Russel Metals Inc

TSX:RUS

Earnings Call Analysis

Solid Q2 Performance Amid Steel Price Volatility

Russel Metals reported a 1% increase in revenue, reaching $1.1 billion, despite a 17% and 12% fall in sheet and plate prices, respectively. EBITDA came in at $86 million with an 8% margin, while EPS stood at $0.84. They maintained a strong liquidity position with $237 million in net cash. Share buybacks worth $56 million were executed, and dividends were raised to $0.42 per share. The integration of the upcoming Samuel acquisition and ongoing facility modernizations are set to boost future performance. However, Q3 is expected to show margin pressures before recovering in Q4.

Strong Q2 Performance Amid Steel Volatility

In the second quarter of 2024, Russel Metals reported revenues of $1.1 billion, up 1% compared to the previous quarter. This growth is impressive considering the significant decline in steel prices—sheet prices fell by 17% and plate prices by 12%. Despite this downward pressure, the company maintained a stable EBITDA of $86 million, resulting in an EBITDA margin of 8%. Earnings per share also improved slightly, reaching $0.84. The resilience in revenue highlights Russel Metals' ability to navigate challenging market conditions effectively.

Operational Adjustments and Resilience

The company demonstrated operational agility by generating $6 million from working capital, despite challenges, including an increase in inventory primarily in the steel distributor segment. Notably, the fixed costs related to acquisition integration and legal costs totalled $1 million, reflecting the company's proactive management strategy. With nearly $237 million in net cash and a capital structure enhanced by a new unsecured bank deal, Russel Metals is well-positioned to continue its operational enhancements and acquisition strategy.

Guidance: Anticipated Changes in Margins

Looking ahead to Q3 2024, Russel Metals expects margin compression, particularly in its service centers. Margins are projected to be lower compared to Q2 due to seasonal impacts and fewer operating days. The company also anticipates a recovery in margins by Q4 2024 as price stabilization occurs. Furthermore, the upcoming integration of the Samuel acquisition—set to close on August 12, 2024—could introduce transitional costs impacting initial earnings but is expected to benefit long-term operational efficiency.

Capital Allocation Strategy and Shareholder Returns

Russel Metals is pursuing a balanced approach to capital allocation, targeting both internal improvements and returning capital to shareholders. The quarterly dividend was increased to $0.42 per share, amounting to $25 million for Q2. Moreover, the company has actively executed share buybacks, repurchasing 1.5 million shares for $56 million. This strategy reflects their confidence in underlying business performance and commitment to returning value to shareholders, while maintaining a robust liquidity of $768 million.

Long-Term Outlook: Strategic Initiatives for Growth

The management emphasized that the groundwork laid in 2024 positions the company well for 2025. Strategic acquisitions, including the imminent integration of Samuel, along with ongoing facility modernizations, are expected to drive growth. Furthermore, improvements in the steel market are anticipated, with signs of price stabilization emerging. These factors create a solid foundation for profitable growth as conditions improve post-2024.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to our 2024 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 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 Marty Juravsky. Please go ahead.

[Martin Juravsky, executive]

Great. Thanks very much, operator. I appreciate it. 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 3, 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 3 or 4 summary observations that I'd like to start-off with. 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. 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 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.

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 unsecured 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 share buyback program, as we have the capital structure flexibility to both invest in the business as well as opportunistically return capital to shareholders.

So with that being said, let me start with the details of the materials here, and we can start on Page 5. 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.

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 coming up over the next couple of months, and that should moderate production for the industry. Lastly, demand has been steady across our businesses.

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. If we look across some of the various charts going from the top left, revenues were up a bit versus Q1, had been running at around that $1.1 billion per quarter mark for several quarters. EBITDA was $86 million, EBITDA margin was 8%, and EPS was $0.84 a share. All 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, 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 7, 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. Gross margins both in dollars and percent were down 1% from Q1, but EBITDA, EBIT, and earnings were all up slightly as it reflects the variable cost nature of our expense profile.

Our Q2 results were impacted by a few non-operational items. Stock-based comp was an $8 million recovery versus nil in Q1. The Samuel acquisition integration cost, legal costs were another $1 million, and we had $1 million in non-cash charge for the write-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 did an increase in inventory, which is mostly a timing issue with an inventory pickup in our steel distributor segment, and I'll go 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.

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 $1 million.

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. 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.

From a balance sheet perspective, we are in a net 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 borrowing-based restrictions and investment-grade financial covenants. The remaining $150 million of notes, the 5.75% notes, become par callable in October.

Our liquidity is $768 million at 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 continued to go up in spite of the share buyback program, and is now $28.22 per share at the end of June.

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 mark-to-market on stock-based compensation, and also the seasonal recovery at our Thunder Bay terminal operation.

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, and as you can see, and as the margins have remained at around that 25% level.

Distributors' revenues were up, margins and operating profit were down. 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.

On Page 10, we are showing a deeper dive on the metrics specifically related to our metal service center business. The top-right graph is the past 5 years of tons shipped, and in Q2, our volumes were up 2% versus Q1, reflecting pretty steady takeaway, 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.

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.

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.

On Page 11, we have illustrated our inventory returns. This chart shows the inventory returns by quarter for each segment, Energy in red, Service Centers in green, and steel distributors in yellow, and the black line is the average for the whole company. Overall, our inventory returns 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%.

On page 12, we have the impact of inventory returns on inventory dollars. 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.

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-month return on invested capital of 19%.

Page 14, just to provide an update on our capital structure, and there have been a number of changes during Q2 and also subsequent quarter end. In July, we closed on our revamped bank deal. Our bank group has recognized a significant evolution in our credit profile, and we now have a more traditional investment-grade type bank structure that has no borrowing-based 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 the $150 million of 5.75% notes that become par-callable in October.

With the redemption of those notes, the already-completed redemption of $150 million of 6% notes in Q2, and the modernization of our bank structure will 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.

Lastly, our equity base per share continues to grow, as you see on the right-hand chart, in spite of our share buybacks, and this chart on the right shows our book value per share of $20.22, which is $1.81 per share increase since this time last year.

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%, as 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 5 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. 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.

Returning capital to shareholders, we adopted a flexible approach. In May, we announced a 5% increase in our quarterly dividend to take it to $0.42 per share, and we have declared another $0.42 per share for the dividend that will be payable in September. 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, since that time, we've acquired about 5 million shares, which equates to about 8% of our shares outstanding at an average price of $36.30. We expect to continue to utilize the NCIB on an opportunistic basis.

On Page 16, just given a longer-term context around some of those topics, returning capital to shareholders. Top left graph, you can see the dividend profile over an extended period of time with the just announced $0.42 per share per quarter that will be payable in Q3, and we'll 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 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.

On the bottom right chart, the impact of the NCIB has been a gradual reduction of our shares outstanding over the past 2 years that has resulted in that 8% 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. 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 million, $25 million per quarter, as our share buybacks have offset the per share increase in our dividends.

On Page 17, I have a bit of an update on the Samuels acquisition. As I said earlier, we have a targeted close date of August 12, so that's not too far away. And again, I'd 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 Russel in getting ready for this position.

So, the deal structure itself has remained unchanged, but there are 2 updates. One, since we announced the deal, Samuels 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 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 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. For administrative simplicity, we also elected to not assume most of the account's 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 represented about $46 million. Therefore, a closing will not take over that liability, and it will be in a position to then just rebuild that account's 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.

On Page 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 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 as we want to put in more and more value-added equipment into some of these facilities that were space-constrained in the past.

On Page 8 -- excuse me, 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, improved facility layout than our previous locations in the city. But equally important, it will 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.

On Page 19, there are 4 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.

It's also interesting to note that 2 of these 4 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.

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 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 -- 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. And what's also interesting is 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. 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.

The red dots represent the business units that had experienced challenges, and were frankly a drag on our results and where remedial action was required. 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 talk about the changes in our business, 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.

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.

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.

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.

So in closing, on behalf of John and other members of the management team, I would like to express our 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.

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

[Operator]

[Operator Instructions] And your first question will be from James McGarragle at RBC Capital Markets.

[James McGarragle, analyst]

I appreciate you having me on. Just looking at the results sequentially at your service centers, I mean, you talked about some potential pressure on margins, given the 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 same deal closing 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 sequential earnings trends in the Q3?

[Martin Juravsky, executive]

Yes, it's a fair observation, James, because there are a series of moving pieces. And maybe it's easier to start with the Samuels 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. Even though it will 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 in 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. The more impactful item will be, as I talked about and 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.

[James McGarragle, analyst]

And just a longer-term question on how you're thinking about, you know, 2025. I'm not asking for guidance, because I understand, lots of things can happen between now and then, especially within your industry. But it seems like steel prices are starting to pick up potentially a lot likely a lot more some positives from these modernization programs. Samuel integration could be a big positive. So we have 3 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 into 2025?

[Martin Juravsky, executive]

Yes. Well, look, it's a great question, James. And frankly, I think you framed it up probably better than I could, because all of the stuff that's going on right now, it provides a really nice springboard into 2025. 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, 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 Samuels 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 U.S. as well as integrate what we're doing within the Western Canadian business.

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 office and being organized so that we can be efficient as a platform. But it really is going to 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 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 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 and the springboard effect that it should play out for 2025.

[Operator]

Next question will be from Michael Tupholme at TD Cowen.

[Michael Tupholme, analyst]

First question is just regarding steel prices. You noted in your outlook in the release and the comments today that you expect to see steel prices stabilize. I think, 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. Wondering if you could just talk about the differences you're seeing in those 2 markets.

[John Reid, executive]

And you're exactly right. We've seen increases come out from 2 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.

Plate typically follows maybe about 30 days. HRC, as you know, it's not always there will 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 that's now moved up about $100, so call it $280, $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.

[Michael Tupholme, analyst]

Okay. That's certainly helpful. Switching over to the margins, you 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 into Q4. It sounded like that was quite a specific comment around service centers. 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 in terms of actual levels given the various moving pieces here?

[Martin Juravsky, executive]

Yes. 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 quarter and Q2 quarter gross margins were about 75 basis points difference. So it 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 steady. 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.

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 is 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 spilled over into the end of Q2 and into Q3.

So we should be okay on the top line perspective in steel distributors in Q3, but the margins will flow similarly to what happens in the broader steel market.

[Michael Tupholme, analyst]

That's all helpful. Maybe just 2 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, as opposed to 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?

[Martin Juravsky, executive]

Correct. Yes, exactly. It's spot on. I was -- my comment was more on a same-store equivalent basis, and then Samuel is a layer on.

[Michael Tupholme, analyst]

Okay. 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.

[Martin Juravsky, executive]

Yes, it didn't move by that much, Mike. And I think 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 give or take the range. So there wasn't any big driver in and of itself, other than it still operated within that normal zone.

[Operator]

Next question will be from Frederic Bastien at Raymond James.

[Frederic Bastien, analyst]

Apologies if you have touched on this before, because I just hopped 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?

[Martin Juravsky, executive]

At a really high level, Fred, it's exactly as we expected. 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, be 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. The only real change, as I mentioned earlier, is we benefited from the fact that we're inheriting a lower invested 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 has already taken place with the passage of time and what Samuels has done on their own over the past number of months. Beyond that, John, I'm not sure if you have anything to rental. We're pretty excited about the opportunity because it's exactly what we thought it was going to be.

[John Reid, executive]

I agree with Marty, Fred. 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 Samuels bringing the inventory in line. It's still not quite to our level of return, so there's still some room to go there, but a lot of that's been done up front.

[Frederic Bastien, analyst]

Cool. 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, executive]

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.

[Operator]

[Operator Instructions] Your next question will be from Ian Gillies at Stiefel.

[Ian Gillies, analyst]

When I look at the Q2 results and the relative out performance of your average selling price versus HRC in play, 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 and whether we could expect to see further stability in that number with more investment as time passes?

[John Reid, executive]

Okay. Ian, 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 in 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 see steel 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 still 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, and it will add to that stability and take out some of the earnings up and down and have a more normalized bandwidth.

[Ian Gillies, analyst]

That's helpful. 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 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 or a little looser to get deals done over the next 12 months to 18 months?

[Martin Juravsky, executive]

It's hard to handicap getting things over the finish line, but we're seeing a fair amount of activity, and it's not like there's been a shortage of things that we've looked at over the last 1 year, 2 years, 2 years. And we're continuing to see that deal float. 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, or, 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's 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. And we're pretty value conscious. So, like, we care a lot about what we pay for stuff, whether 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. So we're optimistic that over the next little bit, there'll be more opportunities.

[Ian Gillies, analyst]

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 have rolled-off. 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?

[Martin Juravsky, executive]

Well, we still use 15% as our target return over the cycle. Now, again, that's over the cycle, and some years will be better and some years will be worse. But overall, we're trying to get to the 15%. So the target for us remains the same. We've generally generated more than that on average over the last couple 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. So that remains the target we look for.

That being said, there'll be some things that, some initiatives might have a 2 or 3-year 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.

[Operator]

Next is a follow-up from Michael Tupholme at TD Cowen.

[Michael Tupholme, analyst]

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?

[Martin Juravsky, executive]

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 is, it's across the Board, it's operational, it's systems, it's a whole series of initiatives.

[John Reid, executive]

Michael, again, we'll look at the systems and bringing those over very systematically that they're on 2 separate systems, both in Canada and the U.S., so we'll bring those over. They'll operate within our regions that we have already established, with Williams Bahcall would handle the United States that's coming over for Samuels on a separate computer system 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 2 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 2 businesses, and how we can maximize what's out there. It's our capacity utilization on equipment. We've done some of that homework now. We'll 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 will be some costs associated with that, but we see that moving fairly quickly over the first 12 months.

[Martin Juravsky, executive]

And in some ways, John, and Mike, this goes back to, 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. 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 in Manitoba or Alberta or B.C., where we have different locations, different products, different equipment.

So it really is highly tailored, 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.

[Michael Tupholme, analyst]

Maybe just 1 other question on Samuel. Marty, you called out some of the changes in non-cash working 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.

[Martin Juravsky, executive]

Yes, 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. So over the next 2 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 2 months, so it's the economic equivalent of more like $180 million.

[Michael Tupholme, analyst]

Okay. And I was just going to ask, you had intended to bring investment and 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?

[Martin Juravsky, executive]

Well, yes and no. It ebbs and flows. A big part of accounts payable is trade payables, which is also driven off of steel prices that ebb and flow. But directionally, if it was September 30, all over again, it would be close to that $45 million number, yes. Let's head another way, Mike. That $45 million equivalency will be a cash benefit in the first 2 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 1, day 2, day 3. There's no cash going out the door for those first, call it, 2 months as we rebuild that level.

[Operator]

And at this time, gentlemen, we have no other questions registered. Please proceed.

[Martin Juravsky, executive]

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]

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.