Good morning, ladies and gentlemen, and welcome to the 2020 second quarter results conference call for Russel Metals. Today's call will be hosted by Marty Juravsky, Executive Vice President and Chief Financial Officer, and John Reid, President and Chief Executive Officer of Russel Metals. Today's presentation will be followed by a question and answer period. At that time, if you have a question, please press star one on your telephone keypad. I will now turn the meeting over to Marty Juravsky. Please go ahead.
Great. Thank you, Chris. Good morning, everyone. I plan on providing a brief overview of the Q2 highlights to give a context for the key developments that we have seen. If you want to follow along, I'll be using the PowerPoint slides that are on our website. Just go to the investor relations conference calls part of the website, you'll be able to find it. On page three, you can read our cautionary statement on forward-looking information. Let me start on page five with a few summary observations. One, it was obviously a very unusual quarter with the developments related to the COVID-19 challenges. In fact, the quarter involved really two distinct segments. One, the decline that we saw coming into the quarter, two, the pickup that we saw coming out of the quarter.
With this backdrop, we are really very proud of our various businesses in proactively adapting and adjusting to the quickly changing market situations. First and foremost, we put in place the right protocols to focus on safety. Even though we were deemed an essential service and we continued to operate, the overall economic conditions impacted activity, particularly at the front part of the quarter. In order to adapt, we made a series of rapid changes throughout the quarter relating to staffing, which is down around 15%, cost containment, discretionary spending, which is also down a fair amount, and inventories as we pull back on our procurement activities. I think the results for the quarter show the flexibility of our business model. I think as most of you are aware, variable costs are a big part of our business.
They represent around 85%-90% of our total cash costs when we include cost of materials, employee expenses, other operating expenses. As just one example, our variable employee expenses are down over 25% versus Q1 of this year and down over 50% as compared to the 2019 average. Counter-cyclical cash flows. We talk about this a lot. In the quarter, we generated CAD 95 million from non-cash working capital this quarter. Diversification across North America. Just as COVID-19 impacted the global economy in very different ways, we have seen that our risk has been reduced by having a broad geographic platform and very diverse customer base. We do not have all of our eggs in one basket. Lastly, our capital structure is in great shape, with our net debt coming down and our liquidity going up substantially in the quarter.
You go back to our Q1 conference call, we talked a lot about the ability to generate cash flow in this part of the cycle, and I think our Q2 results provided that illustration. You go to our financial results on page six. From an income statement perspective, the gross margin percentage remained around 19%, but the dollars came down with lower sales activity. As compared to Q1, our sales in Q2 declined by about CAD 227 million, and gross margin declined by about CAD 42 million. Our EBIT and our EBITDA only declined by about CAD 4 million. As mentioned earlier, we quickly adapted to the environment and were able to bring down our net cash costs on almost a dollar-for-dollar basis with the decline in gross margins. This bottom line was achieved despite a couple notable items.
With our share price increasing in Q2 versus a decline in Q1, the mark to market on our stock-based compensation was a CAD 3 million expense in Q2 versus a CAD 4 million recovery in Q1. This is non-cash, it flowed into our EBITDA. We took an additional CAD 5 million provision related to the potential risk in our inventories, energy in particular. This is also a non-cash item, it flowed into our EBITDA. Given the strong financial profile of our company, we're pleased to once again declare a dividend of CAD 0.38 a share for our shareholders. From a cash flow perspective, CAD 95 million reduction in working capital, with the biggest shift being from accounts receivable. Our credit team did an absolutely terrific job, our pace of collections was well above normal.
We also lowered our inventories. I believe that dependent upon the future economic conditions, we'll make further progress on inventories in the months and quarters ahead. CapEx at CAD 5 million is pretty modest. There are no large commitments on the come. From a balance sheet perspective, net debt declined from CAD 443 million last quarter to CAD 368 million at the end of June, or a CAD 75 million reduction. As a result, we're sitting on a net cash position of about CAD 77 million, excluding our term debt. This gives us a lot of dry powder and operational flexibility. For shareholders' equity, there is an accounting adjustment because of the FX shift at quarter end second quarter versus quarter end quarter one. The bottom line is that we made really good progress in driving free cash flow.
I believe we still have more on the come. If you go to page seven, we have some segmented P&L information. The service centers did well under some really tough market conditions. Despite revenues coming down to CAD 373 million, our gross margins held in and around 21%. In fact, we generated a higher operating profit in Q2 than we did in Q1. Tons shipped were down 14% versus Q1, which is better than the industry data that we've seen among our competitors. The stability of our gross margins in a declining market, in many respects, was due to the value-added processing and the investments that we've made over the last number of years. As mentioned earlier, the team's ability to adapt quickly to the evolving market was a big factor in driving down costs.
In energy, there were several macro factors on top of COVID-19, including low energy prices and drilling activity levels, along with weather delays in Western Canada coming out of breakup. That said, we have two distinct sub-segments within our energy business with different results. The Energy Field Stores segment continued to hold up better in the quarter, as it actually posted an operating profit of CAD 4 million. That operation was supported by infrastructure activity related to the Trans Mountain project. By contrast, the OCTG and line pipe part of the energy segment incurred a loss. We are very focused on inventory management across all of our business units, but in this segment in particular.
The distribution segment managed really well in a very tough environment led by the Canadian business, which typically structures its buying and selling activities on a back-to-back basis, so there's relatively little risk and fairly stable margins. On page eight, we have segmented balance sheet information to provide a frame of reference for some of our recent capital allocation shifts. Our segmented net identifiable assets declined by CAD 129 million since year-end. Most of the shift was on the energy side. We lowered the energy segment's identifiable assets in both absolute dollars as well as on a relative basis. As an example, metal services was 48% of net identifiable assets at year-end, and it's now 45%. On the energy side, most of that segment's identifiable assets are working capital with very little fixed assets.
More specifically, of the CAD 612 million of identifiable assets within the energy segment at June 30th, almost half is OCTG and line pipe working capital. As I said earlier, inventory management of that segment is a key focus. I know outlook is probably a big question for a lot of people, so let me just say this in terms of overall outlook for our business. We aren't very good at predicting the future, but we are really good at adapting to it. This quarter demonstrated that. From my perspective, regardless of how economic conditions evolve, we are really well-positioned from both an operational and a capital structure perspective to take advantage. In closing, on behalf of John and other members of the management team, I'd really like to express our appreciation to everyone within the Russel family.
This quarter presented some really unique challenges, and we couldn't be more pleased with the teamwork and resourcefulness of our colleagues. Operator, that concludes my introductory remarks. If you'd now open the line for any questions, please.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Michael Doumet , Scotiabank. Michael, please go ahead.
Yeah. Hey, good morning, guys. First question, I just want to know if you guys could provide some specifics on the wage subsidy in the quarter and its contribution to each segment. Further, just as it relates to the SG&A margin progression, given your expectations for the wage subsidy, I mean, how sustainable do you think metals EBIT margins are into the second half?
Sure. Why don't I tackle that, Michael? In terms of wage subsidy, we haven't disclosed the specific number, but what I'd say, and part of the reason is because we look at our staffing costs in totality, and there's multiple elements attached to it. We think the government's initiative to actually support employment made an awful lot of sense to be getting companies through this period of time. We reacted to that appropriately. What we've included is some disclosure of the nature of the beast in terms of how the methodology works. In the quarter, we qualified for the subsidy. We benefited for 12 weeks of it. The maximum per employee is CAD 847 per employee. Not everybody gets the maximum, so on average, we're less than the maximum, which is nature of the beast.
In Canada, we have roughly 1,800, 1,900 employees.
Got it.
[crosstalk] In terms of the.
Sorry.
In terms of the go forward, the way we look at our business model is really simple, and in some ways, it's back to what we talked about before. We look at cost in totality, and margins in their totality. In many cases, when we see what's in front of us, we're just going to have to adapt to varying circumstances. As the wage subsidies start to fall off towards the end of the year, we'll make other operational decisions and try and work towards getting the appropriate bottom line and appropriate return for our shareholders. We think that that was a good incentive in terms of keeping employment at an appropriate level during this past quarter.
As that starts to roll off, we'll continue to revisit all of our var ious cost line items, overhead, head count, and the like.
Okay. Thanks, Marty. That's really good color. Maybe just turning to the energy products. I mean, not a huge surprise, but the inventory turns has really dropped there. Maybe given some of the softness in the OCTG pricing, is it fair to expect continued margin pressure through the second half until, say, inventories are adjusted? How should we think about mix between OCTG and Energy Field Stores in the second half as well?
Yes.
Well.
I'll take that one.
Sure.
Like, Marty. Go ahead. No, go ahead, Marty.
No. Go ahead, John. Sorry.
Yeah. The line pipe and the OCTG is definitely where we're having our issues with the turns, and again, just the volume slowdown. When you fell to the rig count levels, I think during breakup we were at a low point of 13. As we talked, now it's bounced back, was at 45 as of this morning. Again, that's still off 67%, 68% from last year. The U.S. is down to 251, there's just not a lot of demand out there for that product. We'll continue to work through that, but the turns are much lower than we want in that segment. Flipping over to the field store side, our turns are down slightly, but they're in a pretty good spot for us. We continue to turn the inventory.
We adjust quicker there because that part of the business, again, is there for the life of the well and maintaining and the maintenance piece, along with the projects like the Trans Mountain that we're participating in phase I and phase II throughout the end of this year. The turns there are at an acceptable level, although on the low end, but they are at acceptable levels. Our focus point, as Marty alluded to earlier, will really be on OCTG and line pipe. Again, it's just a demand issue right now. It's very challenging. Plus, you have an overstock from all distribution.
Okay, great. Maybe just a follow-up, John, to tie that inventory discussion with your expectations on working capital requirements for the second half. Things can change obviously with the market and presumably even each of your businesses are seeing different trends. I'm interested to hear in how much maybe excess inventory you guys think you have, again, particularly in OCTG or anywhere else in your business.
Right now in OCTG and line pipe, we're carrying probably a turn and a half to two turns of inventory versus what we would like to have. We'll continue to try to bleed that off. We're really watching any orders coming in right now are sold, with the exception of one operation that is operating at a profitable level, and they continue to have a program that goes forward that is locked in. It's just not sold upon arrival. We basically have changed all of our purchasing to reflect only items that are sold coming in until we thin our inventory down to an appropriate level. I think we'll continue to throw off working capital there. Again, it will be based on what volumes are available in the market.
At the low rig count, it will be a slow grind to get that inventory down.
Okay. Great, guys. Thanks for the answers.
Thanks, Michael.
Thank you. Your next question comes from Devin Dodge, BMO Capital Markets. Devin, please go ahead.
Hey, good morning. This is Jim Chua calling in for Devin. Can you guys?
Hey, Jim.
Thanks. Can you guys maybe give us a little more color on some of the demand trends in your service centers across your regions and end markets?
Sure. John.
Yeah. I'm sorry. You broke up just a little bit. I'm assuming you said demand trends. Is that right, Jim?
Yes.
Yeah. If you look across our service center segment, non-res construction held up really well compared to what's going on in the world right now with the pandemic. We saw a slight pullback early on in April with that, as everybody adjusted to the essential versus non-essential. It came back pretty quickly in May and June, as all of our demand did. What we're starting to see is construction is solid. Those jobs that were put on hold are starting to move forward, and that's really the bright spot that's out there. Other segments that we've seen in the heavy equipment, ag, those have slowed down, an impact, 20%, 25%, 30%. We're seeing other manufacturing end-use markets slow down as well.
The biggest thing we watch when we look at construction for the go forward is how much of this is a tail on a project versus how much is in the Architecture Billings Index going forward, which represents nine to 10 months out. That index in the construction world for ABI index is actually improving. It is still below 50, which is a sign of growth, but it is actually improved quite a bit in the last two months. We are hopeful that tail will carry on into next year. The other end markets, obviously, that we serve are energy related. Those are down dramatically. 50%, 60%, 70% based on the fall in the rig count and depending on where you are and what part of the country. We are seeing some projects in the energy go forward.
Trans Mountain, as we look at Western Canada, there is some movement there going forward. Overall, most of our end-use segments are down right now. Just for you, Jim, we don't participate in automotive. That's something that, again, we watch it, but as it relates to our competition, it could creep into our market, but we don't participate in automotive other than maintenance.
That's great. Thanks. Second question, d o you guys expect industry M&A to pick up, and has there been an increase in seller interest?
Yeah, we've actually seen a fair amount of deals coming across, especially relative to first quarter and end of the year. Some of those deals are obviously more liquidation type deals where people are looking to get out. We are seeing some reasonable things to look at right now. We think there are some opportunities in M&A for us in this market that we will explore, and we'll just see where they go.
Got it. One last question. Have you guys been seeing any increased competitive pricing pressures in the market?
Yes. Across the board, in every segment. The strongest is obviously OCTG and line pipe. We're seeing it in service centers, and again, I want to commend our service centers. They did a tremendous job maintaining margin. Typically, if you look back at our historical performance, in a falling price environment, you would see margins drop as a gross margin percentage. They've not done so. That's a nod to our value-added processing that's out there as we continue to grow that segment of our business as a percentage of our sales. It's holding that margin steady. We're very pleased with the performance there and with our service centers' overall financial performance. Yes, there's margin pressure in all three segments.
Got it. Thanks, guys, and I'll turn it over.
Thank you. Your next question comes from Frederic Bastien, Raymond James. Frederic, please go ahead.
Hi, thanks, and good morning. Guys, I'm just wondering how much cash you can reasonably expect to release from working capital in the second half. Is it fair to expect that most of that will come from inventories?
Hey, Fred. Yeah, I think to answer your latter question, yeah, I think it's fair to say it's mostly going to come from inventories. As I mentioned earlier, on the receivable side of it, we had a really strong collection quarter, and our receivable levels have been brought down in really good shape from that perspective. There's more work to be done on the inventory side of it. It's a little stickier in terms of ability to move it. It does move over a period of time, and that's where the focus is right now. I think if you kind of stand back and say, where are we going to be for the back half of the year, some of it is going to be a function of overall economic activities, particularly on the service center side of it.
Notwithstanding that, I think the biggest focus in terms of inventories coming down is on the energy side of it. Almost irrespective of economic conditions, we'll be bringing inventories down on the energy side over the course of the next few quarters and even beyond the next few quarters. Orders of magnitude, we've probably got another 10% to go is my order of magnitude guess.
Thanks, Marty. It's hard for us really to make sense of the margins when we have no clear idea of what the subsidies were. Is there a way for you to provide a bit more color on that, or at least provide us with some goalposts or an estimation of what these might have been?
Yeah. Fred, the building blocks to get there, on the Canadian side of it, which is really where the subsidies are, is really related to staffing levels, and there's a maximum amount per person. The maximum amount per person is CAD 847 per employee per week. 12 weeks of benefits in the quarter. We have in Canada around 1,800 or 1,900 employees. Not everybody gets the maximum because that's driven off of where everybody's individual salary or wages are. Off of there, you get orders of magnitude for that math.
Okay, that's going to be an interesting exercise. John, just switching gears here. Do you see any green shoots coming out of energy, either on both sides of the border?
Right now, we just don't see a lot of pickup for energy for the balance of the year. I think inventories hopefully will start to come in line from the distributor side, and people's inventories will start to come down to reasonable levels. Again, we're just not seeing a whole lot other than Canada is benefiting from heavy oil, and the U.S. has basically shut in or capped off their heavy oil production, which is primarily the Dakotas and Pennsylvania area, due to the cost to produce that heavy oil. They're primarily running rigs in the Permian and the low-cost basins, where we do operate with our field stores.
There is a benefit for Canada because there's a need for the heavy oil to come across the border to run the refineries and do the appropriate mix for gasoline, and then to be used in the different grades of gasoline that's out there. We've seen some lift there, and I think that will continue to happen as long as oil is range-bound in this CAD 40-CAD 45. If that starts to creep back up and sustain above CAD 50 and CAD 60, then I think you'll see the U.S. just start opening back up more of that heavy oil play.
Awesome. My last question, John. What's the most important lesson you're taking away from this pandemic?
I guess there's lessons and things that you reflect on that you're really proud of your people, and first and foremost was the safety and the way that our people responded to it through our decentralized model. We had to take the approach of a really centralized to get the combination of information, get it disseminated out to the teams and how they reacted because just as the pandemic attacks different places and different regions of the world differently in terms of number of positive cases, our safety team has reacted appropriately, and our case count is extremely low.
We've had just a handful of interruptions, and so I'm just very proud of our people for how they've handled the safety, how they've taken the welfare of everyone within the Russel family, their suppliers, and their customers to make sure we're operating safely. Some of the lessons that we've learned, obviously, as you go through any downturn, you can look through your operation. There's an opportunity to go back, tighten your belt. We do run at one of the lowest operating costs on a percentage basis in the industry, but we're looking at ways to do that better. It's really challenging our people, and we continue to find ways to do that better through technology, through different operating efficiencies with the new equipment that we have out there.
Really, Fred, we're learning that our value-added processing growth initiative and service centers is really a stronger growth opportunity in a downturn than we anticipated. There are a lot more customers that are looking to us now to do that. To give you a reference point, we're bringing on a new tube laser and flat laser at our Trenton, Georgia facility. We'll be shifting work over where we've been developing that customer base from another facility. We're already booked out at one full shift and well into the second shift, and we've yet to start operation. We're still probably 30 days out from starting operations. We're seeing that stickiness of those customers that want us to do more and more value-added processing as they've had to pull back as well. We're very pleased with that.
Some of the lessons learned on the energy side, again, we're looking at our purchasing trends, specifically in OCTG and line pipe, our import trends, where you get caught with material on the water, and trying to evaluate our buying patterns to make sure that we can maintain a turn level that's reasonable to ultimately get to the level we want to return to our shareholder. We're really working through that closely, and we're really happy with our Energy Field Stores. Again, we continue to see, even in this low rig count, that they're continuing to provide that maintenance component. Although there's not the project piece of their businesses out there, the maintenance component is there, and we can adjust scale and size very quickly. We're very pleased with that.
Awesome. That's very good color, John. Thank you very much, guys.
Thank you. Your next question comes from Michael Tupholme, TD Securities. Michael, please go ahead.
Thanks. Good morning.
Morning.
Morning. Thanks. First question just relates to service center demand and volume trends. Volumes were down 19% year-over-year in the quarter. I apologize if I missed this, but I'm just wondering if you can provide a bit of a snapshot as to how that looked at the end of the quarter, just to get a sense for the progress as the quarter evolved. And then further to that, any indication as to where things sit now on a year-over-year basis here in early August?
Yeah. John, do you want to handle that, or you want me to?
No, go ahead, Marty. I'll provide color at the end.
Sure. Mike, your premise is spot on, which is the entry to the quarter looked an awful lot different than the exit from the quarter. April was obviously down a lot from March. May picked up from April, and June picked up from May. When we look at the quarter as a whole, the June activity on a run rate basis was higher than the quarter average. That being said, the June activity was still below pre-COVID-19 levels, and it was probably below pre-COVID-19 levels by, I'd say about 5%. June activity is continuing on at a comparable pace to where things were at in June. You got some noise in July, though. Holidays in different regions, Quebec, Canada Day, 4th of July. July is an interesting inflection point just because of some seasonal dynamics.
I think the ultimate test is going to be how things evolve into August, where we're in, and September. If you look at the second quarter in its totality, though, there were really two different stories of things dropping off pretty hard into April and then picking up at a reasonable level, but still slightly below pre-COVID levels by the time we got to June.
Okay. That's helpful. Down 5% year-over-year by the time you got to June sounds actually quite good in the context of the environment we're in. Just wondering, do you think there was some sort of pent-up demand that maybe helped those numbers a little bit as you got into June and maybe July? Is that, do you think, indicative of a reasonable runway for the next little while, absent further acceleration and reopening?
Yes. I think what we really saw, the pent-up demand had really jumped in the last half of May. As we came out of April, with so many things being just shut down. We really saw it in May. Was a little nervous going into June to see what held. June actually performed a little bit better. Again, as Marty mentioned, you get a lot of noise in July with all the extended holidays. Quebec taking the two weeks makes it a little difficult. What we're seeing is it looks like July is basically flat with June, with all the noise. August seems to be coming out at flat to slightly up from that.
I think we're going to move, as I said in our press release, I think we're going to move in concert with the pandemic, and so you're going to have an uneven recovery. We'll take two steps forward, maybe one step back as the pandemic surges, and it causes people to move back and forth in different phases of opening. Obviously, children going back to school. There's the one belief that's out there that that may cause the pandemic to surge for a period of time. We'll watch that closely. Right now, we're operating at even or slightly above what we saw in June so far in the quarter.
Okay. That's helpful, John. I suspect there are some regional differences, but just from a high-level perspective, I mean, is that generally applicable across most markets, or is this really a mixture of wildly different things going on in different jurisdictions?
It's typically applicable across, and again, you're going to see different market trends. Again, where you have an area that's not intensely impacted by the pandemic, typically is a low population area that's not an intense steel user. Because of the population, there's just not a lot of demand there. The larger cities have a lot larger issues to deal with. The U.S. is obviously not dealing with it near as well as Canada, so we're very pleased with what's going on in Canada right now. We're seeing some rebound there. Our U.S. operations actually were extremely strong on the service center side and the demand. I think we were only down 2%. We were very pleased with what happened in our U.S. side.
Canada is just making strides to come back very strongly as well. I think it applies across the board. Again, barring a large outbreak. Fortunately, we're not in some of the states that have been impacted dramatically, other than Texas. Right now, we haven't had to deal with that. Again, Canada's handling it so much better than the U.S. to date, so we'll just see how it goes forward as we continue to come and open up the economies.
Okay, thanks. Next question relates to steel prices. We've seen hot rolled coil under some pressure, maybe leveling off here and potentially some possibility of maybe having found a bottom, heading higher. Wondering if you can provide any thoughts on that. I know it's difficult, but secondly, what does the pricing you've seen thus far through the second quarter imply for margins in service centers? Should we be thinking about service center margins potentially being down a little bit relative to the second quarter because of what we've seen with prices?
The first part of your question, and you're right, if you're using the hot rolled coil as a proxy, it appears it's found a bottom in that CAD 440 range. It's bouncing off the bottom slightly. Scrap, which is the main driver for hot rolled coil or all steel pricing now, actually in the last few days has solidified, and we're seeing some potential lifts there. Very uneven, though, where you see that come out. If you're looking in the Midwest to scrap pricing for the U.S., that's down a little more than the Southeast, and primarily driven by exports. There's been a big drive from the export market from Turkey to buy scrap, so it's driven that price up. Again, I think we'll follow scrap as it moves. It looks like it is firming.
If you look at demand, steel mills are running at 59%. There's plenty of room to bring on capacity. They could add extra capacity that will likely keep it range-bound. However, if you look at the North American price right now, we're the lowest prices on the world market. That would mean imports are probably not going to be a big factor into Q3. Really we're fighting against ourselves to some degree there on pricing in the North American market. As long as we balance capacity with demand, then there should be room to run on pricing. Again, I think it will remain range-bound for the balance of the year. [crosstalk] Service center margins, I think returns are fairly strong in service centers. We're north of four. Continue to climb there.
Again, we've talked about before, turns are just a little slower in our Canadian service centers compared to our U.S. service centers, just due to geography and the time in transit to get material into the States that's not made in Canada. I think our margins will hold, and in fact, we may see some slight margin increases throughout the quarter as we get to rebalancing. What material's left will be flushed out that may be carrying any higher cost, and as we replace with the lower cost material. Again, as we continue to press forward trying to grow our value-added initiative, that should help the margins as well.
Okay. Thank you for that. Just turning to the energy products segment. If you had not had the NRVs, looks like that would've been sort of breakeven on an EBIT basis, recognizing that field stores were profitable. Just wondering, though, as we look forward, any sort of indications on how we can think about the margin profile or profitability of that business as a whole would be helpful. Appreciate any comments there.
Yeah. As Marty alluded to, you really got two subsets within the energy for us. You got the field store margins. Although they saw some pressure, they tend to normalize now maybe a couple points below where they were generally on gross margin percentage. It's really OCTG and line pipe, and there's just the margin challenges are there. It's just the order count is so low, and people doing projects due to the nature of, one, their ability to borrow money for projects right now is very limited. There are only a handful of projects that are going, and that's just creating intense margin pressure in that environment for us. I think any lift that we get from the field stores may be offset from OCTG and line pipe. We'll continue to watch.
OCTG looks like it's leveling on price. It's holding up a little bit better than line pipe. Line pipe is continuing to drift with flat roll starting to set a bottom, and they've been the main substrate for both products. I think that we should see that. It's usually a two to three-month lag, so we should start to see that bottoming as well. There's so many mills that are idled or short-term or indefinitely right now in both Canada and the U.S., that I think we'll have offline to rebalance inventories there over time. We're hopeful going into Q4, Q1 of next year, that we'll see the inventory start to rebalance throughout the industry as a whole and provide some room for margin expansion at that point.
Okay. That's helpful. Thanks, John. Then, lastly, again, I apologize if I missed anything on this, but the renewal of tariffs against Canadian aluminum by the U.S. just yesterday. I know aluminum is not something you deal in, can you talk about what the potential reintroduction of steel tariffs, if that were to happen, what you think that would mean, both overall, as well as for Russel?
You want to talk about steel and aluminum there? Again, is that right?
No, we don't have to talk about aluminum. Just looking at what happened with the reintroduction of a renewal of those tariffs and thinking about the possibility that they could also bring back tariffs under 232 against Canadian steel. Just wondering a bit more specifically ab out what you think that would mean if that happened on the steel side.
I would think it's highly unlikely. Of course, I thought it was highly unlikely the first time. If it does happen, again, we do so little across the border in all of our products that I think it would be healthy for Russel and for the service center industry as a whole as we're all a mark-on business, plus your value-added component. It would cause prices to raise obviously about 25% very quickly. That would be helpful for us in that regard. With demand levels being where they are right now, again, I'd say it'd be a challenge to get that in for steel, but anything that's going to cause that price to increase would be helpful for us.
It could be harmful for some of our customer base and how they would have to adapt to it, so it could hurt demand. Again, we would have to look at it. You can tell what it did for us, like when they implemented those early on, it immediately drove us up.
Right. It sounds like if it were to happen, you wouldn't expect the reaction to be much different than it was last time around, is what I'm hearing?
That's right. It's just on a relative basis to demand, where demand is today versus where it was at that time. That would be the only difference, I think.
Okay. That's helpful. I'll turn it over. Thank you.
Thank you. Your next question comes from Anoop Prihar, Stifel GMP. Anoop, please go ahead.
Good morning. Marty, just with respect to the government subsidies that you guys received in Q2, is that something that will be repeated in Q3 and Q4, or is it a one-off deal? Do you have to repay those funds, or is it an outright grant?
The second question first, it's an outright grant. To answer your first question, the government has done this in phases, they introduced the revised rules for the renewal phases, post Q2, effectively they go to the fourth quarter. The impacts of them start to get tapered off as you get to the back end of Q3 into Q4. The way we look at it, I assume the way the government looked at it as well, is it was a stopgap measure to support employment in the Canadian economy as it was going through a transition. We think that worked, it was helpful, it was impactful. It's running its course. As I said earlier, one of the things that we're always doing is revisiting costs in their totality.
To the extent that we are going to see some tapering off of those wage subsidies towards the fourth quarter, sorry, into the fourth quarter, we'll be making other adjustments along the way, dependent upon what's otherwise going on in the broader economic conditions. There were some benefits in Q2. There'll continue to be some benefits in Q3, the way the program is set up, and then they taper off pretty substantially in Q4.
Okay. Thank you.
Anoop, just to follow on, that there are obviously just a tremendous amount of costs related to COVID-19 and the rapid pace when we had to implement this across all of Canada and the U.S. These subsidies actually afforded us time as we had these incurred costs that were obviously unexpected to a large degree. We assumed these large costs. We had some offset with that, with the wage subsidy. It gave us time to make adjustments to get the things in we needed to appropriately protect our people to get through the disruption, and we can continue on to keep, as Marty mentioned, the employment levels appropriate with our revenue. We now have been afforded that time that we can go ahead and make the adjustments necessary to continue on.
Well, actually, just on that point then, can you give us a rough estimate of what you think your one-time costs have been to date with this type of dealing with COVID?
To quantify it in a specific number, I would be guessing if I gave you that. I would say they're not materially off of what we actually received in a subsidy. Again, I think there's more of a neutralizing effect there than anything.
Okay. Well, that's helpful. Thank you.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from John Novak, CCL. John, please go ahead.
John, can you talk about your thoughts with respect to further right-sizing and repositioning of your energy business?
Yeah. As we look at that, John, obviously we like the field store business, Comco and our Apex. We've rebranded Apex in the U.S. under Elite Supply. We like that side of the business. It's very much like our service centers, similar in turn, similar in margin profile, high service business. It's something that we see as a platform to continue on. We look at OCTG and line pipe, it's just becoming more and more structurally challenged. We're taking different avenues and different looks at how to reduce our capital exposure there. We may end up shrinking that size of the business on a long term for Russel, as to what it represents as far as our total portfolio.
Okay. Thank you. Marty, did you defer any payments with respect to federal, state, provincial taxes that will fall into the second half of the year?
Yeah. It will flow through in the second quarter.
I think last year you had a large tax payment in the first half. It doesn't appear that you had one this year. Does that happen in Q3 or Q4?
No. Not with the level of profitability.
Okay. I'm thinking of last year's taxes that were due this year, right?
No material issues there, no.
Okay.
No big shift, no.
Marty, I'm still confused why there's the unwillingness to disclose what the government subsidies are. Every other company is doing it. Some are including it in their footnotes. It's really hard to make sense of your margins. It seems that you're introducing unnecessary volatility in the forward estimates without giving some sense of what those were.
Look, John, we've seen a variety of companies, frankly, all over the map in terms of their disclosure on this topic. We've included the disclosure on the building blocks associated with it. As we've said before a couple of times in different ways, the subsidies were meant to provide some incentives to retain employment. We view that as a component of our overall employment costs, and it's a single component. It's not in its entirety. The building blocks are all there in terms of the disclosure associated with what the subsidies are.
Okay, thanks.
Thank you. There are no further questions at this time. Please proceed.
Great. Thanks, operator. Well, look, we appreciate everyone's interest and discussion for Russel on the second quarter conference call. If you have any further questions or follow-ups, please feel free to give myself or John a call. Again, appreciate it, and we look forward to staying in touch and talking again at the end of the third quarter.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.