Russel Metals Inc

TSX:RUS

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen and welcome to the Third Quarter 2021 Results Conference 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. [Operator Instructions] I will now turn the meeting over to Marty Juravsky. Please go ahead.

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Great. Thanks, operator. Good morning, everyone. I plan on providing an overview of the Q3 results in addition to providing some additional details on yesterday's acquisition announcement related to Boyd Metals. If you want to follow along, I'll be using the PowerPoint slides that are on our website and just go to the Investor Relations conference call section. If you go to Page 3, you can read our cautionary statement on forward-looking information. So if we begin, let's go to Page 5 and just to give a context and a bit of an overview, the results for the quarter were exceptionally strong and built on the back of a really strong Q2. Our initiatives over the last 12 to 15 months have positioned us to benefit from the prevailing market as well as create new opportunities going forward. In particular, when we reflect on what we outlined as our game plan around 12 to 15 months ago, we were pretty proud to have delivered a series of actions that align with that game plan. So to put a little context around market conditions. The market has been and continues to be very good. Even though there is more inventory in the supply chain than there was 3 to 6 months ago, we are continuing to see a good supply and demand balance. In addition, our price realizations continued to increase through the quarter. And overall, company-wide, our margins were comparable in Q3 versus Q2 at a very high level. Favorable market conditions are continuing into Q4. Demand is good and the number of months inventory in the supply chain remains below the historical average. Therefore, we continue to remain optimistic on the overall business conditions. In terms of our portfolio transformation, as a bit of a reminder, the objectives behind the portfolio changes were to both enhance returns and reduce risk. We have accomplished a sizable transformation in a little over a year. The initiatives focused on reducing capital in the energy part of our business, but at the same time, scoping out opportunities to redeploy that capital in higher and better uses. In this past quarter, we saw those initiatives come together quite nicely. A few key items to highlight. Point one, the OCTG/line pipe monetization is effectively done with about $300 million of capital [indiscernible]. As a reminder, that part of our business had low margins, low returns tied up a lot of capital [indiscernible]. In hindsight, our timing was quite fortunate as we are able to profitably exit the business as the window opened with the improving market conditions. In July, we closed the sale of our Canadian OCTG/line pipe business. The transaction repatriated a little over $100 million of cash in the quarter, and we still have some upside participation in the ongoing business, but it's structured to be off-balance sheet to Russell. Our orderly liquidation of the U.S. OCTG line pipe inventories is also mostly complete. Item 2, capital reinvestment in value-added projects is a multiyear process for us. We're seeing very good results from the recent initiatives, and we'll be adding a series of new projects in the quarters in years ahead. In terms of M&A, we have been very active in looking at a lot of acquisition opportunities, but remain extremely disciplined as we review those opportunities. That being said, we couldn't be more pleased with how the Boyd Metals acquisition has come together. It's a business that fits exceptionally well. I'll talk about that in more detail a little later on.Free cash flow and capital structure, with $188 million of cash from operating activities in Q3 and liquidity of over $600 million, we are in very good shape to continue evaluating capital reemployment opportunities if we go through our financial results on Page 6. From an income statement perspective, the continuing strong results were across our business segments. Revenues of over $1.1 billion was the highest level in over 2 years, and EBITDA and EPS were all time records again. Gross margins maintained at a very high level and more comparable to Q2, around 30%. And there were a few items of note in the quarter that I just want to highlight. As we close the sale of the Canadian OCTG line pipe business, we are no longer consolidating the results, but we did pick up our 50% share of their net income, which is around $3 million for the quarter. In addition, stock-based comp had a mark-to-market P&L benefit of $3 million in Q3 due to the decrease of our share price in Q3. From a cash flow perspective, we used $63 million due to an increase in working capital. This was a build within the service centers and steel distributors segment and was somewhat offset by the continued downsizing of our energy working capital. The business condition improvements that led to an increase in AR and inventory was somewhat offset by an increase in accounts payable. In addition, part of the accounting for the Canadian OCTG line pipe sale is a line item that you see that's called sale of business, and we have that as $77 million. That $77 million, plus the $32 million of the accounts receivable that we retained and collected in the quarter is how we realized total cash proceeds of approximately $109 million. CapEx of $8 million continues to be relatively modest, but I do believe it will nudge up in 2022 as we undertake additional discretionary CapEx projects. From a balance sheet perspective, the strong cash flow has led to a reduction in net debt by a further $161 million in the quarter, and we ended the quarter in a net cash position. Our liquidity is north of $600 million, and our credit metrics are incredibly strong. Lastly, we have declared a quarterly dividend of $0.38 a share.If we go to Page 7, I'll talk through our segmented P&L information. Let's start with the service centers. The service centers did exceptionally well again. Revenues were up $33 million or 5% versus Q2. Gross margins remained above 30%, and we delivered $132 million of operating profit. These results are indicative of strong markets and really strong execution by our business groups. We did experience 12% lower volume in the quarter due to the seasonal dynamics in the summer months and during July, in particular. However, the volume decline was more than offset by a 19% increase in our average sale prices in Q3, and that's on the back of a 19% increase in average sale prices between Q1 and Q2, and this translated into continuing strong margins. Even though margin percentage was down slightly from Q2, our margin in dollars per ton is in fact up. I expect some margin moderation in Q4 because of the higher cost of inventory that roll into cost of goods sold. As I mentioned earlier, demand is strong, but we typically do see some decline in operating days as we get into the holiday period towards the end of Q4. In energy, we are seeing positive market sentiment that is at the early stage of translating into financial results. Our revenues came down due to the sale of our OCTG line pipe business, but revenues within our field store segment was, in fact, up 12% on the quarter versus Q2. Also, our margins in the energy business were over 20% as the segment is now being driven by the higher margin field store business. Distributors had another exceptionally strong quarter from a revenue, margin and bottom line perspective. Looking forward, the backlog of business remains good for Q4. If we go to Page 8, this will give us a little bit more context around the portfolio transformation. And this chart shows our inventories over the past 6 quarters to provide a frame of reference for how we've transformed the portfolio. If you look at the current total inventory position of $787 million is, in fact, actually lower today than it was in June 2020 despite significantly higher steel prices. We've pulled over $300 million out of the energy part, as you can see in the red bar. At the same time as the business activity in service centers, which is the green bar and steel distributors in the yellow bar picked up. The result is that energy today only represents around 17% of our September 30 inventory versus 55% in June 2020. This realignment has resulted in more effective and efficient capital utilization as we put our capital into higher and better uses.If we go to Page 9, you can see the overall impact on capital utilization and returns. When we benchmark ourselves against our competitors, we have generated top quartile returns over a cycle, with our overall goal being a 15% EBIT return. As you can see in the red line, 2021 has been well above that target. Through the first 3 quarters of 2021, we generated a return on capital of 40%, 57%, and in the most recent Q3, 64%. Those numbers are exceptionally strong on both an absolute as well as relative basis compared to our competitors. A big part of this performance is a result of our portfolio transformation as the average capital invested a few years ago was around $1.4 billion, and it's now closer to $1.1 billion. So in summary, we had record earnings with less capital being deployed. Going forward, we are focused on opportunities to redeploy that capital, but we will remain disciplined with respect to opportunities that meet our financial and our operational criteria. In fact, we have looked at a tremendous number of opportunities of potential acquisitions over the past 6 to 9 months. And in many ways, the benefit of seeing so much deal flow is that we could remain very selective as we compare and contrast a wide range of opportunities. This brings us to Boyd Metals acquisition. If you go to Page 11, I'll give a little bit of a context around the transaction. So as a starting point, Boyd Metals is an opportunity that's been on our radar screen for some time, and it is truly a hand and glove fit for us. In terms of a few transaction highlights, the purchase price is USD110 million, subject to adjustment for changes in the final working capital amount. The $110 million of value includes all of the business, which includes everything from working capital land building, et cetera. As we reviewed the Boyd business, we're really impressed with their financial track record, their culture, and their people. With last 12 months revenues and EBITDA of 244 and $39 million, respectively, the results are comparable to our own margins in the region. From a valuation standpoint, this implies a multiple of around 3x LTM EBITDA. And over a cycle, we see the business is generating very good returns and being accretive to our earnings. As discussed earlier, we have lots of capital structure flexibility due to the monetization of our OCTG line pipe business. So this transaction could finance with cash on hand or drawings under our existing bank lines. We expect the deal to close in the fourth quarter.If we go to Page 12, we have an overview of the Boyd business. And starting with the map on the top left-hand part of the page, or has 5 locations with its main center being in Fort Smith, Arkansas, which is on the Western edge of Arkansas. In addition, it has 4 other service centers that are all located within a freight logical distance of Fort Smith, and they thereby operate in a bit of a hub-and-spoke approach. This is a very similar approach to how Russell operates. Moving to the right, they have a range of value-added processing equipment across their system, which is also a big focus within our operations and a key part of our ongoing CapEx program. Moving down the page to the chart on the bottom right on product mix, they're about 75% carbon based, but they also have about 25% of their product mix as nonferrous. We like this diversification, and it's a very good balance between both carbon and the nonferrous part of the business. If we go to the bottom left chart, their customer base is very diversified across industry segments as they focus on small order sizes and noncontractual business, again, a very similar business philosophy in terms of how Russell operates.If you go to Page 13, you can see a map of our operations in the region as compared to Boyd's with Boyd's located -- locations in yellow and Russell's locations in green. The geographic footprint is very complementary at extend the boundaries of our existing service territories. As I said earlier, Boyd has a very similar culture to us, and we are really quite impressed by their management team and their staffing and their employee level. Because of the alignment of similar operating philosophies between the 2 businesses, we expect there are going to be some new opportunities across the 2 platforms relating to sharing inventories, value added processing, procurement and the like. And we are really excited to get started. In closing, on behalf of John and other members of the management team, I'd like to express our appreciation to everyone within the Russell family, and we really look forward to welcoming the Boyd Group to our extended family. After a very challenging 2020, we've been able to demonstrate significant momentum through the first 9 months of 2021, and we really look forward to advancing the business for the balance of this year and beyond.Operator, that concludes my introductory remarks. If you would now like to open the line for questions. John and I are available.

[Operator]

[Operator Instructions] Your first question comes from Michael Doumet, Scotiabank.

[Michael Doumet, Analyst]

I mean, nice quarter, first off, and congratulations on the deal. I understand the deal hasn't been closed yet, but is it possible maybe that you can buy some disclosures as to the earnings history of the company and maybe some of the synergy opportunities. Maybe correct me if I'm wrong, but I believe we do kind of target a pretax ROIC at 15%, just how we should think about the numbers going forward?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Yes. Michael, it's Marty. You hit the nail on the head, which is we do target a pretax RONA of 15%. And we've disclosed the LTM numbers in both revenue and EBITDA. We obviously haven't gone back to the beginning of time in terms of public disclosure. But if you want to use those metrics, what I can say is that over a cycle, their results without even taking into account synergies would allow us to meet our objectives over a cycle Of that 15% RONA. In terms of synergies, we don't put numbers on the table. And frankly, we speak, as I said earlier, there are opportunities, but we actually don't formally come up with a synergy number, and we don't view it that way. We think there's going to be opportunities for the Boyd business and our business to work together cooperatively and find opportunities, but we don't go to the point of actually trying to put a hard wired number to it.

[Michael Doumet, Analyst]

That's great. No, that's helpful disclosure. And then in the outlook, you talked about -- I think you quoted a modest retreated margins in Q4. And if I look at consensus as a group, we have EBITDA down 50% sequentially. So I imagine we're going to have to make our adjustments, and I know you don't comment specifically on consensus. But any way you could help us with additional parameters there? I know there's still 2 months in the quarter, but do you expect margins to normalize a little bit more quickly in Q4 or maybe at the same pace as Q3 versus Q2? Just any comments like that would be helpful.

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Why don't I make one comment, and then I'll turn it over to John. So the reference to consensus, please in my favor and take all of the consensus numbers with a grain of salt, we saw consensus shift massively just within the last quarter for Q3. So as it relates to what consensus is for Q4 and what consensus is for next year, it's frankly all over the map. So with that context around, John, do you want to put a little bit of context around market conditions?

[John Gregory Reid, CEO, President & Director]

Sure, Marty. The market conditions again for demand are very good right now. And again, very solid when we look out there across the end markets, the end users that we use. We also use the purchasing manager index, both of them coincide nicely that lead to increasing demand. If you look at architectural billing indexes, those are leading to increasing demand in construction. We're seeing that from our customer base as well. Oil and gas rig counts continue to improve. That end market is doing very well. Automotive restoring signs of bringing back on production. We'll use more flat roll. Although we're not in automotive, it does help us up in any buyable flat roll. We have seen the inventory positions improve in service enters, still though they're both. The turns are both historical norms. So we're not back to that middle capacity continues to run in the 84% to 85% range, which is basically at capacity. We've seen a little bit of softening in flat low [indiscernible] overshot them just a little bit. It's just rebalancing and getting back in line, if you look at the inverting curve of plate for the last year, you can tell that plate fall in the high and flat roll. That's now come up almost to a neutral point. Further probably push on past that. So we feel pretty good about what we're seeing demand like going forward into Q4 and even into Q1 from what we've made from our mutual customers. And with regards to pricing and margin, there could be a little bit of pressure along the way. We got is any reason to drive anything either direction and a big change right there.

[Operator]

Next question comes from Michael Tupholme, TD Securities.

[Michael Tupholme, Research Analyst]

Maybe just to start somewhat high level. You've now completed the exits of your OCTG business. So apart from the fact that you still have an interest in the JV. I'm wondering in terms of your strategic priorities over the next 24 months, now that, that transformation of the energy business is complete, how should we be thinking about the focus going forward?

[John Gregory Reid, CEO, President & Director]

Yes. So we've been focused. Again, we're sitting on a lot of liquidity. We'll continue to look at opportunities out there and mandate. There are -- as Marty mentioned, the pipeline has been pretty active. We'll continue to grow our value-added process and through our service centers. We continue to ramp up that initiative. It's had tremendous traction so far. We just see that building now. So we've gotten better and better as we start these up. So we really have it on this franchise now to roll it out. So we continue to see that going on as well. So those will be the 2 big things that we're looking at going forward. Again, I think the M&A pipeline continued to remain active over the next 12 to 24 months.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. I guess -- and just to follow-on that. So it certainly sounds like your capital allocation priorities haven't really changed. But at the same time, as you pointed out, you've got considerable flexibility or in net cash position. Obviously, you'll use some of that cash for the Boyd acquisition. But are there certain -- are there certain capital allocation priorities that maybe have historically been further down on the list that there since wasn't the capacity or flexibility to address, but perhaps now, you're in a position to also address those concurrent with the focus on M&A and value add?

[John Gregory Reid, CEO, President & Director]

Yes. I don't think so. We've never really been capital constrained. We've always had a very solid balance sheet. We just continue to improve it over the last 12 months, so that even have obviously more flexibility now. So I don't think we were really constrained in the past. We'll continue to be very disciplined on how we manage working capital and look at capital allocation as that's a key or business being again in distribution and in a cyclical industry. But I don't think there'll be any fundamental changes there. It's just -- I think there's more opportunities coming forward.

[Michael Tupholme, Research Analyst]

Okay. And then on the acquisition side, I mean, I know it's difficult to comment. It sounds like you've certainly looked at a lot of opportunities. And -- but I'm wondering, is the Boyd transaction, is that somewhat representative of what we should expect with respect to potential future transactions? Or is that oversimplifying things?

[John Gregory Reid, CEO, President & Director]

Yes. I think in terms of size and scale, I mean, Boyd was a nice fit for us. Geographically, it was a great fit for us. But again we don't have a specific model we're looking for. It's nice to be at to add on to your existing footprint or to bolt-on something. We would look at standalones as well. But the big thing about boy that was very attractive to us, one, the culture lined up very, very closely with our culture, tremendous people. And it's a business that's a plug and flight. Their management team, they stand-alone. They manage their business very well. We'll integrate in nicely, but we see them continue to run this business and our decentralized culture going forward.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. And then perhaps for Marty, so I know the transaction with Marubeni closed early in the quarter, so that's really not -- we're not seeing any sort of contribution really in the Energy Products segment in the quarter, it's in the equity pickup line. But when we look at the Energy products business in the quarter, you were still selling down some of our OCTG inventory. Can you give me a sense for what that business would have looked like sort of on a more of a run rate basis in terms of how it's going to look going forward, what this quarter would have been as far as the field store contribution?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Yes. Well -- so I guess, Mike, if you look at it the vast majority of it in the quarter was from field stores because you're right, the joint venture closed in the quarter and closed at the front end of the quarter. So we literally had a few days' worth of offloading Triumph before it got sold into the joint venture. And then the wind down of the U.S. OCTG line pipe business was also occurring in the quarter, but it wasn't a huge number for the quarter there with me for one second this year. If you look at yes. So on a top line basis, there's about $30 million of revenue related to line pipe OCTG for the quarter.

[Operator]

Your next question comes from Frederic Bastien, Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

Good quarter. I have a few questions on Boyd specifically. John, that business is right in your backyard, so to speak. So just curious how familiar you are with the business and if you could share how long you guys have been kind of talking to each other?

[John Gregory Reid, CEO, President & Director]

So now the principles of Boyd posted my career. And we actually, early on, when we were started into 2 different companies prior to becoming -- we get bigger, we actually shared new concepts on how to run the business, value values and principles. So we're very familiar with them. As they started their growth as we grew through it. So a very strong company, top 10 and ran the company came from AFCO metals and got a lot of experience in the steel business was kind of not for sure his experience when I was getting started. So again, very, very solid group, very well run in the marketplace, very well-respected in the marketplace. Again, tremendous amount of depth coming through by numerous been there for them for a long time. And so those 2 will continue to run the business there on a daily basis. So very familiar with them, Frederic, very good operators in the business. Again, it couldn't align more closely with what we're doing at us were culturally. And so I think it's just, as Marty said, we handlers.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. And just -- I know you can't comment for them, but I mean, do you know if the Biden administration's proposal to increase the capital gains tax may have created a bit of urgency for them to transact?

[John Gregory Reid, CEO, President & Director]

I don't know if it was urgency. We have been having these discussions for probably over 2 years on and off. I mean we really got postponed with COVID. I think if we think about it, they have senior partners uninvolved in the business and has been since state one, but he's of retirement agent and maybe a little beyond retirement age. Times getting closed, probably worknotes year or 2 years. And so I think it was more of a timing of the principles that on the large majority of the company, we're looking for an exit strategy and looking for the proper partner to move forward with their business. Now I'm sure it benefited to have the tax and get it done by the end of the year. I'm sure that was obvious, a consideration for them. We tried to structure it that way. But I don't think that was the determining factor.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. And then just wondering, I mean, I mean, this business seems to be running well. I mean, obviously, it runs well and so on, doesn't feel like you're going to spend a lot of effort or management time on the integration of that business versus what you might have done in some other acquisitions that Russell has done. So would you then consider another deal of this size if it fell in your lap in the next few weeks, few months because you certainly have the capacity to absorb it?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Yes. In some ways, the short answer is yes. And we like the Boyd business from all kinds of perspectives, including the fact that it's really, really well run and doesn't require an awful lot of oversight. So to me, that is a perfect fit and allows us to not only with them do what they do really well, but also continue to look at other opportunities.

[Frederic Bastien, MD & Equity Research Analyst]

Great. I guess just one last question. You comment -- or you mentioned that the margins are similar to those of Russell Metals in the region. But how do they compare to those of the service center segment overall?

[John Gregory Reid, CEO, President & Director]

Very similar. There's some opportunity for them to continue to push forward with their value add. And they just -- they've got a strong amount of value-added in their business now, but they have an opportunity to push forward and maybe to leverage up with what we've done currently is where they can either use the value-added processing and the totaling mechanism or they can put in their own equipment. Again, that will be their call on how they want to spend that capital, but those opportunities are there, excluding some of the high end where we've got extreme margins in value-add processing. It's almost an identical manage.

[Operator]

Our next question comes from Alexander Jackson, RBC Capital Markets.

[Alexander Jackson, Assistant Vice President]

You've kind of touched it already, but in terms of capital allocation, with the business changing, I'm curious, does that dividend increase come into play kind of in the near term?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

The way we look at it right now is we've always viewed the various capital allocation alternatives as being under consideration. But in terms of Boyd as an example, we think that's just a really great opportunity to put capital to work. We continue to be -- as John said earlier, we continue to be actively looking at the M&A landscape. So for us, actually having capital structure flexibility to look at adding value to the business, whether internally through additional investments, CapEx investments or their external through acquisitions that meet our criteria, that's where our focus is for the near term.

[Operator]

[Operator Instructions] Your next question comes from Anoop Prihar, GMP.

[Anoop Prihar, MD & Special Situations Analyst]

John, just wanted to ask you sort of a big picture industry question in terms of your interpretation of the trade deal that was announced earlier on this week with the EU. I mean, on the one hand, you went up more product entry in the U.S., but at the same time, it seems they set those quotas to be in line with the EU has historically sent into the U.S. So I'm just curious to know what impact if any do you think that's going to have on your business as you look forward to next year?

[John Gregory Reid, CEO, President & Director]

Thanks, Anoop. It's really interesting. If you look historically, it was about 5 million tons of tallied in from the art coming in from the EU, and now with the trades, we're going to go down to about 3.4 million tons. If you look at North American production, that's running at a $100 million range. We're talking about 3% to 4% increase of product coming in, it's going to be predominantly in coated flat-rolled material just cause a little back up in the hot roll, but it's predominantly going to be galvanized cold-rolled prepaint. What's interesting when you read into the document, there's 54 different quotas included in that for carbon. I think there's another 16 for aluminum. And those quotas are managed individually as well as the importers in managed individually. So it really takes a sophisticated person to import that and our steel distribution group that obviously being the 30-plus years, very experienced. I think it's -- we really going to provide opportunities for experienced importers that have strong balance sheets to really be the importers of choice here versus maybe some of the smaller players that don't have the balance sheet, and they'll have a sophistication to manage those 54 different carbon variations with individualized quotas. And overall, I think the impact is going to be fairly muted on both sides.

[Anoop Prihar, MD & Special Situations Analyst]

Great. Well, that's helpful. I didn't realize it was going to be such a complicated endeavor.

[John Gregory Reid, CEO, President & Director]

Yes. No, it will. It's -- I mean I don't count on the government to solve my problems [indiscernible] create them. So there you go.

[Operator]

Your next question comes from Michael Tupholme, TD Securities.

[Michael Tupholme, Research Analyst]

Maybe just a follow-on there. Apart from the agreement between the U.S. and EU, can you speak more generally about what was happening with respect to imports? You did mention that the inventory and the supply chain has increased, and I'm not sure that's directly related or exclusively related to imports. But if you can comment on what you are seeing in the -- with respect to where it would be helpful.

[John Gregory Reid, CEO, President & Director]

There's been no material change on inbound imports. We see some product specifics. I think the catch-up has just been mills have been playing catch up because the supply chain was so just cleaned out during the COVID again, we dropped our inventory, the manufacturers, the mills didn't produce any inventory, the end users cleaned out their inventory and the work in progress. So I think it's taken a long amount of time to rebuild the inventory, and we're starting to catch up some there. Demand took off faster than anticipated. So I think we were behind. So I don't see a lot of import impact right now and begin with the 232 still in place for other countries or quota systems, it still is very limited to was coming into the country. So I'm not seeing a big impact. And I think the mills approach has been very disciplined in North America and kudos to them. I think they work very hard to get to this point. But when there is something that comes in, I think they view that as a one-off in that area and won't be act to it versus in the past where you had a lot more tonnage coming in available if they had to react to maintain share. So I just don't see a whole lot of change in the imports coming in, driving pricing direction from the domestic mills. I think that the missing mills actually have the drivers do on that right now.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. And then I'm not sure if this is related to that or not, but your steel distributors segment, obviously, extremely strong performance this quarter. And if we just look year-over-year, the revenues in that segment were up a lot more than the service centers revenues were up. And I'm just wondering, is there a dynamic here where you had ordered some material from offshore, and that was sort of on its way and coming in, but it was ordered some time ago at lower prices? Or is that what that play there? And I guess, maybe more importantly, how do we think about that business going forward?

[John Gregory Reid, CEO, President & Director]

Yes. So it's a good question. And again, we had -- we did have some holding gains opportunities that came in at 232 came into play and we came out of COVID. And keeping in mind that there are certain products that just aren't made in Canada. So you build heavy plates being those items will naturally always import. Again, predominantly, those margins came from our U.S. operations, where we had inventory in stock at the time we see -- as the price started to move up, they actually held inventory weighting in anticipation of further increases. And now as they continue forward, again, just due to the imports coming in or all the problems with logistics and shipping, they're in a very good inventory position compared to a lot of our distributor or trading competitors. And service center industry being very lean of inventory versus the mills reduced gave us some early opportunities to kind of flex our muscle there, if you will. So I think longer term, you'll see their margins still normalize back to a more reasonable level. But again, in this environment right now, I think those will continue for the next 2, 3 quarters to have strong margins by comparison.

[Michael Tupholme, Research Analyst]

Okay. That's great. And beyond the margins, though, I was just also wondering just about the top line, like is that something we should expect to moderate again because of was there sort of a timing impact there? Or is this sort of run rate type level for the next little while?

[John Gregory Reid, CEO, President & Director]

Yes, it's 2 things. Part of it was time and again, especially Canada. Again, with the restrictions, people couldn't get things in. So we had the opportunity. Part of it's just the cost of steel has moved up. So the tonnage may not have moved up as much. It's just the cost of steel, being 3.0x to 4.0x, but it was 1.5 years ago. So -- but there were some opportunities, specifically in Canada, where we were able to participate something either to Russell Metals or to our competition where their product was not available. And so we really were able to maximize that opportunity in our Canadian operations. Going forward, I don't see big changes there as, again, we're doing plating being primarily that are not produced in Canada. So I don't see big changes to the tonnage volume, but to see where pricing goes for.

[Michael Tupholme, Research Analyst]

Okay. In service centers, the volume's down 12% quarter-over-quarter. I think you said in the release that a driver of that was seasonality, but I don't know, like, is that essentially the vast majority is just a seasonal thing? And similarly, I think you indicated potentially some further decline into the fourth quarter. Is that also just seasonality?

[John Gregory Reid, CEO, President & Director]

The fourth quarter will be seasonality for sure, really. In second quarter, we saw some seasonality, and we really saw the construction shutdown in Quebec was in full effect. I think people were tired working through COVID. And so that 2 week shutdown. They've really shut down for 2 weeks. Historically, we would get people kind of shut down, maybe linger on some projects, but it really shut down. So that's one of our largest service center operations, we saw the impact. And we saw the bounce back later into Q3. So as far as we're concerned, we're not seeing any demand issues that are out there that we're concerned about or market share issues that we're concerned about. So again, I think it was seasonality, coupled with a strong construction shutdown in Quebec.

[Michael Tupholme, Research Analyst]

Okay. And then just lastly, the equity pickup you saw this quarter from the JV, $2.8 million. Is that a number that would sort of be representative of what we should be thinking about in future quarters, Marty?

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Well, it was an extremely strong quarter coming out of the gate. And there is -- just piggybacking on the last conversation about seasonality, There's also a very high seasonality attached to that business. So this is a high quarter season for that business. So it's a pretty robust level. We're very pleased with it, but this isn't what I would expect is the average over an entire year type level, especially there are -- when you get into spring breakup period, you get some a down quarter later on in the year. So this is a robust level, let's put it out way.

[Operator]

There are no further questions at this time. Please proceed.

[Martin Leb Juravsky, Executive VP, CFO & Secretary]

Great. Thanks, operator. Well, again, look, I appreciate everybody for joining our call. Much appreciate all the questions. And if you have any additional questions, please feel free to reach out. Otherwise, we look forward to staying in touch over the course of the quarter. Have a good day, everyone.

[Operator]

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.