Good morning, ladies and gentlemen, and welcome to the third quarter 2022 earnings conference call for Russel Metals. Today's call will be hosted by Martin Juravsky, Executive Vice President and Chief Financial Officer, and John Reid, President and Chief Executive Officer of Russel Metals Inc. Today's presentation will be followed by a question and answer period. At that time, if you have a question, please press star one on your telephone keypad. I'll now turn the meeting over to Martin Juravsky. Please go ahead.
Perfect. Thank you, Operator. Good morning, everyone. I plan on providing an overview of the Q3 2022 results. If you wanna follow along, we'll be using the PowerPoint slides that are on our website, and just go into the investor relations section. If you go to page 3, you can read our cautionary statement on forward-looking information. Before I go into detail, let me put a little context around the quarter. We were very pleased with how our business segments performed. There's obviously been a fair amount of uncertainty in the broader economy of late, but our operating units showed tremendous resiliency as they navigated through the quarter. Another way that I would describe our results is balanced. Given our broad geographic platform across our three business segments, we are pleased with the breadth of the strong operating performance across the various segments.
Let's turn to page five to discuss the macro market environment, market conditions. Steel prices have come down but remain at very healthy levels. As you can see on the left chart, even though there has been price moderation for sheet and plate, the price levels that we're experiencing in Q3 remain well above historical norms. The right chart illustrates the recent movements in service center inventories for the industry. Inventory levels in Canada on the top right chart, in U.S., on the bottom right chart, remain in normal range compared to pre-pandemic levels. As we look at takeaways from our customer base, demand from our metal service centers customers, which includes industrial manufacturers, fabricators, non-residential construction, agriculture, shipbuilding, infrastructure, and energy, remains active in their respective markets.
As a result of seasonality, we did lose some operating days in Q3 due to the Canada Day, Fourth of July, and Quebec construction holiday periods. Looking forward, the broader economy has some uncertainty because of higher inflation and increasing interest rates. While these factors typically impact sectors such as home building and retailing more than our customer base, we do expect to see some caution in terms of near-term buying activity among our industrial customer base in the coming months. In addition, we do expect to see some seasonal slowdown in Q4 due to normal vacation schedules around US Thanksgiving and the December holidays. Going to our financial results on page 6. Starting at the top from an income statement perspective. Revenues of CAD 1.3 billion in Q3 was the highest level that we have ever achieved.
Overall gross margins declined to 21.5%, but remain strong. Our Q3 results were impacted by a few items. One, a positive pickup from the TriMark joint venture. In the quarter, it had a P&L impact of CAD 15 million, being a combination of CAD 13 million dollar equity earnings and CAD 2 million of preferred share dividends. From a cash flow perspective, TriMark paid dividends in the quarter, which included CAD 2 million of preferreds that I just mentioned, plus CAD 12 million of dividends on the common shares for total cash received of CAD 14 million. Going forward, TriMark has already declared, and we received CAD 7 million of dividends in Q4, and we expect to receive additional dividends in Q1.
If we look back at the series of initiatives to monetize our OCTG line pipe businesses, including the 2021 liquidation of the U.S. businesses, the cash that was pulled out of TriMark at the time that the joint venture was created in 2021, in combination with the recent and expected dividends from TriMark, we will realize a very profitable exit from our OCTG line pipe businesses. In the quarter, stock-based comp had no impact on the P&L for Q3 versus a CAD 4 million recovery in Q2. Also, there was an increase in the NRV reserves on inventory, which had a CAD 6 million impact for the quarter. From a cash flow perspective, we had a CAD 41 million increase in working capital, which was driven by the lag effect between accounts payable versus inventory and AR.
More specifically, we had an increase in accounts payable while inventory and AR were relatively flat. Inventory being flat was a combination of a small increase in tonnage offset with a small decline in average unit costs. For inventory, I expect both tonnage and unit costs to come down in the months ahead as we see working capital converted to cash in Q4 and into Q1 of next year. CapEx of CAD 10 million has ticked up a bit as we are continuing to advance a series of our value-added equipment projects. From the balance sheet perspective towards the bottom of the page, our net debt declined from CAD 108 million at the end of June to CAD 92 million at the end of September as we continue to generate good cash flow.
Our liquidity is greater than CAD 500 million, and our credit metrics are strong. One item of note in the quarter is that we annuitized about CAD 35 million of assets and corresponding liabilities from our non-union defined benefit pension plan. The counterparty is a highly rated insurance company. This will close in Q4. As you will see in our financial statement footnotes, we have a very nice surplus of over CAD 30 million in the pension plan, and that surplus can be used to reduce the company's future contributions into various retirement plans. This immunization reduced risk for all parties while providing a strong credit counterparty for the benefit of our retirees. For share buybacks, so far, we picked up a little under CAD 19 million, of which around CAD 16 million was accounted for in Q3 at an average cost below CAD 28.
Our capital base grew in the quarter with our book value per share up another CAD 1.81 per share and is now at CAD 24.70 per share. To put that in context, we acquired shares under NCIB at around 1.1x book value. Lastly, we have declared a quarterly dividend of CAD 0.38 per share. We've added a new slide on page 7, if we go to that for a second, to provide a variance analysis between last quarter and this current quarter. In looking at service centers, the decline in volumes impacted EBITDA by around CAD 11 million. As I mentioned earlier, we lost some operating days due to normal seasonal vacation schedules.
The CAD 51 million decline in margins was due to lower prices, while we have not yet seen the offsetting impact of lower cost of goods sold due to the lag effect. We do expect cost of goods, cost of goods sold to come down in Q4. Offsetting this is a CAD 9 million favorable variance in service centers due to lower fuel costs and lower variable compensation for that segment. Energy improved by CAD 1 million in the quarter, and steel distributors declined by CAD 15 million due to the moderation of steel prices that particularly impacted our U.S. distributors business. There was a CAD 18 million favorable variance in other, which included the pickup from TriMark and the reduction in variable compensation expense. Somewhat of an offset is the mark-to-market on our stock-based comp that was neutral for the quarter, an additional recovery in Q2.
On page eight, we have our segmented P&L information. The service centers is continuing to do well amidst the market volatility. Revenues were down versus Q2, but still represented one of our top three quarters. Tons shipped was down 5% versus Q2 due to the summer holiday effect that I previously mentioned, but was up 9% versus Q3 of 2021 due to the impact from the Boyd acquisition. One disclosure item of note is that starting last quarter, we included in our MD&A tonnage information on a period-over-period comparison. If you go to page 14 of our materials that show a five-year period, including quarterly information, we've also included for this quarter our historical tonnage going back for those five years on a quarterly basis, if you want that for reference.
Continuing with service centers, average prices were down 6% versus Q2, but up 4% versus Q3 of 2021. Gross margins were just over 22%, which translates to about $547 per ton. The gross margin per ton and EBIT of $67 million are strong by historical frames of reference and also in the context of the recent steel price declines. In energy, we're continuing to see positive market sentiment. Our energy revenues were up 9% versus Q2. Gross margins came in at 27%, an operating profit of $30 million, which are very nice levels compared to the periods before we monetized the OCTG line pipe businesses. Distributors' revenues and operating results came down as they were impacted by the moderation of steel markets.
That being said, the bottom line operating profit of CAD 13 million was pretty good compared to historical periods. On page 9, we have illustrated our inventory turns. This chart shows inventory turns by quarter for each segment with energy in red, service centers in green, and steel distributors in yellow. In addition, the black line is the average for the entire company. A few observations. Overall, our inventory turns remain strong around 4 turns. By sector, our energy and service centers were consistent in that 4-4.5-turn range. For steel distributors in yellow, the inventory turns were around the same level of 2.3 in Q2 and Q3. On page 9, excuse me, on page 10, you'll see the impact of the inventory turns on dollars.
Total inventory remained at around CAD 1 billion as of September thirtieth, which is a small increase versus June thirtieth. The changes within the segments weren't significant versus June, but we do expect to see some inventory tonnage drawdowns and average cost reductions flowing from both distributors and service centers over the next several quarters. On page 11, you can see the overall impact on capital utilization and returns. Our capital deployment is up to around CAD 1.6 billion, and our LTM returns of 41% remain very strong by both historical comparisons as well as versus our competitors. If we go to page 12, want to frame up how we see our capital priorities going forward. For investment opportunities, we seek average returns of over 15% on average through the cycle, and we've delivered well above that over multiple cycles.
The ongoing opportunities for us are threefold. One, value-added projects, which we've talked about a lot in the past, are continuing, and they are multiyear initiatives for us. We moved forward with several projects in this past quarter and expect to invest around CAD 30 million per year on these discretionary capital projects for several more years. As a reminder, these projects typically have better than three-year paybacks. Second item is facility modernization. In several cities, we have legacy locations that can be upgraded and consolidated into newer and more modern facilities. These projects will allow for volume growth, increased operating efficiencies, and improved health and safety conditions. In a number of these situations, we'll also be able to monetize the real estate from our existing locations and thereby reduce the net capital costs for those types of projects.
We recently approved the CAD 7 million net investment related to our Saskatoon operations. This project is underway and should be finished in early 2024. In total, we expect around CAD 50-75 million of these types of investments over the next five or so years. In terms of acquisitions, we remain committed to our financial and operating criteria as we look at acquisitions. That being said, we expect to remain disciplined yet active in seeking out growth opportunities that fit into our existing business units. In terms of returning capital to shareholders, we've adopted a more balanced approach to returning capital to shareholders over the last number of months. For dividends, we have maintained our CAD 0.38 per share per quarter dividend, which equates to about CAD 24 million per quarter.
In addition, during August and September and into early October, we purchased around 670,000 shares under our NCIB for just under CAD 19 million in total. 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. It has been a really tremendous nine months in 2022 so far, and is really a direct result of some very strong contributions by our 3,000+ member teams. Operator, that concludes my introductory remarks. You can now open the line for any questions. Thank you.
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. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Michael Doumet, Scotiabank. Michael, please go ahead.
Hey, good morning, guys.
Hey, Michael.
This is the seventh quarter in a row that Russel beats consensus, just in case you guys weren't already tracking that. You know, obviously incremental strength in the energy side this quarter, but you know, metal service center profitability is down, you know, versus last year, but still better than any other quarter before 2021. Can you give us a sense, maybe just breaking out, you know, how much value add is helping here just in terms of maintaining margins?
Yeah, no, thanks for the question, Michael. Yeah, we have noticed, but appreciate you pointing it out there on the seven straight quarters. It is helping, and it's an incremental that you see that every time we add equipment and add machinery. As Marty said, you've seen less than three-year paybacks on that. We continue to add, that continues to ramp up. We're seeing that margin impact. Again, we think that will raise the bar. I think we've mentioned this before, but probably around two points, over time. We're moving in that direction. I think you see that as a reflection now in our margin performance.
John, just on that two points, you know, presumably you're comparing that with you know, pre-COVID, pre-pandemic. How much of those, you know, that 2 points do you think you've achieved already?
I would say we're halfway to maybe a little over halfway there. Again, this is probably another two- to three-year window before we maximize the opportunities that are in this value added at the current projects we're looking at. We may expand that further into areas that we're not currently in. We're evaluating those on a day-by-day basis.
The only thing to supplement is what's interesting is as we have done some acquisitions over the last couple of years, and probably as we continue to look at those, they also come with embedded opportunities within them. So, you know, we're, you know, halfway along within our existing portfolio. But with the incremental pieces that come with new acquisitions, there's also new opportunities that often come with them, and we have seen that with the last couple of acquisitions that we've made. So, it's a moving target in terms of the incremental opportunities that are out there.
Perfect. Thanks. Maybe just a second question. You know, nice to see the multi-pronged capital return and capital reinvestment strategy laid out. On the reinvestment piece, are you finding M&A today competes a little bit more closely on a return basis versus buybacks?
From an economic perspective, Michael, is that what you're referring to?
Yeah, from the return basis, like which one makes more sense in terms of multiple.
They both can make sense is the way I'd characterize it. In the last quarter, we, as we mentioned, bought back a bunch of our stock as we thought it was fairly cheap. That was opportunistic. You know, we have our metrics that apply for acquisitions as well. If we can buy opportunistically, either internally or through acquisition, both make sense for us. It's not really one or the other. We can do both if they both make economic sense.
What we have seen over the last little while, though, probably going back more six months to a year ago, is a lot of M&A opportunities that just didn't have really good values attached to them. Our expectation or perhaps our hope is that if we have a moderation of the economic conditions, we'll see a more balanced approach to valuation expectations on acquisitions, which kind of lines up for us where we can do both acquisitions and to the extent that opportunistic buybacks make sense, we can do both.
That's great. That's really helpful. Thanks, guys. Nicely done.
Great. Thanks, Michael.
Thank you. Your next question comes from Michael Tupholme, TD Securities. Michael, please go ahead.
Thank you. Good morning.
Mike.
Was hoping to start with a couple of questions regarding the energy field stores segment, strong performance in the quarter and your near-term outlook commentary regarding that segment remains positive. I guess the question is, as we look forward really to next year, can you talk about your expectations for continued growth potential in that segment from a revenue perspective?
It looks like there's a lot of capital to spend and that there is more discipline going on on the E&P side, but they do have a lot of capital. Backlogs are very strong right now. We're seeing those already well into second quarter. I'm now looking past break up and beyond now, so early third quarter. We feel like the revenue will be steady. Potential projects are out there that could increase revenue for us in the energy field stores, and then we're growing market share on both sides of the border.
Okay. Sorry, just to clarify, John, when you say steady, are you saying sort of the baseline at least steady, but potential for some increases? Did I understand that correctly?
Yeah, that's right. I think there again, I think the energy will remain very steady at the current price of oil. I think you know, there are potential for some projects that are out there for potential nice size increases going in both Canada and the U.S. So again, there may be some potential M&A opportunities for us on energy to expand some of our value-added processing there. We'll continue to look at that. But on the same store basis, we think it's slow, steady increase. Then with these projects, potentially some nice pops along the way.
Okay. Just because this segment doesn't include the OCTG line pipe anymore, just from a seasonality perspective, you know, when we look out to, say, next year, can you just help us sort of make sure we understand the seasonality properly?
Yeah. The biggest challenge with seasonality obviously is in Canada. When we're looking at breakup, things just slow down because they can't get the pipe into the field. Again, that does impact us as far as what projects are going forward. We'll deliver some to the pads, but it's still very difficult transportation. That as an industry as a whole just slows down for that roughly six-week period, depending on mother nature, whether it's four weeks or eight weeks. The industry as a whole will typically slow down some projects there. There are some maintenance projects, but there is limited transportation opportunities. The large majority of our energy obviously still being in Canada. We'll see that seasonality impact.
It's not materially different going forward than we've seen historically, given the change in sort of composition of the segment.
That's right. Keep in mind, field stores would dip down, but they wouldn't stop where your OCTG line pipe would, you know, go to no revenue or little to no revenue during those periods. There is a maintained or an even bandwidth or stable band earnings during that cycle and revenue for the energy field stores. There is some maintenance component. There's some things going on, but they don't just have revenue stop like the OCTG line pipe did.
Got it. Just last one from me on energy. It's not for the segment, but for the TriMark JV earnings. Marty, you said it was CAD 13 million of earnings and CAD 2 million of preferred share dividends in the quarter. Like, with the strength you're seeing in energy markets, is that the sort of level of run rate performance we should expect from that JV, you know, quarterly, on a quarterly basis now? Or how do we think about that going forward?
Near term, it remains strong, but on average, no. This is an above average level. This is a well above average level, and we're enjoying it while having it. We're reaping the dividends as a result of it, but it's not a sustainable level at this level.
I mean, to the extent that things don't roll over in the sector. Like, I understand that this is a cyclical, you know, there's still cyclicality here, so, but, you know, for the foreseeable future, assuming there's no kind of rollover in demand, this is the kind of level we should be expecting.
Let me put it to you this way. In the very near term, and then circling back to your question to John about the seasonality and spring breakup in Canada. The very near term, we're still at a really good clip for that business. You know, spring breakup will kick in in Q2 of next year. That's on the horizon. With what we see today, it remains strong. Absolutely, it remains strong. There will be some seasonality that kicks in next year and then how the cycle evolves, it'll be what it'll be. For the Q4 of this year and probably Q1 of next year, it remains very strong.
Okay. Just shifting over to service centers. You talked about some destocking by your customers in the third quarter and some cautionary or some cautiousness around buying as well here, I think in the fourth quarter. I guess when we look at same sort of tons, should we be thinking about a sequential change that's consistent with what you saw in the third quarter? This sort of down 7% sequential in the third quarter. Like, is that the kind of order of magnitude we should be thinking in terms of fourth quarter versus third quarter?
Yeah. That's fair, Mike. That order of magnitude. As mentioned on the call, we included some new information in the back now that shows our quarter-over-quarter shipments going back five years. You can see that seasonal dynamic that plays out. There's been a couple times, for example, fourth quarter of 2021, we made an acquisition, so the numbers are a little bit apples to oranges. If you look back over those five years, you'll see that order of magnitude between Q4 and Q3, the seasonal impact. You know, 7%-10% is probably on average what it's been over an extended period between Q4 volumes and Q3 volumes. Sorry, 7%-10% down, Q4 versus Q3.
Right. Okay. I'll get back in the queue. Thank you.
Great. Thanks, Mike.
Thank you. Your next question comes from Ian Gillies, Stifel. Ian, please go ahead.
Morning, everyone.
Ian.
Good morning.
In the metal service segment, we tend to have a focus on HRC price because it's in our face. Can you maybe talk about what's happening with some of the other products within that segment, whether it be plate or some of the other upgraded products, and how they may be performing better or worse than maybe the spot HRC price?
Sure. I think the spot HRC price has probably been under the most pressure. All the commodities are out there in that. If you're looking at long products, be it beams, bars, anything that's not a product of coil, I think is probably performing a little bit better there. It's more tied to scrap. It hasn't had the volatility of the others. HRC has had the most volatility. Again, you have the most supply there. It's a supply and demand issue. When you look on the plate side, it's performed by far the best. It has the most level spread between scrap and the actual finished good price. You do have a limitation on the number of producers in North America. There's five.
They've done a good job, and kudos to the mills for sustaining discipline to maintain that price. We have seen it drift south, but it's in a very good place right now. Historically, it's at all-time highs. It's hovering around that area. Demand for that product, again, seems to be stable when you look at construction, you look at infrastructure, you look at heavy equipment, ag, all those things, energy, are going really well into next year. Those all should bode very well for plate. Pretty bullish on where plate's headed. The challenged product we think will be the HRC and the product of HRC, again, just due to supply and demand dynamics, that there's, again, a lot of supply out there in North America.
Yeah, I know. I would agree with that sentiment. If we switch over to the energy supply side, given the strength in that market, is there any intention to add more field stores organically over the next 12 months to capture markets you're not in or maybe add geographies that you're not at yet? I guess along those same lines, is there any intent for any major expansion at your existing field stores to maybe increase revenue per store?
We're always looking at M&A. We think there'll be opportunities. We're looking at maybe going out into more of a value add component in the field stores as well. We're exploring some of those options on both sides of the border. Growing with our existing stores, we'll move as the rig and the work moves, but also maybe looking at different products that go into different product lines, such as solar, wind, other opportunities. We're in the same fields, and we supply new product lines there, so we're exploring those opportunities now as well.
Okay. Last one from me. The dividend is obviously a board decision, but are you able to provide any update around how you're thinking about that, given the strength of the cash flow position, the strength of the balance sheet? It's another nice way to return cash to shareholders, and you're obviously have capacity to do so.
Yeah. It's a good question. The way we look at it is sort of that last slide that I went through, which is the balanced approach. We do have a healthy dividend currently. For the last quarter was the first time that we've returned capital to shareholders through a share buyback. The numbers were almost the same, CAD 24 million with the dividends, but CAD 19 million with the share buyback. Kind of having a balanced approach and having the ability to flex where it makes the most sense. We visit the dividend with the board every quarter, so I can't predict what the future is gonna hold. For purposes of where we are right now, we view it's a very healthy dividend.
We have capital that we can deploy in a very balanced way across other areas, including the share buyback that we did last quarter for a little bit, as well as some internal investments, as well as probably some M&A opportunities that will continue to emerge in the period ahead.
Okay. Thanks very much. I'll turn the call back over.
Thanks.
Thank you. Your next question comes from Frederic Bastien, Raymond James. Frederic, please go ahead.
Good morning. Just wanna build off your comment made about plate and the limited numbers of producers out there. There is new capacity coming on stream, I understand, so just wondering how that might impact pricing on a go-forward basis.
Yeah, again, with the number of producers, number of mills will change with the new Brandenburg mill coming on, but number of producers, that will actually still be the same with Nucor being one of those producers. And I don't know what the benefit for them is, any of the five producers that are in North America to drop the price because they're not gonna get another ton. So again, they have a very disciplined approach, which is the first time in my 32 years I've seen this much discipline again, so I applaud the mills there. So I don't know what they gain by dropping the price. There could be some volatility as you bring on a new mill if they don't have the supply or if they don't have a customer buying in the capacity that they want.
It could. We could put some of that in the first quarter, maybe second quarter of next year. You know, I don't foresee it right now, again, with just the limited number of producers out there.
Okay. With the midterm elections just passed, is there any risk to the Section 232 tariffs to be removed? Or like what are your views there? What is the general consensus?
Well, for starters, I'm still not sure exactly who won or still waiting to get all that sorted out, but I don't see either side making a change there. Again, I think it becomes a real political upheaval there with some key states, especially Pennsylvania and with the steelworkers. I don't see there being a change. There may be some things that move around from the Section 232 from tariffs to quotas or vice versa. There may be some quota that moves around from the government to alleviate some pressures in certain products that we have in North America. I don't see a whole lot of change in that going forward.
Okay. Cool. I have a question for Marty. You are targeting upwards of CAD 75 million in facility modernizations, which should allow you to sell real estate at legacy locations. How much value do you reckon is tied up in these locations?
There's value tied up in locations that we're potentially going to modernize in new locations as well as legacy locations that are in reasonable locations. There's probably CAD 150 million-CAD 200 million, if not more, in off-balance sheet value attached to current market values for our real estate versus what's on the books. I mean, we've had some real estate in our portfolio for 50 years and obviously completely undervalued in the context of the current market. You know, just orders of magnitude, call it CAD 200 million + of off-balance sheet value attached to that real estate.
Great. That CAD 75 million dollar in investment, is that net of any monetization that you might do?
Yeah, it is. In using Saskatoon as an example where we announced it's CAD 7 million net, and that's net of the realizations that we're gonna have off of the existing real estate, yes.
You'd be quite active in terms of upgrading your facilities and
Yeah. Upgrading the facilities is gonna be a big focus item for a number of years. You know, sometimes it will involve legacy locations, sometimes it won't. You know, to your, the starting point of your question, we have a fair amount of legacy real estate, some of which we're gonna continue to operate under that have pretty significant inherent value in it.
Awesome. Thank you.
Thanks, Ruth.
Thank you. Your next question comes from James McGarragle, RBC Capital Markets. James, please go ahead.
Yeah. Thanks, guys. Most of my questions have been asked, but as you think about acquisition opportunities, I was just curious if there's been any changes in terms of you know, geographic location or focus on service centers, as well as kind of you know, where we're at in the cycle with maybe some weaker steel prices and demand, at least in the near term. Thanks.
Again, we've said this for years, but we continue the U.S. obviously being a big footprint for us in steel service centers. Again, we will look at energy on both sides and the opportunities with fuel stores, but our emphasis would be on service centers in the U.S., obviously, with a value-added component to build off of our network there is our largest opportunity we think for growth. We have a pretty strong network across Canada now, so it's more of a niche place, similar to our Color Steels acquisition that we did, we have to put it, you know, plug in in the right place and the right opportunities. There are some of those out there in Canada as well. Those are the type of things we're looking at for that growth.
Regarding your comment to valuations, we think some of that expectation may be resetting. Again, if the economy does come off, it slows a little bit in the future, that may bring some valuation expectations of the sellers into a more reasonable arena. We've seen some expectations have just been too high for deals we've not transacted at all, and are not just with us, but with the broader markets that have been out there. Again, that's where we shifted back to, you know, our NCIB and looking at opportunistically at our stock being cheap versus valuation of buying something at a peak. We're hopeful that we will see, you know, some valuations change. We think there's gonna be a fair amount of opportunities over the next two years out there to look at.
Great. Thanks for the color.
Thanks, Alex.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one on your touchtone phone. Your next question comes from Michael Tupholme, TD Securities. Michael, please go ahead.
Thank you. Marty, can you provide some more detail on the inventory reserve provision taken in the quarter and what area that was in and where that occurred?
It's a really granular bottom-up calculation that we do on reserves every quarter. For us, it's not so much, you know, done at a macro level, it's really done at a micro level buildup. It is within, primarily within the service centers. Obviously, given the robustness of energy right now, things are in really good shape from that perspective. As the analysis is done every quarter, again, it's done product by product, SKU by SKU, so it's literally thousands of line items that build up to that. It just so happens, no surprise, that given the environment we've been in for the last little bit, there are some products in some areas that are underwater.
It's not a very significant number, the CAD 6 million in terms of the change quarter-over-quarter. Sometimes, Mike, as you know, you'll see that reserve that we have, sometimes it goes up and sometimes it goes down. In terms of specific areas, it's a little bit in a few different areas, so it's not isolated to one specific area or one specific product, is the way I'd kind of characterize it.
Michael, also just to add a little more color there. If you looked at us historically when there were downturns or changes in that, large majority of those write-offs would come from OCTG and line pipe due to the long lead time nature for their items being 6-9 months out. We've now exited that side of the business, and that risk has come off the table for us.
Yeah, no, that's all very helpful. Thank you. Part of the reason I wanted to ask and understand where that was, and I appreciate all the detail, Marty, and John, I guess just wanted to initially be clear on which segment that was impacting. I guess the next question is just around margins in service centers. Gross margin is 20.1% for the quarter. I think if you normalize for that CAD 6 million, if we assume it's all in service centers, you're up sort of mid-20% range. How do we think about margins going forward? Like, you know, there was some obvious pressure on HRC prices during the quarter, and then I guess we continue to see some pressure here, recently.
You know, is it sort of a situation where we should assume that level carries on going forward, or is there more downside from what you saw in the third quarter?
Yeah. The way I'd characterize it, there's obviously two moving pieces in terms of margin. One, revenues, and two, cost of goods sold. As I mentioned earlier, our cost of goods sold per ton were actually flat Q2 versus Q3, and that is really a function of the timing lag of when stuff comes in and it's heading out the door. Cost of goods sold, all other things being equal, probably gonna start moderating down. There's some benefit flowing through in Q4 as a result of that. That being said, price realizations are probably off a little bit as well. When you put the two things together, we're probably gonna be, from a margin perspective, if you do it dollars per ton, probably down a little bit quarter-over-quarter.
From a percentage perspective, if you look at that little over 20% gross margin in Q3, flat to down a little bit is what I'd characterize for Q4.
Okay. That's great. Thank you. And then I guess just shifting over to steel distributors, which we haven't talked about yet, revenues held in pretty well in the third quarter, if we look at where you were in Q3 versus Q2. Given the changes in steel prices we've seen, and some of your comments around customer you know cautious behavior, I know that was more for service centers, but nevertheless, just wondering if you can help us think about steel distributors going forward, both from a revenue and margin perspective.
Again, you'll have your normal seasonality of Q4. Obviously, there was some lag effect from just some revenue realization from timing getting things through the port, especially in our Canadian service or Canadian distribution. That will start to normalize out as well. In the U.S., you will see a little bit of a pullback, especially in the Texas market, where we have a big Houston-based business. Their tax that they have at the end of every year, the customers try to go down to zero and then bring everything in January one from a tax perspective. That's in more of a historical pattern you would always see from us. We think that Q4 will.
Revenue will lighten up, earnings will lighten up, although the distribution revenue and earnings is pretty locked in Canada with the back-to-back sales. I think that will pick up again in Q1 as people reverse course, things start to pick back up where we feel like the economy's gonna probably gain some momentum in Q1, and I think they'll gain momentum as well. So they'll have inventory ready to go to service that market when it bounces back.
Okay. That's helpful. Thank you. Lastly, we don't talk about this very often, if ever, but the Thunder Bay Terminals piece, I noticed the EBIT this quarter was a little higher than usual, CAD 3.8 million. Don't think I've seen it that high ever. What is the driver there, and is that some kind of a new normal or is that elevated versus what we should expect?
It's a good level. It's a high level, and it's driven by volume activity through the terminal. As we talked about seasonality earlier as well, there is seasonality attached to that business as well, obviously, with ports open and closed. But it's a pretty high level, and we're pleased with how their results have been for the last couple quarters. But that'll moderate off as we go through the winter period and the canal pulls back in terms of its activity.
Got it. Okay, thanks for the time.
Thanks, Mike.
Thank you. There are no further questions at this time. Please proceed.
Great. Thank you, Operator. Look, I appreciate everyone for joining the call. If you have any follow-up questions, please feel free to reach out at any time. Otherwise, we look forward to staying in touch and having conversations during the balance of the quarter. Thanks, everyone.
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.