Good morning, ladies and gentlemen, and welcome to the Russel Metals, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, November 9th, 2023. I would now like to turn the conference over to Marty Juravsky, Executive Vice President and Chief Financial Officer. Please go ahead.

Great. Thank you, operator. Good morning, everyone. I’ll start off and John Reid is also on the call. So, as I finish off, we’ll both be available for the questions. So, I plan on providing an overview of the Q3 2023 results. And if you want to follow along, I’ll be using the PowerPoint slides that are on our website, you can just go into the Investor Relations section. If you go to Page 3, you can read our cautionary statement on forward-looking information. So let me begin with just a little bit of a perspective on the quarter. I think that Q3 was a nice example of how we have a lot of inherent flexibility that is built into our business model. And our team really did a great job in navigating through volatile steel market conditions. One of the things that John and I have said multiple times over the past few years, is that, the change that we’ve made to our portfolio, the low should be higher, the high should be higher, and we’ve reduced the cash flow volatility through the cycle. And I think this quarter illustrated that very well, as it was one of our best quarters from a free cash flow perspective. We had solid profitability, plus the counter cyclicality of our business provided for cash generation from working capital. In addition, we realized proceeds in selling our TriMark equity interest. And at the same time, we returned about $45 million to our shareholders through a combination of both dividends and share buybacks. So let’s turn to market conditions to start off on Page 5. Steel prices have moved around quite a bit over the past few months, with hot rolled sheet prices coming down from around $1,200 per ton in April to a level that was below $700 in late September, in part driven by the uncertainty related to the UAW strike. More recently, though, we have seen a bit of a pickup, there’s been a lengthening of mill lead times and an increase in prices and they’re back over $900 per ton. On the plate side, it hasn’t been as volatile. It was over $1,500 a ton through September, and it’s now closer to $1,400 a ton, as producers have been proactive in managing the marketplace. Overall, it seems like producers have been reasonably disciplined in managing supply which is constructive for our part of the supply chain. Somewhat related, you can see from the charts that are on the right-hand side of the page related to service center inventories that the industry remains at relatively modest levels, at the same time, that demand is steady. If we go to Page 6, there’s a snapshot of our Q3 results. And if we look across the various charts starting on the top left, revenues were $1.1 billion versus $1.2 billion in Q2. The decline was due to both price declines as well as summer seasonal dynamics that impacted volumes in the service center segment. EBITDA was $96 million versus $131 million in Q2, due mostly due to margin compression of service centers in steel distributors. That being said, our overall gross margin of 9% was down from Q2, but remained at a pretty healthy level compared to pre-COVID frames for reference, 2018-2019 type timeframes. From a bottom line perspective, EPS was $0.99 per share and our annualized return on invested capital was 23%. Even without the non-recurring gain from the sale of our TriMark joint venture, our return on invested capital was an annualized 20%. As we’ve always discussed, we have a strong internal focus on return on capital and that has led to industry-leading results over an extended period of time. Lastly, in terms of capital structure, in the bottom right-hand chart, we have a net cash position of $272 million versus net debt of almost $500 million at the end of 2019. This approximately $775 million increase in free cash flow, give us a lot of financial flexibility going forward. We’re disciplined in what we do with shareholders’ capital, which is why we’ll continue to be active in looking at reinvestment opportunities, both internally and externally, as well as returning capital to shareholders by both dividends and share buybacks. Going to our more detailed financial results on Page 7. From an income statement perspective, I’ve covered some of the high level items on the previous page. But a few other items of note, revenues of $1.1 billion, which I mentioned before, down 7% from Q2, price realizations were down in the service center business and we had our normal seasonal decline in volumes that we get in Q3s in a typical year. On the flip side, we had a sequential increase in revenues from our energy field store business, as that activity continues to do well. On margins, all segments were down and I’ll discuss these in more detail in a minute. Interest expense came down to $2 million, as the increase of interest rates and an increase of our cash balance, is allowing us to generate interest income on our cash reserves. As I mentioned earlier, overall, we had earnings per share of $0.99 per share and $61 million in total. Our Q3 results were impacted by a few non-operating items, TriMark, on the sale we picked up a gain. But overall, it was $12 million, a combination of the $10 million gain, as well as $2 million worth of earnings in the period prior to the sale closing. Stock-based comp had a $1 million negative impact versus a $2 million impact in Q2, and we had a $5 million increase in our inventory NRV reserves in the quarter. Now, to put this $5 million NRV adjustment in context, many of you are aware that in previous years, we had some very sizable NRV hits. We’ve always had a very conservative bias in managing inventories by not taking speculative inventory positions. However, more recently, the sale of our OCTG/line pipe business and other capital control measures, have substantially reduced the NRV risks that we have experienced in the past. If we go further down the page from a cash flow perspective in Q3, we generated $58 million from working capital, primarily driven by a reduction in inventory. And as previously discussed, we picked up $60 million on the sale of our TriMark joint venture interest, as it closed in early September. CapEx of $50 million was similar to Q2, as we continue executing on our discretionary projects. Our annual CapEx should pick up to around $75 million per year on average over a few years. From a balance sheet perspective, we’re in a net cash position with net cash of $272 million. This is $118 million pickup in the past quarter. Our liquidity is almost $1 billion and we have the strongest balance sheet that we’ve ever experienced. To put the balance sheet in perspective, we manage the company with a very conservative investment-grade credit type bias. And I think we’ve demonstrated this approach through market volatility over the past couple of years. In the quarter, we picked up about 500,000 shares under our NCIB, which brings the total to about 2.8 million shares since we put the NCIB in place in August of 2022. Our cumulative average price is $33.42. Our book value moved up again and is now over $27 per share, notwithstanding the share buybacks that we did in the quarter. And lastly, we have declared a quarterly dividend of $0.40 per share. On Page 8, I’ve included an update of the TriMark transaction that we summarized at the end of last quarter. So the staged monetization is now complete, with the final piece being the $60 million sale. We have repatriated all of our capital back that was tied up in OCTG/line pipe, which when aggregated, totaled approximately $375 million. This approach provided for a very profitable exits, including this last tranche that realized the $10 million gain, virtually all of which were shielded from tax. More importantly, our goal with the portfolio changes was to reduce the volatility of earnings, lower the risk profile and enhance our margins and returns over a cycle. Also, we now have a tremendous amount of financial flexibility, as a result of that repatriation in capital to pursue a range of alternatives, some of which we have already done, some of which are on the come. On Page 9, you can see our EBITDA variance analysis between the last quarter and this quarter. In looking at the service centers, the volumes were down from Q2, but the biggest factor in Q3 was the decline in margins that impacted results by $29 million. In terms of operating costs, that was a positive variance, as operating costs came down by $6 million, as our variable compensation models tied directly to financial performance, and creates a direct toggle up and down with our financial results. Energy Field stores were mostly flat quarter-over-quarter, with steel distributors down $8 million due to lower steel prices and margins. In the other category, there was an $8 million favorable variance, which included the pickup of our TriMark gain, a small pickup in our Thunder Bay terminal operation and lower mark-to-mark it on our stock-based compensation expense. We go to Page 10, we have our segmented P&L information. For service centers, revenues were down and margins came off as did EBIT. I’ll go through some more detail metrics for the service centers on the next page in a minute, but our overall revenues and margins per ton remain very healthy by historical comparisons. More importantly, the steel market seems to have found a floor and some price increases have occurred in the past few weeks. In Energy Field stores, we are continuing to see solid performance, Q3 2023 revenues were up versus Q2 and were up versus Q3 of last year. Margins did come off a bit as one of our divisions moved some volume for project work that was at below our normal margins. Our steel distributors revenues, margins and profitability were down with the adjustment in steel prices. If we go to Page 11, we are having a deeper dive on some of the metrics for our metal service center business. The top right graph is the past number of years per tons shipped. And the Q3 volumes were down from Q2, because of the normal seasonal summer slowdown, but the volumes were very similar to Q3 of 2022. Demand continues to be solid going into Q4. But we typically have a reduction of operating days in Q4, which results in lower volumes in Q4 versus Q3. And you can see that trend that has occurred over the past years. It’s typically down about 7% to 10% Q4 versus Q3, because of the lost operating days. On the bottom left graph, we have revenue and cost of goods sold per ton. On revenue per ton, our price realizations decreased by $131 per ton, versus only a $37 per ton decrease in cost of goods sold, which resulted in a $94 per ton drop in margin. As a reminder, there’s usually a three to four months lag between steel price changes, and when that flows through our inventories and into our cost of goods sold. So even though our cost of goods sold came down in Q3, that lag effect should cause our cost of goods sold to come down further in Q4, all other things being equal. For Q3, our gross margin was $442 per ton, which remains higher than our historical average of closer to $300 per ton. And as I said earlier, we’ve repeated over the time, we expect to realize higher average margins and lower volatility over the cycle as compared to pre-COVID margins due to our ongoing investment initiatives. On page 12, we have illustrated our inventory turns. This chart shows the inventory turns by quarter for each segment with Energy in red, service centers in green and steel distributors in yellow. In addition, to the black line is the average for the entire company. Overall, our inventory turns improved from 3.9 to 4.0 as we remain focused on tight inventory controls to reduce risk during periods of market volatility. By sector, service centers were 4.6 turns, which again is industry-leading versus our publicly-traded peers. Our Energy Field stores improved from 2.6 to 3.3. Well, steel distributors also improved from 2.9 to 3.2 in the quarter. On Page 13, we have the impact of inventory turns on inventory dollars. Total inventory declined by $65 million in the quarter compared to the end of Q2. And as mentioned earlier, the counter cyclical nature of our cash flows provides for a drawdown in inventory when prices come off. I do expect to see some further declines into Q4 given the lag effect that I mentioned earlier between prices coming in and how that flows into our inventories, and then ultimately, cost of goods sold. If we go to Page 14, you can see the overall impact on capital utilization and returns. Our capital deployed came down to just below $1.4 billion because of our working capital reduction. More importantly, our returns continue to be industry-leading. Our last 12-month returns stands at 26%. If we go to Page 15, I want to update our capital structure. The continuation of our strong free cash flow and disciplined approach to capital utilization gives us a lot of financial flexibility. On the left table, you can see that our cash position went up to $569 million, which was $119 million increase over June 30th, and a $365 million increase since this time last year. We are now realizing return on our cash balance that substantially offsets the interest cost on our outstanding notes. Our equity base is almost $1.7 billion. And if you look at the chart on the right, you can see the continuation of our growth in our equity base, our book value per share is over $27 per share, which is a $0.90 increase since June 30th. And a $2.61 per share increase since this time last year. If we go to Page 16, we have an update on our capital allocation priorities going forward. Given our strong balance sheet, we have a multipronged approach to capital allocation. For investment opportunities, we seek average returns over the cycle greater than 15%. And as some of those charts that we’ve talked about earlier, have demonstrated we have more than delivered on that target. The ongoing opportunities are threefold. One, we’re continuing to identify and pursue new value-added projects. In total, we have proximately 30 equipment projects on the go throughout North America. It is extremely active right now and we expect to see an impact of those items tail into this year and into 2024, and frankly, beyond. Facility modernizations, we have five modernizations underway, some of which we’ve talked about in the past, and they are tracking for completion at various times in 2024. When combined with other projects on the go, we have a robust series of initiatives that should grow our volumes, increase operating efficiencies, generate attractive returns, and in many cases, improve health and safety conditions. In terms of acquisitions, we’ve seen a lot of deal flow over the past while and we’re actively looking at opportunities. In Q3, we closed the acquisition of Alliance Supply, which is a small tuck-in to our Canadian Energy Field store business. In addition, we’re pursuing a number of opportunities that could fit within our metal service center business. In terms of returning capital to the shareholders, as we’ve talked about in the past, we’ve adopted a flexible approach for dividends. In May, we increased our dividends to $0.40 per share, and we’ll continue to reevaluate the appropriate level, for purposes of this quarter, we have, again, done a $0.40 per share dividend. For the NCIB, we acquired 529,000 shares last quarter. And since August of 2022, we have acquired 2.8 million shares at an average cost of $33.42. And we expect to continue to utilize the NCIB on an opportunistic basis. Overall, given our capital structure, we have the financial flexibility to pursue a variety of alternatives and initiatives, including share buybacks, dividends, acquisitions and internal reinvestments. In closing, on behalf of John and other members of the management team, I’d like to express our appreciation to everyone within the Russel family. We couldn’t be happier with how Russel has navigated its way through the markets over the past few years. And we really look forward to some exciting and new opportunities ahead. Thanks to everyone across the company for your contributions. Operator that concludes my introductory remarks. And if you would now like to open the line for questions, that would be great.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from James McGarragle from RBC Capital Markets. Please go ahead.

Hey, good morning, Marty. And thanks for taking my question.

Hey, James.

Hey. So, on the M&A front, you’ve completed some tucked-in acquisitions in successive quarters. You said you’re evaluating some deals and your US peers also made some similar commentary during reporting and the pipeline was very strong. So can you just talk a little bit about what you’re seeing in terms of target multiples in the market, and kind of how that’s evolved during the last year?

It’s hard to make reference for the market as a whole, because there’s not that many data points, it’s not that liquid a market. All I can say is, how we look at it. And we look at it the same regardless of whether the market is up, down, sideways, which is, we’re trying to generate an appropriate return on capital, and we’re very public of our target return on capital over cycle is over 15%. So you can reverse engineer into multiples for that. Sometimes vendors meet those criterias and sometimes they don’t. One of the fascinating things, I think, for John and myself over the last little while is, when we look back to 2022, for example, there was a lot of opportunities that we had looked at, and we didn’t complete a single acquisition in 2022. And it wasn’t for lack of looking, it was – we couldn’t find the right opportunities that made either economic sense, commercial sense or in some cases, they just weren’t commercial – cultural fits. There have been a lot of deals that have come back to market a second time, a third time. And, sometimes it’s not the first kick of the can that allows vendors and buyers to find an alignment. So for us, we stick to our criteria, regardless of what the macro economy is and regardless of what vendor expectations are, we don’t chase stuff for the sake of chasing stuff. And so sometimes things come back to us add value that worked for us.

And as a follow-up to that, clearly, you have lots of cash available. Are you limited in any way from a management perspective in terms of evaluating deals and potentially integrating acquisitions versus the amount of dry powder that you have available on the balance sheet?

The short answer is no. Well, I mean, we’re in a really good shape from a capital structure perspective to look at a variety of things. We are sensitive to making sure that things that we look at can be properly brought on from a systems, people cultural fit perspective. So we’re very conscious of that. But we don’t see any significant limitations for the things that we’re looking at right now. We’re set up very well, if they make sense.

And just one more follow-up for me before I turn it over on infrastructure spending in near shoring. I know the US steel producers were highlighting during reporting that they expect to benefit from infrastructure spending starting early in 2024. I know you have a little bit more tilt towards Canada, but do you see similar line of sight as to when we should start seeing an uptick in volumes at your company related to some big infrastructure projects in Canada and the US?

Hey, James this is John here. Good question. And again, we’re about a 60:40 split in Canada and US. So we’re seeing benefits on both sides. I think early in 2024, there’s some anticipated infrastructure spending, especially when you look at clean energy, solar, wind, will be heavy users of steel, along with other infrastructure spends that are being government funded. When you shift to Canada, we’re seeing some of that in energy as well. And there’s some large energy projects that we’re looking at right now that will participate in through our Energy Field stores, as well as our Western Canadian service centers. So we see a really nice opportunity going into 2024 for that spin to impact our business in a positive way.

Thank you very much.

Great. Thanks, James.

Thank you. The next question comes from Devin Dodge from BMO Capital Markets. Please go ahead.

All right, thanks. Good morning, guys.

Hey, Devin.

Within the service center segment, I believe activity levels in BC and Quebec have been a bit slower than maybe some other regions in your network. Just can you speak to some of the drivers behind that? And if you see any signs that these markets there starting to improve?

Thanks, Devin. This is John. Yeah, in Quebec, again, when you look through Q3, keep in mind, you have a construction holiday. So again, they take two weeks off. And so that’s some of the impact that we saw on demand. During that period, again, we’ve seen import put some pressure in that market. But overall, we think that’s improving nicely. We think the construction backlogs are very stable. And so, we’re anticipating a good Q4 and really going into 2024 being very strong for Quebec. When you move out to BC, it’s a different market out there. We’ve seen, again, a lot of changes to the market, as far as our carbon-based business, our non-ferrous business has been very strong out there. But again, there has been some manufacturing slips, the pulp and paper industry has slowed down or actually idled or closed facilities. And so we’ve seen some market degradation out there. But overall, we’re pleased with where we are in BC, as far as end market perspective on demand, and our model still flexible, we can adjust to what is very positive. We just don’t see that as a big growth market for us in the near future.

Okay, that makes sense. Thanks, John. Okay. And then I was going to ask about M&A. Obviously, lots of dry powder, based on your earlier comments, optimism around putting some of that capital to work. So within Russel, is there a desire or at least an openness to expand your Energy Field store business in a more meaningful way? And, if so, is there a preference between Canada and the US?

We’ll look at it, again, as on a business-by-business perspective, as Marty said. Again, we’re very comfortable with our Energy Field stores, it’s really a distribution model that, again, we exited our OCTG/line pipe is a different model. And just frankly, underperformed for years on our capital, and our return on capital. But when we look at the field stores, we think there’s a great opportunity, both in Canada and the US to continue to grow. But we’ll be very strategic about how we do that. Being able to use the existing networks that we have to share our employees to make sure that we’re hitting the return metrics that we want, is critical for us. The other – there’s really not a bias one way or another. We just look at a deal-by-deal perspective to make sure they do the right things for our metrics for our company and our shareholders.

Okay. Thanks, John. I’ll turn it over.

Great. Thanks, Devin.

Thank you. The next question comes from Michael Doumet from Scotiabank. Please go ahead.

Hey. Good morning, guys.

Hey, Michael.

Hey. So, on the metal service centers, you highlighted the impact of a higher cost inventories on the segment margins. Given the 80-day age of inventory, the recent price action for steel, is that mostly behind you? And, Marty, I might have missed this, but just how are you thinking about gross margin percentage Q4 dollar margin for Q4?

Yeah. It’s an interesting inflection point, because we’re in the middle of two things moving in two different directions. So, our inbound inventories have been coming down, and will continue to come down. At the same time, we are starting to see some price increases on new orders and product going out the door. So, Q4, it’s a longwinded way to say, there’s a bunch of moving pieces happening, all things being equal. Cost of goods sold would have come down in Q4, just because of that lag effect that we’re still seeing with lower cost inventory coming in versus our average cost of inventory that we have in place. The pickup that we’re starting to see in prices, that’s we’re probably going to see a little bit of that starting to take place on the top line. But that’s probably more of a Q1 phenomenon before we start to see that show up in margins.

Got it, okay. So, all else equal, I’m assuming steel prices somewhere around the time, it feels like Q1 margins should be presumably a little bit better than Q4. Is that the right way to think about it?

You’re spot on. That’s exactly spot on.

Perfect, okay. And then $440 of gross profit per ton this quarter. Just wondering how you think about that versus what you’ll be earning on average going forward? And I know you talked about the historical average but you’re also talking about value-add. So any way you can contextualize how much gross profit is coming from value-add today? Where that can go in the next couple of years and maybe where that was before?

Michael, as we bring these products on, and again, the value-add services as they come on, we think so far we picked up about two points of gross margin over a cycle. Again, steel prices will move up and down, but as we continue to do these very good performing at or above expectations and we’ve got several of these projects will come on in Q4 we’ll continue throughout 2024 and beyond with these products. So we think it will continue to make an impact on that gross margin. It impacts gross margins come on, they move up very quickly [inaudible] profitability within the quarter that they come on. So, we see that continuing to expand that out. Again, we’ve said before, we don’t – we think we’re less than halfway there on this overall project and to spend for the value-added. So, we’re very optimistic that that will continue to spread our gross margin, ultimately our bottom line margin over time. So, I would anticipate that continuing to grow in 2024 and 2025 as these projects come into fruition.

Thanks, John. And maybe just a third. On the share repurchase. I might be reading into this too much, but I guess that’s probably my job. You split the level of repurchases this quarter versus last. So does this quarter’s level of repurchasing that reflect maybe more of a steady state of what you’d like to do? Again, understanding that it is opportunistic or does the lower amount maybe reflect potentially better uses of capital elsewhere?

It’s a good question. And I wouldn’t characterize we have a steady state frame of reference of, there’s not a cadence that we’re going to be hardwired to. It really is a flexible, adaptable, opportunistic approach to it. So, I mean, to be blunt, it’s going to be price-dependent, and we will be more aggressive at certain price points than other price points.

Makes – perfect. Thank you, guys.

Okay. Thanks, Michael.

Thank you. The next question comes from Jonathan Lamers at Laurentian Bank. Please go ahead.

Good morning.

Hey, Jonathan.

Good morning.

Was the steel price softness early in the Q4 around the UAW strike situation? Are the metal service centers or the steel distributor business taking on any additional inventory? Or have they continued to maintain discipline there?

Thanks, Jonathan. Yeah, our approach over the long haul is, again, not to be expected of inventory buyers, we stayed on returns, we may buy a little bit more, a little bit less. But overall, we’re going to try to turn our inventory faster than the industry. We think that mitigates the risk. And so our approach did not change during that timeframe. Unfortunately some of the industry approach did and we saw an overstocking, people got caught pricing dipped due to the UAW that you mentioned, and over the course that we saw the industry as a whole in a little bit of an overstock position, which is now rebalanced. And Marty alluded to it earlier in his comments, and you can see the charts and graphs in inventory position for the service center industry as a whole was in a very good position right now. So there’s not a lot of slack in the supply chain. But as these increases start to take effect – take hold, scrap prices continue to increase, drive up the HRC prices. And we think that will move into the market very quickly. We’re highly transactional. So we’ll move into the market very quickly with that.

Great, color. Thanks. And one follow-up, John. When you were mentioning that you think the value-add processing is added two points to the gross margin above and beyond the cycle. Just to confirm, are you talking about on the overall revenue of, say, $4.5 billion for this year or on the revenue just from the metal service center business?

Just for service centers.

Yeah, okay. Thank you. And one more. Marty, you mentioned that you’re very busy with new value-add processing projects. Does the budget you’ve spoken to of about $50 million per year for growth CapEx remain appropriate in the 2024?

It does for now, but just well technically, a budget is for an annual period. It’s a constant rolling project list that we have. And so things are getting added to it all the time. And the exact timing of which sometimes moves around depending upon order to lead time. But for planning purposes, $75 million for next year $50 million of discretionary that’s a good frame of reference.

Thanks for your comments.

Okay. Thanks, Jonathan.

Thank you. The next question comes from Maxim Sytchev from National Bank Financial. Please go ahead.

Hi. Good morning, gentlemen.

Hey, Max.

Good morning.

I’m not sure if it’s John and Marty, who want to take this. But I guess my question is a bit more sort of broad-based. I mean, historically when sort of the businesses is “good” we had in prior cycles, sort of lots of working capital investment and so forth. And we typically would be negative free cash flowing right now, but we’re actually seeing the opposite. Do you mind maybe hypothesizing a little bit in terms of why the cycle is different? And maybe sort of any thoughts on kind of sustainability of the underpinnings that sort of supporting the dynamic right now? Thanks.

It’s a good question. Again, and there’s some unique things going on right now. We freed up cash flow throughout the OCTG/line pipe departure and then what we ultimately that we’re finally selling the JV here the TriMark. So that freed up cash flow during the cycle when we typically would have been using cash flow, then we had a little bit of a downturn where steel pricing things started to come off. We throw off, again, being counter cyclical will throw off cash, but we threw off cash again on top of that. So it put us in a very favorable position in the cycle. And so yeah, I think it’s cleaned our balance sheet up, it’s eliminated a lot of the volatility that has caused us some issues in the past, and downtime so that when you look at, we took inventory provisions when we struggled and used a lot of cash in the past that was typically related to OCTG/ line pipe as Marty mentioned earlier, some of the capital discipline we put in in some of our other divisions. So those things are keeping our balance sheet in a much better position over the cycle, and really kind of smoothing out that cash flow.

Super helpful. Thank you so much. And then maybe if you have any thoughts on kind of the sustainability of the rebound we’ve seen very recently in HRC proximity, obviously, I have realized that, you know, you’re much more exposed to play. But certainly stock correlates to the former as well. Just curious kind of what you’re hearing from clients kind of on the ground if it’s possible? Thank you.

Sure. And, again, we start always with scrap pricing being the major input cost into both HRC and plate, we’re seeing scrap price in across North America and the world market improved right now. So that will drive the pricing. When you look at HRC, the recent increase as Marty mentioned, we were just under $700 a ton. If you look at the list prices that are out there, between $950 and $1,000 a ton lead times have stretched out. Typically around four weeks, now they’re five to eight, most mills are booked out through the end of the year. So we think that’s been a nice impact. Part of the interesting dynamic was in anticipation of the autoworkers’ strike that’s happened to our industry. So I think there was a surge of people getting inventory, getting prepared and making sure they had plenty of product. And the strike last in longer than was anticipated, I think caused some bottlenecks in the chain. I think that’s now worked through. And so we’re in a good place. So I think that is sustainable going forward, I think we’ll see a good Q1 of things are pointing towards a very strong Q1 for demand. On the plate side, there was an adjustment during the quarter, that Nucor led, but again, that was really to bring the list price just down to market price, there were some things that were going on in negotiating so that way, it wasn’t a big change. It’s highly anticipated throughout the markets, I think they were just cleaning up where a list price should be. The interesting things if you look at the spread historically between hot rolled coil and plate, it’s typically been between $180, $200 a ton and $300 a ton spread between the two products, we’re getting very close to that alignment. Again, there probably be a little bit higher than that’s been historically just due to some of the inflationary pressures that are sticky that will stay around and then driven up cost at the mill level. So, overall, we’re talking to our clients to your final part of the question about demand, we feel really good about demand going into Q1. When you look at the restoring that continues, you look at the infrastructure and the clean energy government initiatives on both sides of the border, we think those are going to really start to see some fruit in Q1. And so the non-res construction has great backlogs that are out there right now, the only thing we’re seeing on the backlogs that are pulling back in construction is really related to speculative building or housing that would be more inflation-sensitive – I’m sorry, interest rate-sensitive. So we’re just seeing that impact a little bit. But that’s something that we don’t participate in a lot be it housing and there be a little bit in the speculative construction and that’s pull backed some. But overall, our fabricators are booked pretty solid for 2024. And so we see that being a good year in that product as well. The end user demand is very steady and a lot of optimism around next year from our [inaudible].

Okay.

Thanks, Max. Operator –

Thank you. The next –

Go ahead.

Thank you. The next question comes from Ian Gillies at Stifel. Please go ahead.

Good morning, everyone.

Hey, Ian.

Good morning.

We’re heading into that point in the business cycle, where people tend to worry a bit more about small private businesses rather than larger enterprises. So is there any way you’re able to articulate the exposure on the metal service center side to call it medium and larger businesses versus smaller businesses? Acknowledging this is tough given the volume of transactions you do?

When you get – I’m assuming that, I’m understanding your question correctly, Ian. Again, when we look at the service centers that are medium to larger, typically balance sheets are in good position. Lines are in good position of credit. And so, they can get, again, thrive the cycle. Smaller service centers, again, when they go through these cycles, the use of capital, then except the trailing 12 months if there’s a downturn that’s constrain their lines on ABLs. So there are opportunities then for the M&A transactions that pop up. So we’ll look through those at the cycle, again, as Marty said earlier, we’ll stay to our discipline looking over a longer-term what the return is due for our shareholder base. But I think there’ll be opportunities, again, for more M&A for the medium to larger service centers that are well positioned on the balance sheets. Some have been aggressive, some have not. But again, an economic speak to where we’re setting, we feel like we’re in a really good position to do virtually anything we want to do at this time. And so those opportunities present themselves will be aggressive.

So, John, the way I was thinking about that questions was more so on the customer base, I’m just trying to maybe assess the risk to tonnage as we move forward and so on and so forth.

Yeah, I think customers, again, they’re going to evaluate it based on their size and scale. Again, you can have small customers medium, large, but based on their size and scale, they get meeting their larger service centers are going to have a deeper breadth of the inventory that’s out there, that’s available, that’s an easier transaction, the smaller service centers can’t get caught on that side of it. So, and then as we move into the value-add, then the industry changes, there’ll be more value-add, the scale and the size and the liquidity it takes to do the value-add just we want to buy and implement the machinery, the footprint it takes up, the new additional capital it takes up really gives an advantage I think to a larger service center.

Okay. And then with respect to where metal service centers is today, on percentage of sales tied to value-add products. Can you maybe give us where that would have been call it, two or three years ago? Where it is today and where you’d maybe like it to be by the end of ‘25?

You said, versus two or three years ago, and we’ve more than doubled where we are on value-added. We’ve been doing it for a while, but we’ve gotten to where we really can put these in, almost franchise these type things, we got the footprints, so we can put them in. So we’ve more than doubled in the last two to three years. By the end of ‘25, we’d like to more than double that again.

Okay. Thanks very much. That’s all for me.

Great. Thanks, Ian.

Thank you. The next question comes from Michael Tupholme from TD Securities. Please go ahead.

Thank you. Good morning.

Hey, Mike.

Good morning.

Hey. First question relates to Energy Field stores’ gross margin, just looking at the quarterly margin. So you mentioned in your prepared remarks that it was weaker a little bit in the quarter due to a specific project I think you said. I’m just wondering you can give us a little bit more detail around that situation of dynamic?

Yeah. It was basically there were some – we have three businesses, two in Canada, one in the US, and one tends to be a little bit more project-oriented. The one company tends to be more project-oriented, and a little bit lumpier and oftentimes it’s moving that volume at a little bit lower margin than we get in some of our other areas. So there was a little bit higher of that activity in this quarter with some of that project-oriented work from that one business segment, and comes in as a profitable business, it just comes in at a lower margin. And so that brought our weighted average margins down for this quarter for Energy Field stores relative to what is typical through multiple quarters.

Okay, so it sounds like really was sort of a mix issue in the quarter.

Yep. Exactly – that’s a good way to characterize it, Mike.

Okay. Do you see that dynamic carrying on into the fourth quarter?

Probably not. I mean, the rest of the business is still making the same margins. It was last quarter it just not being pulled down by that lumpy stuff. The lumpy stuff does pop up every now and again. And I don’t think there’s a ton of that coming in Q4, there’s probably a little bit coming in Q4, it was a little bit more disproportionate in Q3. Or said another way, Mike, our normalized margins should be for Energy Field stores, should be higher than they were in Q3.

Got it. Okay, that’s helpful. Thank you. John, you made a number of comments earlier about some of the movement in steel prices we’ve seen and talked a little bit about what’s been driving those movements. I guess, going forward from here, do you – what do you see happening sort of over the foreseeable future in the next little while in terms of HRC and plate? Directionally, do you think there’s further room to go on HRC? And does plate come down any further? Or is this sort of level now that these moves have occurred where you see things stabilizing?

I do think there’s further room to run on HRC. And, again, as scrap continues to go up as I mentioned earlier, but I think there’s further room to run there. I think inventories are imbalanced throughout the supply chain. I think the mills are very disciplined as to what’s coming forward, again, this is contractual bidding season for the mills. So they’ll do everything they can to continue to keep that price going forward. But the automotive demand now coming back, you’ll see that bill, we don’t participate in it, but it does use HRC. On the plate side, again, I think there’s a large corporation as we’ve had new mills come on in North America, getting ready for the wind, and the wind isn’t significant impact. So if this starts to move in 2024, the tonnage is going up 5, 10 times what it’s been in the past, so there’ll be significant plate moving into the market, also as energy continues to stay steady, that’s a big driver for the plate market. So I think for the plate end use market, there’s really good demand that’s on the horizon for 2024. And we feel like it’s got room to start to move in a lot more in lockstep with HRC. So, again, that spread that I mentioned, I think will hold more consistent than it kind of disconnected in ‘21 through early part of ‘23 think it’s come back in lines, I think we’ll see that in $200 to $400 range between HRC and the like going forward.

Okay. And any commentary around import activity, and what has been happening recently and what you see happening over the foreseeable future there?

I don’t see a lot of change over the 232, again, in this personal opinion, but I don’t see the 232 changing meaningfully, there may be some window dressing or posturing. But, again, especially moving into an election year in the US, with Pennsylvania being a swing state, I just don’t see a lot of change in the 232. So that’ll keep the limit of the imports at bay. In Canada, we’ve actually seen a little bit of an increase this year in imports, primarily driven by OCTG and line pipe. So, again, the product does not impact us any longer. But overall, we think it’s in a very healthy situation that the imports are at the right level to come in, we have the right supply. We’ve been in balance in North America, and both in Canada and the US. So we think the imports will still play an important role, but it just will not have a role as it has had historically worked to come in and really create while the market swings.

Okay, perfect. There were some discussion earlier about gross margins for service centers, which I think it sounds like you’re optimistic that there’ll be some improvement, maybe back to kind of more normal levels in the first quarter of next year. Marty, I think your point that there are a lot of moving pieces that play in Q4, but I’m not sure I totally understood if you did suggest where you see margins in service centers going in the fourth quarter versus Q3. Like, is there some improvement but maybe not back to kind of more normal levels? Or is it still flattish given the various pieces versus Q3 just not sure how you’re thinking about that?

Yeah. So if you look at Q4, you’re right, a lot of moving pieces. And that is the right way to characterize it. Given we’re sitting here, halfway through the quarter on, where are we? November 9th, give or take. The reality is, the first part of the fourth quarter saw continuing challenges on pricing before we saw the recent uplift. So you’ll probably see in Q4 is a little bit of margin compression into Q4 because of that dynamic and the pickup back will be in Q1. So, Q4 the way I characterize Q4, probably below normal, below expectations on a trend line basis.

Okay, that’s helpful. Thank you. And does the same hold true for steel distributor? I know there’s some back to back business obviously there. But not everything is. So it’s sort of following service center margins just in terms of the movements quarter-to-quarter directionally? Is that how to think about the steel distributors as well for Q4?

Short answer is yes.

Okay. Thank you. And then just very lastly. The gain on sale on an after-tax basis. Is it identical to what it was on a pre-tax basis?

Pretty close. There was a little bit of tax leakage, a few hundred thousand dollars. But by and large most of it was shielded from tax. So, for all intents and purposes, pre-tax and after-tax were very similar.

All right. Thank you for the time.

Great. Thanks, Mike.

Thank you. The next question comes from Frederic Bastien from Raymond James. Please go ahead.

Hey. Good morning, guys.

Hey, Frederic.

Your Energy Field stores business has been pretty consistent from both the revenue and margin standpoint since the monetization of the OCTG/line pipe business, which was by design, I think that’s what you’ve been aspiring to for a number of years. As you look forward, what are your goals for this business over the next four or five years? Are there opportunities to grow that meaningfully either organically or through acquisition? Or are you just happy to hold the line on that business?

No, Fred, you’re spot on on your comments. So we’ve been looking to make this shift and it is impacting overall for us so we can see the gross margin that they’ve been able to perform. When we look at it organically, their growth opportunities that are out there, again, Alliance is a nice tuck-in or bolt-on there in Canada, we’ll continue to look at opportunities like that in both the Canada and the US. There’s also room for growth, again, value-added on that side through valve actuation and other areas that are out there. If there’s a meaningful opportunity, again, we’ll look at it on a standalone basis. There’s competition for capital within Russel, and so we meet those criteria. Does it fit into our culture criteria that we have for the company? And so, we’re not restricted to saying we’re not going to grow in that area. Service centers, again, are something that’s a larger part of our business and there’s opportunities to grow there as well. But we’ll take a look at all of them equally based on their own merits.

Okay. You touched on, sorry, value-added opportunities within that segment. Can you expand on that a bit?

Yeah so there’s things that we can do, again, valve actuation is one, we can do field services that are very similar to the same concept that we use in the service centers. And we’re doing that in Canada. Now we’re starting to grow that in our US operations. And so those just to add to that gross margin profile. And so – and the business it’s very stable on margins, it actually allows us to enhance those margins. Going forward and it’s something we have all the products right now, we’ll just have to put in the facilities and then be in the right locations to perform that value-added process for the end users.

Okay, cool. That’s useful. Thanks. That’s all I have.

Great. Thanks, Fred.

Thank you. We have no further questions. I will turn the call back over for closing comments.

Great and thank you, operator. Appreciate everybody very much for joining the call. Thank you for that. If you have any questions, please feel free to reach out directly. Otherwise, we look forward to staying in touch during the balance of the quarter. Take care, everyone.

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