a pretty good position. So, as far as they go running back up, we'll see what pricing does, but there is a lot of supply coming out of the marketplace in Q3 with shutdowns. I think there's over eight mills shutting down in Q3 for maintenance.

[Michael Tupholme, TD Securities]

Okay, that's definitely helpful. Thank you, John.

When we think about margins in Steel Distributors, appreciate your comment that that direction, I guess they'll follow a similar pattern in terms of movements to what you'll see in Service Centers. You're still at quite healthy levels in Steel Distributors relative to what you would have seen historically. I think you're down from where you were a year or two ago. But relative to the longer-term level in Steel Distributors, you're running at quite healthy levels. What is the right way to think about the margins in that business over the medium to longer-term? Is this sort of a new normal, this [indiscernible] 15% EBIT margin in the second quarter in steel distributors and gross margins were 22.5% like is this the new normal, or how do we think about the medium to longer-term?

[John Reid, President and Chief Executive Officer]

We'll still see the cyclicality in that business with the trade suits, with imports being at Bay that's helped stabilize that market. Some both sides of the border for us or the groups have been in it well over 30 years. So, they're very professional traders at what they're doing when they're bringing in product or working product from inside the North American market. So, again, they'll be very opportunistic. We have one side, the worst side. Again, buy and sell is all kind of locked up. So, it's pretty much a flow through with very low margin risk. There's a little more risk in the U.S. But again, they will pull back from markets that they don't see the opportunity to make those kind of margins, or they won't just keep plowing forward, as maybe some others do in the market. But there will be cyclicality to this that follows steel price, that follows the steel pricing that's out there. But they will pull back, and they may slow the revenue side down before they give up margin.

[Michael Tupholme, TD Securities]

Okay, that's helpful. Thank you. Just maybe on picking up on your comment there about imports being at Bay, do you anticipate any change on that front going forward? And I guess I'm thinking about one, they seem to have been fairly modest for some time, but at the same time, prices are healthy here in North America. And then, your comment about mill shutdowns in the third quarter, does that attract some import product as a result of those shutdowns kind of here in the shorter term?

[John Reid, President and Chief Executive Officer]

Yes, if you look at the import statistics, they're not marginally different. They're up a little bit year-over-year. But that's really a function of quotas and timing. When they brought in the steel from the imports on quotas, more so than they're bringing in more, there are product specific things that will come in ebb and flow there where you'll bring them in. But right now we're not seeing that as a dramatic change. We don't think the 232 will have any significant change. It's up for review in November, December, but going into an election year, I think there may be some window dressing around it, some things moved around, but I don't think there'll be any material change in that.

So, I think that 232 is functioning as intended, that it's protecting the North American steel market from a surge of low priced imports. And so, I don't see any directional changes on that. So, again, I don't think you're going to have an import market that's going to make any more impact than it has in the last two or three years.

[Michael Tupholme, TD Securities]

Okay, thank you. And then, regarding M&A, obviously announced a tuck-in in energy field stores, I mean, I think I've asked this before and others have as well, but when we think about your M&A strategy, can you talk about what the main focus is right now in terms of ideally what you'd be targeting? It sounds like activity and opportunities are picking up. So, maybe that gives you an opportunity to go after the kinds of things that you're most interested in whereas in the past, that may not have been possible given market dynamics and conditions. So, just kind of curious if you can just talk to what the focus is here at this point.

[Martin Juravsky]

It's a good question, Mike. In some ways, the last two acquisitions we made in service centers, one at the tail end of 2020, and one at the tail end of 2021 were really good illustrations of the types of things that are front and center for us. Now there are businesses that are complementary to where our service centers are both from a product perspective as well as from a geographic perspective, augmenting the regions where we currently operate and sometimes as product expansion as well into other opportunities, value added opportunities, non-ferrous opportunities from time-to-time.

But in complementary geographic regions, so we're not looking to do stuff that's far afield. We do look at those things from time-to-time that could be standalone business units. But by and large we're looking for stuff that fits very well into what we currently have and is complementary to that. Most of the focus is on the service center side. There are situations that pop up from time-to-time on the energy field store side, and the small tuck-in that we announced is an example of that. But most of it is really complementary expansions within the service center business on both sides of the border.

[John Reid, President and Chief Executive Officer]

Just to add on to that, Mike, I mean, we've talked about it in the past. We obviously look at culture as a big thing for us. Will they be able to fit in the Russel culture? How do we integrate that? Being highly decentralized, are they very centralized and is there going to be a natural rub there? Is this somebody that has a smaller location, that has a key person leaving it'll impact the business. So, we like to find well-run businesses. We like to look for opportunities and expand our product or expand our offering. We are not as tied to a geographic [indiscernible]. We maybe once thought we would always continue to grow in the U.S. and [indiscernible] land stuff in Canada. So, we are more opportunistic on that if it fits for us. Then, there is obviously the financial metrics that we look at and have to complement what we are doing. So, we stay pretty disciplined there as well.

[Michael Tupholme, TD Securities]

Okay. That's already helpful. I will leave it there. Thank you.

[Martin Juravsky]

Thanks, Mike.

[Operator]

Your next question comes from Frederic Bastien from Raymond James. Frederic, please go ahead.

[Frederic Bastien, Raymond James]

Hi, good morning.

[Martin Juravsky]

Hey, Fred.

[Frederic Bastien, Raymond James]

I was a little surprised by how active you are buying back stock in Q2 given where the stock has been trading lately. If my maths is correct, you repurchased 1.2 million shares at an average price of $36.16 [change] (ph) during the period, which is quite a step up from what you did earlier I guess in the back-half of last year. Can you comment on that? And secondly, on your appetite to continue buying back stock at the current level?

[Martin Juravsky]

Yes. Your math is close. Yes, we picked about 1.2 million shares in the quarter. The average was just below $36 per share for the quarter. Cumulatively, we have picked up $2.2 million shares. Since we put the NCIB in place, it is little over $32. We view this approach to acquire shares opportunistically relative to our view of intrinsic value. So, from our perspective, we are always recalibrating opportunities. We are always recalibrating our view of intrinsic value.

And I think that's the game plan that we'll continue to have going forward as we have done the renewal of the NCIB up to 6.1 million shares. If we think there is a good opportunity to pickup our shares, it's no different than looking at acquisitions or anything else in terms of capital deployment. We think it makes good economic sense and in particularly of NCIB, the focus is being able to do it opportunistically below our intrinsic value. And we think where we are trading at today, is below intrinsic value.

[Frederic Bastien, Raymond James]

Great. That's all I have. Thanks.

[Martin Juravsky]

Great. Thanks, Fred.

[Operator]

Your next question comes from Maxim Sytchev from National Bank Financial. Please go ahead.

[Maxim Sytchev, National Bank Financial]

Hi, John and Martin. Good morning.

[John Reid, President and Chief Executive Officer]

Good morning.

[Martin Juravsky]

Hey, Max.

[Maxim Sytchev, National Bank Financial]

I think actually Fred kind of like asked my question. But maybe just thinking like sort of broader in terms of kind of capital deployment on a perspective basis, is -- so is more flexibility is sort of part of kind of the new algorithm when it comes to kind of capital deployment on a going forward basis? Just curios what's been sort of maybe the catalyst to potential sort of rethink your approach, or obviously I guess with the balance sheet and your cash position, so just to enforce more optionality? Just maybe some broader follow-up will be super helpful. Thanks.

[Martin Juravsky]

Yes. Well, Max, it's really the way you characterized, it is spot on. You used two words, flexibility and optionality. And those are very -- those ring true to have we think about it as well. We have the balance sheet that gives us a tremendous amount of flexibility to do anything that makes sense, or do nothing if it doesn't make sense. And so, we are not wedded to one thing or another or another.

That been said, we do see opportunities across variety of capital deployment alternatives. But given the way our balance sheet is setup right now, we think we can do a variety of things if they all make sense. This past quarter again, we are active on the NCIB. We stepped up our dividend last quarter; did a little tuck-in acquisition. We are being active on internal investments. We have flexibility to do a variety things. So, your operative words, optionality, flexibility, those two ring very true in terms of how we think about capital deployment opportunities.

[Maxim Sytchev, National Bank Financial]

Okay, excellent. That's it from me. And great quarter, thank you so much.

[Martin Juravsky]

Thanks, Max.

[Operator]

There are no further questions at this time. I'll turn it back to Marty for closing remarks.

[Martin Juravsky]

Great. Thanks, Operator. Appreciate everybody for tuning in. If you have any follow-up questions, please feel free to reach out at anytime. Otherwise, we look forward to staying in touch during the quarter. And have a good rest of the day everyone.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. And ask that you to please disconnect your lines.