Russel Metals Inc

TSX:RUS

Earnings Call Analysis

Company Foresees Above-Average Year in 2024

Despite slight revenue dips in the distributors segment and flat volumes, the company maintained a solid margin of $443 per ton for Q4 2023, performing well against historical levels around $300. It also returned a remarkable 25% on invested capital for the year. The company revisited its dividend approach, incrementing it to $0.40 per share while maintaining a balanced approach to capital repatriation, almost equally split between dividends ($96 million) and share buybacks ($82 million). Executives projected that ongoing initiatives would add a couple of hundred basis points to margins over time. The capital expenditure (CapEx) is expected to exceed $75 million in an above-average spend year in 2024, with about two-thirds of that being discretionary, aimed at value-add projects and facility modernizations. While the company is currently net cash, they prefer a flexible approach to leverage opportunities.

Russel Metals Demonstrates Strong Performance and Promising Growth Trajectory

Russel Metals recently conducted its 2023 Year-End and Fourth Quarter Results Conference Call, reflecting sustainable business practices, a robust pipeline, and the potential for continued long-term value creation. Led by their dedicated team, recognized with an industry award for safety, the company has demonstrated significant agility and financial discipline. Russel Metals is poised for growth with the impending Samuel acquisition aimed at enhancing their position in Western Canada and the U.S. Northeast, as well as a recent acquisition within their energy field store business.

Market Stability Amidst Fluctuations in Pricing

While sheet and plate prices have been relatively steady, recent weeks have seen a dip in sheet prices. Despite the shifting landscape, Russel Metals anticipates reasonable industry inventory levels and a more balanced price spread between sheet and plate moving forward, pointing to a stable market environment conducive for the company's operations.

Impressive Financials and Strong Capital Structure

The company ended the year with one of its best performances, marked by substantial free cash flow and an exceptionally strong capital structure, transitioning from a net debt to a net cash position since 2019. With third-quarter revenues at $1 billion, a decline from the previous quarter, the EBITDA margins have improved by around 100 basis points across all segments. A robust return on investment capital, surpassing the target through the fiscal cycle, underscores their commitment to financial prudence.

Future Outlook and Investment in Growth

Russel Metals plans considerable investments in capital expenditures, forecasting over $100 million for 2024, aiming to modernize and add value to their capabilities. The company also anticipates additional share gains, primarily from direct end-user customers, through the integration of sophisticated in-house processing equipment, which could lead to cost and time efficiencies for clients. This strategic direction is expected to contribute a few hundred basis points on average to their cycle performance, enhancing their competitive edge even when market conditions are less favorable.

Balanced Approach to Scale and Operational Quality

Russel Metals is mindful of the challenges in expanding its scale, focusing on building quality businesses that align with their financial, cultural, and operational criteria. This measured approach to growth through acquisitions is central to maintaining their strong market position and ensuring sustainable business success.

Optimizing Liquidity and Capital Deployment

The company has outlined a philosophy rather than strict targets for managing their balance sheet, aspiring to maintain liquidity and flexibility to capitalize on opportunities across market cycles. This strategic positioning has enabled superior capital deployment, yielding returns in excess of investments over the past years. Russel Metals has identified their optimal leverage within the framework of historical metrics, with the capability of adjusting to a 30% net debt to invested capital ratio while pursuing an evergreen list of projects.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to our 2023 Year-End and Fourth Quarter Results Conference Call for Russel Metals. Today's call is hosted by Marty Juravsky, Executive Vice President and Chief Financial Officer; and John Reid, President and Chief Executive Officer of Russel Metals. [Operator Instructions]I will now turn the call over to Marty Juravsky, CFO; and John Reid, CEO. Please go ahead, gentlemen.

[Martin Juravsky, executive]

Great. Thank you, operator, and good morning to everyone. I plan on providing an overview of the Q4 2023 results. And if you want to follow along, I'll be using the slides that are located on our website, and all you need to do is go into the Investor Relations section. It's located in the area called conference call, and you'll find the slide there. If you go to Page 3, you can read our cautionary statement on forward-looking information.Let me start with a little bit of perspective and context around 2023. First of all, I want to thank the 3,500 people that are part of the Russel family. The team effort has been truly exceptional, and we were very proud of how the group came together and delivered not just in 2023, but over the last number of years. Second, I want to thank our shareholders for granting us the patience as we implemented a series of initiatives over the past few years. It probably sounds like a cliche to say that we are focused on advancing the business for the long term, but we try to be very targeted in how, when and where we deploy capital.If we look at 2023, our safety record is the best in our history, and we were recently recognized with an award by our industry peers. There's a robust pipeline of internal investments with some projects being completed in 2023 and many more in progress for 2024 and beyond. This pipeline of projects is targeted value-added equipment and facility modernizations, and that pipeline is now the largest backlog in our history.We announced the Samuel acquisition, which is expected to close in Q2. This acquisition was a long time in the making and would position our business well in Western Canada and the U.S. Northeast. We also completed a small tuck-in acquisition within our energy field store business in Q4.So let me start with Page 5 and begin with a little bit of a discussion around market conditions. So after some volatility with sheet prices in Q2 and Q3, both sheet and plate were relatively steady in December and January. That being said, sheet prices have declined somewhat over the past couple of weeks. When we look at both benchmarks today, there are a few interesting observations. The absolute prices are at levels that are higher than in previous cycles because of good demand, a higher cost curve for producers as well as better discipline by producers.The current spread between sheet and plate is making more sense than it had over the past few years. We saw periods in 2021 where sheet was, in fact, higher than plate, which is a bit of an anomaly. We also saw periods where plate was $700, $800 per ton higher than sheet, which is also an anomaly. The current spread is more reasonable compared to historical spread levels.You can see from the right charts in terms of inventories within the service center supply chain that the industry remains at reasonable levels for inventory. At the same time, the demand is solid.On Page 6, we have a snapshot of our results. 2023 was the third best year in our history from a top line, bottom line and return perspective. We generated significant free cash flow and have the strongest capital structure that we've ever experienced, and that gives us a lot of flexibility to pursue a range of opportunities.If we look across the various charts going from top left, revenues were $1 billion in the quarter versus $1.1 billion in Q3. EBITDA was $82 million, and EBITDA margin was 8%. Both of those were down from Q3, but without the Q3 contribution that came from TriMark, the Q3 and Q4 results would have been very similar from an EBITDA, EBITDA margin, EPS and return perspective. We think there's a very good outcome as Q4 is typically impacted by seasonality.Our annualized return on investment capital came in at 19% for the quarter, and our total for 2023 was 25%. When I mentioned of financial discipline and focus on returns, I think the bottom middle chart illustrates how we have delivered over an extended period of time. Our target is over 15% through the cycle and to be first quartile in the industry. The portfolio changes that we've experienced over the last number of years have led us to achieving these goals.Lastly, in terms of capital structure, you see that on the bottom right-hand chart, we have net cash of $332 million versus net debt of almost $500 million at the end of 2019. This capital structure shift, as I said earlier, gives us a lot of financial flexibility going forward.If we go to Page 7, there's some more detailed information on our financial results, just starting at the top of the page from an income statement perspective. I covered several of the high-level items already, but a few other items to note. As I said earlier, revenues of $1 billion for the quarter, it was down 8% from Q3. Price realizations were down a little bit, and we had a small decline in service center volumes.On margins, all segments were up by about 100 basis points, and I can discuss these in more detail in a few minutes. Interest came down to $1 million for the quarter as we are generating interest income on our growing cash reserve.Our Q3 results were impacted by a few nonoperating items. TriMark, we picked up $12 million in Q3, but had nothing in Q4 as our interest in TriMark was sold in early September. Stock-based compensation was $7 million for the quarter due to the increase in our share price in the quarter, and we had a $3 million increase in our inventory NRV reserves.Going down to the middle of the page from a cash flow perspective, in Q4, we generated $82 million from working capital, primarily driven by a reduction in inventory and AR, which was somewhat offset by a reduction in accounts payable.CapEx. CapEx of $28 million was higher than in the past couple of quarters as the pace of our various projects is picking up some steam. The 2023 CapEx of $73 million is in line with the $75 million that we had expected for the year. Going forward, we expect our 2024 CapEx to be over $100 million as there are additional value-added modernization projects that are coming through during the next 12 months.From a balance sheet perspective, we are a net cash position of $332 million. This is a $60 million improvement in the past quarter. Our liquidity is over $1 billion, and we have the strongest balance sheet that we've experienced, as I've mentioned earlier. We managed the company with a conservative bias, and we have demonstrated this approach through market volatility.One item of note is the Canadian dollar did strengthen in the quarter, which did have a negative impact on our OCI account in translating our U.S.-based financial results from U.S. dollars to Canadian dollars.In the quarter, we picked up 390,000 shares under our NCIB, which brings the total to 3.2 million shares since we put it in place in August of 2022. Our average purchase price to date is $34.65. Our book value per share remains north of $27 per share, notwithstanding our share buybacks in the quarter. Lastly, we declared a quarterly dividend of $0.40 per share.If we go to Page 8, we have our EBITDA variance comparing last quarter to this quarter. Starting to the left, if we look at the service centers, the volumes were down a little bit compared to Q3, but our margins were up a little bit, and we also benefited from a $4 million variance related to a reduction in our operating costs, which is mostly variable compensation.Towards the middle of the page, energy field stores were down on an EBITDA basis as Q4 was impacted by some seasonal slowdown in our U.S. business and because Q3 included some lumpy projects at one of our Canadian divisions. Steel distributors was up $3 million due to good business activity and lower costs. There was a $13 million unfavorable variance in other. As I said earlier, in Q3, we had a $12 million pickup from the TriMark component. And obviously, there was nothing in Q4 because it was divested. We had a slight decline in our Thunder Bay Terminals operation, and there was also an additional expense related to the mark-to-market on our stock-based comp. As a favorable variance, excuse me, other expenses came down by $4 million in the quarter.If we go to Page 9, there's our segmented P&L information. For service centers, revenues were down, but both margins and EBIT were up. I'll go through more detailed metrics on the service centers on the next page, but our overall results were very good in what is typically a weak quarter.In energy field stores, we are continuing to see solid performance. In Q4, revenues were down versus Q3 with some seasonal dynamics that I talked about before, particularly for our U.S. operation. Margins did come up a bit. As a reminder, and as I said earlier, one of our divisions moved some volume in Q3 for project work that was a below normal margin, which is why our Q4 revenues were down a bit, but our margins were up.Steel distributors segment revenues were down slightly, but margins and profitability were better than Q3.On Page 10, there's a deeper dive on some of the metrics for our service center operations. Top right graph is volumes for the last number of years. Q4 2023 volumes were good. They were down 1% versus Q3. But given the seasonal comparison, if you look compared to Q4 of last year, they were up 5% versus this time last year.Bottom left graph, we have the revenue and cost of goods sold per ton. Revenue per ton or price realizations decreased by $114 per ton versus $115 decrease in cost of goods sold, which resulted in a slight pickup in margin per ton that is shown on the bottom right graph.When we look at operating results over the past number of months, 5, 6 months, the margins were declining on a month-over-month basis as prices were coming down, and we were working through the lag effect of some higher cost inventory. This downward margin trend reversed towards the latter part of Q4. So our margin profile was better at the end of Q4 than at the beginning of Q4. For Q4, our gross margin was $443 per ton, which remains at a pretty good level compared to the historical levels, which were closer to $300 a ton.As we've said many times in the past, our initiatives that are related to the value-added processing equipment and the other investment profiles that we have should lead to higher average margins and lower volatility over the cycle as compared to our legacy margins.On Page 11, we have illustrated inventory turns. The chart shows turns by quarter for each segment, energy in red, service centers in green, steel distributors in yellow. In addition, the black line is the average for the entire company. Overall, our inventory turns declined from 4.0 at September to 3.8 at December 31. This is typical at this time of year as our Q4 terms do come down a bit with the pullback in shipments in the last few weeks of December. That being said, the 3.8 for Q4 of this year is better than we normally see in a typical Q4.By sector, our service centers were 4.4 turns, which is again industry-leading. Our energy field stores came down to 2.8, but that should improve in Q1 while our steel distributors improved from 3.2 to 3.5.On Page 12, we have the impact of the inventory turns on inventory dollars. Total inventory declined by $43 million with a small decline across all 3 segments. In service centers, we had a decline in prices that more than offset a small increase in tonnage. This is consistent with our expectation that I mentioned a number of months ago on our Q3 call.On Page 13, we have the overall impact on capital utilization and returns. Our capital deployed came down to $1.3 billion because of our working capital reduction in the quarter. More importantly, our returns continue to be industry-leading. As mentioned earlier, our 2023 returns on invested capital was 25% for the year.If we go to Page 14, I can provide an update on our capital structure. The continuation of the strong free cash flow gives us a lot of flexibility. On the left table, our cash position went up to $629 million, which is a $60 million increase versus September, and it's also a $266 million increase since this time last year. Our equity base remains over $1.6 billion, and the chart on the right shows that our book value per share remains over $27 per share, which is over $2 increase since this time last year.On Page 15, we have an update on our capital allocation priorities going forward. Given our strong balance sheet, we continue to have a multipronged approach across all of these bubbles that are on the page. For investment opportunities towards the top left of the chart, we seek returns over the cycle, greater than 15%, as I've already discussed, and we've delivered well above that target.The ongoing opportunities are threefold. We are continuing to identify and pursue additional value-added projects. In total, we have over 40 equipment projects on the go right now. Facility modernizations, we have 5 projects underway. They are tracking for completion at various times in 2024 and its early 2025.In total, our CapEx was $73 million for last year. As I said earlier, we expect that number to go up to over $100 million for 2024 as our project pipeline is currently over $200 million. That's a multiyear number as we continue to identify more and more opportunities.In terms of acquisition, we looked at a lot of deals over the last couple of years. In Q4, we closed the acquisition of Alliance Supply, which is a small tuck-in for our Canadian energy field store business. In addition, the Samuel deal is expected to close in Q2.In terms of returning capital to shareholders, the bottom part of the page, we've adopted a flexible and somewhat more balanced approach. For dividends in May, we increased our dividend to $0.40 per share per quarter, and we'll continue to reevaluate the appropriate level on a regular basis.For the NCIB, we acquired 390,000 shares in the quarter. And since August of 2022, we acquired 3.2 million shares at an average price of $34.65. We expect to continue to utilize the NCIB on an opportunistic basis. If we compare the 2023 activity of our NCIB versus dividends, the dividend run rate was around $96 million versus $82 million in share buybacks for last year. So we are close to a balance between the 2 forms of capital repatriation. That 50-50 frame of reference is not a hardwired target, but it's a good litmus test to see if we're being somewhat balanced.On Page 16, I want to provide a context around the cumulative impact of the actions over the past few years. In total, we generated $1.7 billion worth of cash with $1.2 billion coming from operations, $400 million coming from asset sales, which is mostly the monetization of the OCTG line pipe businesses and $35 million from option exercises. If we compare that $1.7 billion on the left to the capital redeployment on the right graph, it is split into roughly 3 equal buckets.In orange are our reinvestments, which in total is just under $600 million, and it includes $181 million of completed acquisitions, $225 million for the pro forma impact of the Samuel transaction and $170 million for internal CapEx. The blue part totals around $500 million, which was the capital returned to shareholders through both dividends as well as the more recent initiative under our share buyback program. And the last bucket is in green, which is around $600 million in debt reduction, cash buildup, which provides us the financial flexibility that I've mentioned earlier.Again, when we look back at this, it just provides an interesting frame of reference of the amount of cash that's been generated, the cash that's been redeployed in very similar buckets, about 1/3, 1/3, 1/3. Also, it's interesting to note that when we look at the asset sales of around $400 million, that is roughly the equivalent of the amount that has been invested through acquisitions and in the announced acquisition. So it comes down to a situation of trying to do more with effectively the same amount of capital, just better capital redeployment, and you see that on Page 17.The top left is invested capital, and it has averaged around $1.3 billion, $1.4 billion over the last decade, but the biggest difference is that we reallocated capital away from some underperforming businesses and reinvested in our core business. The result is we are doing more with the same amount of capital.Bottom left chart shows returns, which are at the higher tier over the last couple of years than they have been in the past. On the top right is EBITDA margins. We've consistently said that one of the outcomes of our action should be to raise the floor, raise the ceiling and reduce the volatility through the cycle, and you can see some of that result being demonstrated over the last couple of years.By comparison, there were some tough times in the past, 2015, even the front end of COVID of 2020. The sustainability of the business and financial performance is different than it has been in the past because of some of those initiatives. The net result is somewhat illustrated also on the bottom right graph, which is our book value per share. We've been in elevated baseline and are in a pretty good position to continue to grow through the cycle.In closing, on behalf of John and other members of the management team, I'd like to express our appreciation to everyone within Russel. Thank you to everyone across the company for your contributions.That concludes my introductory remarks. So operator, if you'd now like to open the line for questions, that would be great.

[Operator]

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

[James McGarragle, analyst]

Congrats on the strong results. Just looking at the results sequentially at your service centers, we've seen steel prices up significantly versus the lows from last year. You pointed to higher volumes quarter-over-quarter. So how should we be thinking about sequential trends, in particular, on the gross margin side, given the higher pricing and the focus on value-added services kind of within the context of your historical seasonality?

[Martin Juravsky, executive]

Yes. Well, I think without being too short-term focused, this is more a function of what does the trend line look like. I think we've tried to be consistent in saying that these initiatives should add a couple of hundred basis points on average over the cycle. Now the cycle does move around a little bit and sometimes it gets more pronounced than others. But overall, it should be a couple of hundred basis points of impact through the cycle.Now that being said, we just happened to have had a couple of pretty good years from a cycle perspective. But even when cycles turn south and even with the volatility and they have turned a little bit south from time to time in 2023, we still demonstrated some pretty good results as evidenced by the margins that we had in Q3 and Q2, where there was some softening in pricing. So overall, James, to get to your question, the initiatives over the course of time should add on average a couple of hundred basis points to our results.

[James McGarragle, analyst]

Okay. And then another one on some of the recent CapEx spend. This is a 2-part question. So you alluded to potential share gains from some of those initiatives? And what's the opportunity set kind of if we look longer term with regards to share gain? And then on the uptick in CapEx from prior guidance, is this a pull forward of spend or additional spend? And can you just comment a little more specifically on what you saw in the market that kind of prompted that increase in CapEx spend? And after that, I can turn the line over.

[Martin Juravsky, executive]

Sure. Thanks, James. So why don't I answer the last question first, then John can deal with the first question in terms of the market. In terms of CapEx, it's not so much a pull forward. What we have is sort of an evergreen list, and it's the backlog of projects in the go, and it's constantly getting updated every day, every week, every month. And the timing is a little bit imprecise, but it effectively is a multiyear plan.And then in terms of the specifics of when certain things come to fruition, it's a function of lead time in certain equipment, in some cases, its readiness of certain facilities. In some cases, it's both equipment as well as buildings. And buildings could sometimes be driven by permit requirements. So it's not so much we pulled stuff forward. It was really a function of -- there was an evergreen list that we always have. And this is just what that 12-month window between January 1 and December 31 looks like, but we tend to get more focused on the evergreen list that is a multiyear evergreen list.What we've said, though, is that we expect it to be north of $75 million per year on average, and 2024 is going to be one of the years that's a little bit above average.

[John Reid, executive]

Yes, James, to your first part of the question on share gains, a lot of the share gains are actually coming directly from the end-user customers. And so where they had bought the steel in the past from us or someone like us and then that steel would be processed in their plant, and it may have 2, 3, 4 processes done. With this value-added equipment, we've now installed, we're able to bring that in-house and do that for the manufacturers or end users to where they can free up that space, free up the time in the working capital. And we're able to do that with a -- typically at a more competitive price because it's not a multistep process where we just have some more sophisticated equipment that can do all those in one step.So that's where the majority of the gain is coming from. And so we feel like we'll continue down that road as we're seeing this just kind of evolve into the next step of things people are wanting us to do.

[Operator]

Next question will be from Michael Doumet at Scotiabank.

[Michael Doumet, analyst]

So, on the topic of capital deployment, you've invested a lot of growth capital. Marty, good presentation there just to connect the dots on what you've done in the last 3 years. I guess the issue is that in the last 3 years, you've managed to outearn what you've spent. So I'm thinking maybe longer term here, what your thought is on the optimal balance sheet for Russel Metals leverage targets, what you strive to get to longer term as you continue to invest?

[Martin Juravsky, executive]

Yes. It's a good question, Michael. Because at the end of the day, you're right, we've built a really strong position. Some of it was by design because of the initiatives that we did and some of it was being in the right place at the right time as the cycle turned very favorably. And building dry powder is a good thing because we don't have the crystal ball on how cycles evolve, but having that flexibility is extremely important.So obviously, we've got tremendous flexibility right now. This is probably more of a philosophy than hardwired numbers attached to targets. But the philosophy is we want to maintain good flexibility at all points in the cycle so that we can always be in a position to take advantage of opportunities that are presented to us because we don't know what's presented to us. And so what that means is, yes, we're sitting on a position today that's net cash. That's not the long-term plan. But at the end of the day, we do want to have a philosophy that gives a tremendous amount of flexibility to seize on opportunities.When we look at historical metrics, there's frames of reference of -- there's been times you can do 30% net debt to invested capital. We can do something like that within the frames of our liquidity today. But it's not so much a hardwired target as it is more of an overall frame of reference of maintaining strong liquidity at all parts of the cycle so that if the cycle turns up, we do certain things. If the cycle turns down, we do different things. And so that liquidity flexibility is more of a qualitative underpinning than a hardwired number, it should be this or it should be that.

[Michael Doumet, analyst]

That's perfect. I really like the answer. And then maybe just switching over to the numbers here. So steel distributors, 2023 pretty outstanding year. Maybe if you can break down, John, the reasons behind the outperformance, especially into Q4. And then just wondering, as we think about 2024, the overall sustainability of the margin profile?

[John Reid, executive]

Yes. So a very astute acknowledgment there on steel distributors and primarily driven in Q4 and really throughout the year by our Canadian steel distributors. And again, we've typically done back-to-back contracts. As the market moves up and down in price, they'll lock and sell back to back. They had opportunities and some windows this year to do some more transactional things that were in favor just due to the market and available tonnage that was brought to us from suppliers. So they were able to take advantage of that opportunity.But overall, again, I think that gave them some margin windows that aren't typical. So I think we'll go back to a more normalized margin that we've seen historically in 2024 for our steel distributors. Our U.S., again, it's highly transactional. It had an average year for them. They'll be probably stronger in '24. So there'll be some balance in there. But as far as their gross margin profiles, I think it will be more historical.

[Operator]

Next question will be from Davis Baynton at BMO Capital Markets.

[Davis Baynton, analyst]

This is David on for Devin Dodge. Regarding the Samuel acquisition and expanding into the Northeast, how quickly can Russel add scale to that region?

[Martin Juravsky, executive]

It's -- some of it's out of our control because it's a function of opportunity. And we don't want to hardwire targets or hardware timing because it would kind of force the wrong situation perhaps at the wrong time. Just to kind of, Davis, to peel back, John, I've lost track of how many acquisitions we looked at in the last number of years, probably close to 100. And so building scale is not hard. Building quality businesses that fit financially, fit culturally, fit operationally, that is hard.And so we don't have hardwired time lines or targets to say we need to be of a certain size in certain regions at various points in time. We're just going to continue to be opportunistic. And we think that is a region where we actually have some operations already in Wisconsin. The 2 locations in Pittsburgh and Buffalo for Samuel are a nice extension of that.So we actually do have a good platform, and we'll be opportunistic as new situations present themselves. And if they don't present themselves, we're not compelled to grow in that region where we've got good scale for what we have. If there's better opportunities, terrific. And if there aren't the right opportunities, we've got a good platform as it currently stands.

[Davis Baynton, analyst]

Okay. Great. I appreciate the context. And then switching gears maybe a little bit here. Are your 5 facility modernization processes are still expected to be completed in calendar year 2024?

[Martin Juravsky, executive]

Yes, mostly in 2024. A couple might spill into early 2025.

[Operator]

Next question will be from Jonathan Lamers at Laurentian Securities.

[Jonathan Lamers, analyst]

Yes. Thanks for the commentary on the share gains in Q4. So I mean just to circle up on that, the volume growth was pretty good in Q4, just over 4%. So, am I understanding correctly that, that was mainly in Canada with the transactional items in the market and also some share gains on the value-add initiatives that John discussed?

[John Reid, executive]

Yes. And I think Michael was asking specifically about steel distributors only. So if you're looking more broadly across the service centers, I think, is what you're touching on, on the share gains based on the percentages you gave there. So again, those were, again, different. That was driven by the value-added initiatives that we've done primarily that are out there. So again, 2 different segments to our business. I think you may have blended the 2 together.

[Jonathan Lamers, analyst]

Right. Okay. I was just wondering if you could give us an example of one of the value-add initiatives where you've seen success that's allowed you to gain share with your customers and -- or turn inventory faster. I think it's kind of underappreciated that you're leading the sector in terms of inventory turns for the MSCs and would just like to understand that a little better.

[John Reid, executive]

Yes. So just a couple without getting too granular on specific is we were a big beam inventory player. We put in a beam line that allowed us to go in and now we're actually taking those beams where our customers that were in fabrication, we're doing a value-added downstream that may include in a project of scale, maybe a $1 million project, $1.5 million. We're now adding a component of a couple of hundred thousand dollars of labor margin to that by being able to do that on that line within a monthly period. That would be one project.So with -- again, as Marty said, over 40 underway, probably well over 100 completed. We're seeing that in each individual location happen over and over again. So we've become now not just a commodity supplier to that to our customer, but we're a value-add extension of them where they can go out and take on more additional work if they don't have that capacity in their shop or if they do not have that process, it gives them an avenue into that. So it allows us to go out and do that with that in a lot of cases without adding to our inventory profile because we're just adding the labor component.

[Jonathan Lamers, analyst]

And Marty, on the acquisitions, you mentioned you looked at close to 100 last year. For the ones that you're saying no to, are there any common reasons why you'd be saying no? Is it valuation primarily or -- and how much higher do you find that the margins for your service centers are versus the targets that you see?

[Martin Juravsky, executive]

So the 100 was not last year, it was over a couple of years. But regardless, it was a big number that we looked at. In terms of reasons, it's all over the map to be -- some of it is valuation. And within that 100, there were some deals that came back to market multiple times, and we had issues, not just the first time we had issues, the second time or in some cases, the third time when they would come to market. Sometimes it is valuations. Sometimes it is a cultural fit.There are some things that are nonnegotiable in terms of things like safety. And obviously, there are situations where you can bridge from legacy safety cultures to what our standards are and sometimes you can't. Sometimes there's entrepreneurs who have run really successful businesses want to leave. And is there a backup plan in place behind them? So there's a whole variety of reasons, and I wouldn't pinpoint to saying it's only one item. It is really a whole series of things that are important criteria to us, which is why we tend to be fairly selective.

[Jonathan Lamers, analyst]

And I apologize if I missed this. On your CapEx plans for '24, which include over $100 million, do you have a breakdown for how much of that would be for the Samuel's integration, how much would be for value-add and how much is maintenance CapEx?

[Martin Juravsky, executive]

Yes. So the maintenance CapEx component of that is probably $30 million, $35 million, plus or minus. So the balance of it is discretionary. And so that goes -- kind of go back to the core pieces of the value-added projects, the things that John was just talking about as examples as well as those facility modernizations. So about 2/3 of that is discretionary.

[Jonathan Lamers, analyst]

And how are you thinking about the dividend and the NCIB here given the share price has recovered somewhat, but the stock still looks compelling on valuation now that you're flush with cash and will be busy with integration on Samuels as far as large acquisitions go?

[Martin Juravsky, executive]

Yes. So in terms of dividends, we'll -- we made the dividend increase from $0.38 per share per quarter in May to $0.40 per share per quarter, and we'll continue to revisit on a periodic basis. I can't tell you exactly what the period is going to be. But it's something that we'll probably revisit more actively on a go-forward basis than had been done over the last number of years. It's hard to completely forecast what that would look like, but it will probably be a periodic reassessment.On the NCIB, it's opportunistic. And in some ways, it's the sort of same circumstances is M&A. M&A is opportunistic. We're not interested in doing everything that is available out there from an M&A landscape. By the same token, there's times we will be more active or less active on the NCIB. There are certain price points we'll be more aggressive than others. And so we've tried to articulate as an opportunistic approach to the NCIB, and I think that's going to just continue to be the frame of reference.

[Operator]

Next question will be from Michael Tupholme at TD Securities.

[Michael Tupholme, analyst]

Maybe just to pick up on all those last questions. Just regarding the dividend, Marty, you mentioned you'll -- you expect to continue to reassess periodically. Is there a payout ratio you have in mind that we should be thinking about as we try to think about how the dividend may evolve over time?

[Martin Juravsky, executive]

The short answer is no. It's not viewed that way that we've got a hardwired dividend ratio that we're going to do a recalibration on every quarter, every year. It's looking at things more holistic than that for a whole variety of criteria. So I wouldn't want to sit here and say we've got a hardwired formula that you can plug into a model. It's not the way we've looked at it recently, and it's probably not the way we're going to look at it on a go-forward basis.

[Michael Tupholme, analyst]

Okay. That makes sense. As far as the quarterly performance for service centers, we did see gross margins improve quarter-over-quarter in the fourth quarter. I know you commented earlier about how we should think about sort of gross margin improvement potential over time given the value-added initiatives. But in the short term here, just given the way steel prices have moved, we saw them move up through the early part of this year, and then, I guess, recently, there's been a little bit of a check back.Can you just help us think about Q1 service center gross margins versus Q4, just given kind of the movements we saw in Q4 in steel prices and kind of what we've seen so far this year, just because, again, it's sort of rising and then now falling a little bit? So just trying to understand where that leaves us for Q1 versus Q4 service centers gross margins.

[Martin Juravsky, executive]

Sure. Well, your last observation is spot on. They do move around. That is for sure. And I think overall, it kind of underpins another point, which is there is still a cyclicality attached to this business, and we pay attention to that a lot. We don't predict it. We don't control it, but we recognize that it's there and we try and adapt to it.So part of the dynamic attached to margins is also just the lag effect between prices changing on product and incoming inventory that may be committed to a couple of months in advance of actually product going out the door and that whole lag effect of how it flows through, which is why on a very short-term basis, usually measured by a couple of months, you often do see times where top line might be going up, bottom line -- cost of goods sold might be coming down or vice versa, and that translates into dynamics with margins.Q4 was a little bit of that because there was a point where we actually saw pricing coming down, actually Q3 and Q4, pricing coming down, but cost of goods sold was coming down more on a lag effect basis. So they weren't working in symmetry. What that ultimately meant for us is that when you break down Q4 into its components, margin picked up in December versus what they were in October or November, and that kind of the level that's maintained itself into January. So the January level is kind of similar to December and December was a little bit higher than it was in November.So where we are right now, all of the things being equal, the January level is probably sustainable, which is a little bit higher than the -- than it was coming into Q4. But there's obviously, as you point out, some moving pieces in terms of steel prices. So it's hard to be too predictive, but at the end of the day, it was a better story coming out of Q4 than going into Q4 from a margin perspective.

[Michael Tupholme, analyst]

Okay. That's helpful. Can you provide an update on where things stand in terms of the approvals for the Samuel service centers acquisition and what key items are still required to achieve before closing?

[Martin Juravsky, executive]

Yes. So there's a whole variety of things that are taking place in terms of planning and readiness and all that. And we're spending an awful lot of time. There's a lot of IT elements attached to coordination. There's a lot of people elements attached to readiness, a lot of back-office elements attached to that. There's ongoing dialogue with the regulators. So it's really a multipronged approach, and there's a lot of resources that are going into it. It's a carve-out from an existing company. So there's complexity attached to that by definition. There's locations in various locales. So there's a lot of components attached to kind of going from concept, going from an agreement to closing, which is why it takes a little bit of time. So there's a whole variety of those things taking place in parallel right now.

[Michael Tupholme, analyst]

Okay. But Q2 is the expectation for closing?

[Martin Juravsky, executive]

Correct.

[Michael Tupholme, analyst]

And you were asked about CapEx earlier, the $100 million, and gave the breakdown between maintenance versus discretionary. Does the $100 million include what you intend to spend, if anything, in the context of the Samuel acquisition and whatever you plan to do once you do close and in terms of any value-added-related initiatives?

[Martin Juravsky, executive]

Yes. Well, let's put it this way. The $100 million, what I said is greater than $100 million. So whatever needs to be done in terms of Samuels that, by definition, would be inclusive in it, but we don't know enough right now to know exactly what we would want to do. And to be more specific, too, from a timing perspective, there's a lead time associated with doing any kind of investment. So we wanted to do something within our existing operations today.There's a lead time to the planning. There's a lead time associated with an approval process. There's a lead time associated with the equipment. So for all intents and purposes, it wouldn't be a big dial mover element in 2024 anyways.

[Michael Tupholme, analyst]

Okay. Makes sense. And then just regarding the energy field stores, I don't think there's been a lot of discussion on this call about that segment. But the outlook commentary you provided in the release sounds fairly constructive as it relates to that segment. Through the first part of this year, at least, we have seen -- look like North American rig counts are down versus last year. I'm not sure they've changed much sort of sequentially, but just on a year-over-year basis, they're down a fair bit, maybe more so in the U.S. than in Canada.We've obviously seen some natural gas price weakness of late. I'm just wondering how you're thinking about that business for sort of full year 2024 versus last year. Is this a business you think you will see growth in, in 2024? And if so, where is that coming from? Or how you're thinking about it would be helpful to better understand.

[John Reid, executive]

For the broader industry, I think it's fairly flat. We'll see maybe a little bit of a bump in Canada with some of the large projects that are starting to come to fruition. But we're pretty bullish on that. We're taking share on both sides of the border right now. And that's where we saw our growth last year, and so we'll continue to see that. And we think we'll continue to grow share both in Canada and the U.S.

[Operator]

Next question will be from Ian Gillies at Stifel.

[Ian Gillies, analyst]

Is -- relative to 3 months ago, when you do the bottom-up analysis through your various operating jurisdictions, is sentiment better or worse from your customers and I guess, your operators?

[John Reid, executive]

When we're looking at -- specifically at one division or are you talking about each one...

[Ian Gillies, analyst]

Yes. Sorry. Sorry, I apologize. And that's specifically for metal service centers.

[John Reid, executive]

Okay. Yes, metal service centers, it's interesting. Demand is pretty flat overall. What you've seen is the interest rate sensitive projects that are out there or maybe industries that are out there, they've obviously pulled back a little bit based on what's going on with the increased interest rates. There is some anticipation that they'll take back off as interest rates start to roll over and come down. But overall, we've seen a very steady demand.Our tonnage is very steady. We're seeing price fluctuations up and down, so there's some sensitivity there. But we're in a very, very healthy pace right now for our industry. When you look back historically, again, third best year ever, and we're holding that type of rate right now. So we're pretty bullish on our service centers.

[Ian Gillies, analyst]

And John, I suppose a follow-on from that. And I know it's incredibly hard to tell, but do you get the sense yet of whether you're seeing any demand pickup from whether it be the IIJA, the IRA or any of these various government bills? Or do you think that ends up being a net tailwind as we move through the middle and maybe back half of this year and into 2025?

[John Reid, executive]

Yes, I think we've seen a little bit and it's -- but it's not the huge tailwind that maybe the media had portrayed it as early on. But I do think we'll see that in midyear and late year with it being an election year, it will get pretty interesting, especially with the U.S. election. So that could get delayed a little bit, but we are starting to see things move forward. It's out of the ground now. And so we're starting to see things leave the planning process and go to the procurement process for some of those projects.

[Ian Gillies, analyst]

Okay. And on the pricing side, I mean, we tend to spend a lot of time focusing on HRC and plate, but there's a pretty large chunkier book that isn't really either of those 2 products. What's -- are those -- are the prices in those other products that are harder to find, are they a bit stickier? Are they holding in a bit better? Like how should we be thinking about those?

[John Reid, executive]

Yes. And so -- and we do spend a lot of time focusing on HRC and plate. You're exactly right. Some products, again, that's the base substrate metal for them. So if it's tubing pipe, those things are coming from a substrate, so they're driven by it. The others are more sticky and less volatile. So if you look at your traditional bar stocks, your beams, angles, channels, valves are a highly engineered product, if you shift over to energy. So in our energy field stores, flanges, fittings. So those are highly engineered, so they just don't move as much. There's not as much raw material to move there or commodity item to move.No, you're exactly right. The others are more sticky. The nonferrous, we will see movement in based on the indexes that are out there and the input coming in. So it has more volatility as well as we continue to grow that initiative and get larger in nonferrous, we'll probably start to talk more of that pricing as well.

[Ian Gillies, analyst]

Okay. That's helpful. And as you think about the facility modernization products -- projects that are ongoing, I presume you've embedded those in growth capital. And so can you maybe talk a little bit how you're going to generate returns just from upgrading facilities and the like?

[John Reid, executive]

So there's 2 real avenues that are there when we're upgrading facilities. One is just modernization efficiencies. And so if we've got -- some of our facilities are older, a little bit antiquated. But as we come in, we'll come in with better equipment and well as expanded facilities that allow us to, again, improve efficiencies through our warehouses and handling.And then the additional space also allows us to grow in the value-add space to add equipment plus now we can take on additional share sales that are out there. So if we're growing, we may be running that capacity at a facility now by doing this, it will allow us to expand further.

[Operator]

Next question will be from Maxim Sytchev at National Bank Financial.

[Maxim Sytchev, analyst]

Most questions have been asked already, but I just wanted to try maybe to ask a sort of a different tack in terms of visibility because one of the things we've heard is that as steel pricing was kind of rising throughout Q1, there was a bit of a slowdown in terms of the pace of whether inquiries or maybe less kind of inventory restocking. I'm just curious to see what you guys are seeing on the ground and whether that's a bit different in your universe. Yes. Any comments would be greatly appreciated.

[John Reid, executive]

Yes. So we did see steel pricing going up, you're right, into Q1, and we've seen it roll over now, and you can see some of the indexes are starting to roll over. Inventories for our industry as far as the service centers were at a very good level. And what I mean by that is that they weren't too high, weren't too low, so they're turning at a very normalized level. So you're not going to see pricing pressure from one side or the other from it being either too low or too high.The mills are running at a capacity level around that 75%, 74%, which is very healthy for the mills. So again, on all those levels, I think we're in pretty good shape going forward. We are seeing that steady demand out there. So again, this is a steady state that we're in right now. We'll just see pricing fluctuations based on raw material inputs from scrap. And then any up or down will have an effect. But right now, it looks to be a very steady state for us in the first quarter.

[Maxim Sytchev, analyst]

Okay. That's super helpful. And Marty, just because you made a comment around sometimes cost of goods sold, obviously, moving in the opposite direction to -- in the short term in terms of the revenue. But in terms of what you have in the inventory and what's going to be flowing through the COGS, do you mind maybe commenting a little bit on directionality, how should we think about this?

[Martin Juravsky, executive]

Yes. Most of that -- if steel prices didn't move, and they will, but if they didn't move for the next couple of months, we've probably seen that lag effect already factored in to our cost of goods sold. So some of that dynamic that I was talking about before, where prices were moving around, prices were coming down, but our cost of goods sold were still going up a little bit and the reverse has happened, it's kind of all other things being equal, that lag effect has worked itself through our inventories and into our cost of goods sold now. Does that get to your question, Max?

[Maxim Sytchev, analyst]

Yes, absolutely. Yes. So I guess like a bit of stability, assuming things going to stay as they are, which...

[Martin Juravsky, executive]

Maybe they won't.

[Maxim Sytchev, analyst]

Okay. Okay. Understood. And maybe just last one. I mean like obviously it's an election year in the U.S. I guess any chance of Section 232 being potentially removed, I guess, highly unlikely from your perspective?

[John Reid, executive]

Yes. I think both sides need 232 right now with Pittsburgh being -- Pennsylvania, I'm sorry, being a swing state, I think they're both very keen to stay with 232 and to keep it as is and not make any changes there because that state may swing the election. And so it's -- both are pandering to the unions that are out there in those states, both sides of the party. So I just don't see any changes at all to 232 going into an election.

[Operator]

[Operator Instructions] And your next question will be from Frederic Bastien at Raymond James.

[Frederic Bastien, analyst]

Lots of interest in Russel Metals. That's awesome. John, I recall you flagging the Inflation Reduction Act and some investments in renewable power as a really positive source of growth like 12, 15 months ago. Is this sort of a market you're really excited about? Obviously, demand seems to be broad -- strong and broad across geographies and things like that. But any specific markets that you're really excited about?

[John Reid, executive]

So solar is something we're really excited about. Believe it or not, a lot of solar goes on in Alberta. That's -- again, we're very excited about solar. We're participating on both sides of the border there and also wind. And so as we continue to see the wind projects go forward, that money is now available. That was kind of -- they were kind of running out well late last year. Those funds are now available to be reused again from the government acts that you mentioned. So that will start to ramp back up as well. And again, good users of our product in that, and so we participate again on both sides of the border there. So we think both of those are good.Obviously, the EV plants are continuing to grow. And we're seeing that transition start to happen. We don't typically participate in automotive. But on the EV side, we do have some participation to some of our tube laser and value-added work that we're doing for various people.

[Frederic Bastien, analyst]

Okay. You've been at this for a while. Is this -- I don't know, is this the best market, the best opportunities you have ever seen in your time in the steel sector? It seems like we're going to be in for a couple of good years of strong demand, strong prices?

[John Reid, executive]

I guess it's a nice way of telling me I'm old Fred, since I've been at it for a while, but...

[Frederic Bastien, analyst]

We've known each other a while, and [indiscernible] in the same bucket.

[John Reid, executive]

It's definitely been a very robust market compared to anything I've seen and really the sustainability of that over 3 years, there's been some peaks and valleys in that, but everything is very high. So the demand has been very good and also the price of steel has been very good. So it appears that the pricing has reset that the new floor on steel, when you look at where steel will come to when things slow down, will be interesting to see. But it looks like the cost of those things that went in had reset the bar for our industry. And so it's been a really nice ride for the last 3 years, and we don't see anything really pulling back on that for the next -- I guess, the next 2 or 3 years. As far as we can see out, we just don't see anything to change that right now.

[Frederic Bastien, analyst]

So my next question is going to be what's keeping you up at night? It doesn't seem like you're -- it seems like you're sleeping well. But what are the concerns that you're having right now [indiscernible] potentially with your people and the strategy going forward?

[John Reid, executive]

Yes. And again, I -- Marty touched on it in his opening comments, and just so proud and excited for our team that they won the MSCI safety culture award. They continue to set records every year with our safety performance, again, all-time low again this past year on our LTIs. But that's really what keeps me up at night is our -- we've got 3,500 Russel family members that are out there every day.This is a dangerous product. Again, we think we've put things in place to stop the risk, keep them from happening, but accidents do happen. And so the -- really the things keep me up at night are worrying about our teammates, their safety, making sure they go home safely to their families every night and that we're doing everything we can do as a company and as a Russel family to take care of them. So that would be the #1.When we look at it from a business operating side, it's really -- we've got great people. We've done a good job with succession, building depth in the organization. So that's what I think separates us and makes us really strong. So that definitely does not keep me up. It's what do we see in the economy and then what's going to come in as a black swan event. We've got a balance sheet that's very flexible, that allows us to really take advantage of opportunities or manage markets as they turn down. But is there another COVID around the corner or our financial crisis, those things are out of our control, but they do concern you at night.

[Operator]

And at this time, Mr. Juravsky, we have no further questions. Please proceed.

[Martin Juravsky, executive]

Great. Thank you, operator. I appreciate everybody for joining our call today. 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 balance of the quarter. Take care, everyone.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.