Q2 2020 Stella-Jones Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to Stella Jones Q2, Twentytwenty earnings Conference call. At this time, all participants are not listen only mode. Following the presentation. We will conduct a question and answer session and instructions will be provided at that time for you.
Did you up for questions. If anyone has any difficulties hearing the conference. Please press star followed by zero for murder assistance at any time before turning the meeting over to management. Please be advised that this conference call will contain statements that are forward looking and objective number of risks and uncertainties.
That could cause actual results to differ materially from those anticipated I would like to remind everyone that this conference call is being recorded on Wednesday August 2020, I would now like to turn the conference over to Exascale President and CEO. Please go ahead.
Good morning, ladies and gentlemen.
Sure so by the troubling Chief financial officer of intelligent.
Thank you for joining us for discussion of the financial and operating results for stellar Jones, a second quarter ended June Thirtyth 2020.
Our press release reporting Q2 results was published earlier this morning.
Along with our MDD can also be found on our website at www Dot Stella <unk> Dot com.
We will be posted on SEDAR today as well.
Let me remind you that all figures expressed on todays call art in Canadian dollars unless otherwise stated.
Let me begin my thinking each and every 100 2300 employees across North America, who have worked diligently and safely to ensure the critical contiguity of arc central operations and support our customers throughout dependent Nick.
With the exceptional contribution from the team and proven resiliency of our business model, we delivered record results this quarter.
Well, we realized solid performances in our utility pole and really type product categories, which continued their growth momentum from the first quarter and benefited from exceptional demand for residential lumber stemming from increased home improvement activity in the context of the norm.
Quarterly run its course Luna virus pandemic.
Sales grew 15% this quarter compared to the same quarter last year to $768 million and EBITDA increased 28% to $120 million, surpassing the 100 million dollar Mark for the first time in a single quarter.
During the quarter, we generated strong cash from operations, which allowed us to reduce our leverage and position the company to continue to deliver value to our shareholders.
Let me now turn to a brief overview over second quarter sales results by product category.
Utility pole sales amounted to $230 million up from 200, and an $11 million generated in the second quarter of 2019.
The increase this quarter is primarily driven by upward price adjustments in response to raw material cost increases.
Romit railway Tei sales increased to $225 million up from $199 million in the same period last year.
Excluding the currency conversion affect sales rose, 10% as certain class when customers accelerated their twentytwenty maintenance program.
While demand remains strong for non class one customers supported by a healthy level of untreated tight inventory.
[noise] residential lumber sales totaled $257 million up 32% from $195 million generated last year.
This significant increase in sales is attributable to greater than expected volumes as a result, a strong home improvement activity in the context of the quoted 19 pandemic.
Industrial product sales amounted to $33 million down 6% from $35 million recorded in the previous years quarter, primarily as a result of lower piling project activities.
The sales of logs in lumber or product category, you to optimize procurement was $23 million down from $27 million last year sales decreased given the limited market supply of lumber.
So then I will now provide further details regarding our results and financial position before I conclude with our Twentytwenty outlook. So then huh.
Thank you, Eric and good morning, everyone turning to profitability.
Given by the strong sales growth this quarter gross profit increased 21% to $131 million compared to gross profit of $108 million in the second quarter last year.
Similarly, operating income and EBITDA increased 31% and 28% to $101 million and $120 million respectively.
This increase is largely attributable to strong pressure treated with demand, particularly for residential lumber.
Pricing improvements, which more than offset the rising raw material costs.
Net income rose, 33% for the second quarter to $69 million or one dollar and two cents per share compared to $52 million or 76 cents per share last year.
Turning to liquidity and capital resources.
Cash flow generated from operating activities totaled $146 million in the second quarter, largely explained by improved profitability and the seasonal the reduction in inventory, which was amplified this quarter by very strong residential lumber sales.
We deployed the cash generated to invest in our network return capital to our shareholders through dividends and reduce our long term debt as at June Thirtyth 2020, the net debt to trailing 12 month EBITDA ratio decreased to 1.9 times and we had access to 200.
$5 million in liquidity through a combination of cash on hand syndicated credit facilities and an undrawn the man facility.
Given the strength of our balance sheet today, Stella Jones announced a normal course issuer bid, which will allow us to repurchase up to 2.5 million shares representing 3.7% of our outstanding common shares from August 2020 to August 920 21.
In addition, consistent with previous quarters. The board of directors yesterday declared a quarterly dividend a 15 cents per share payable on September 18, 2020 to shareholders of record at the close of business on September 1st.
I will now turn the call back to Eric for the outlook Eric.
Thank you. So then huh.
We revised our earnings guidance were 2020 to reflect our strong operating performance this quarter, largely driven by the greater than expected demand for residential lumber.
As a result, we now expect EBITDA for Twentytwenty to be in the range of $320 million to $345 million up $20 million from the previously disclosed guidance. The lower end of the range continues to reflect on certain impact of the pandemic on customer demand.
We also expect the EBITDA margin to be comparable to 2019.
This revised guidance assumes an exchange rate of one point 38 for the balance of the year.
The Twentytwenty Capex guidance remains the same as previously disclosed in the range of $45 million to $55 million.
The company strategic vision focused on continental expansion remains intact and acquisitions continue to be an integral part of this growth strategy.
Our pipeline of acquisition opportunities is active and we're in discussions with several identified targets across North America, but certain but the current context is creating certain headwinds.
We remain committed to delivering value to our shareholders as part of our capital allocation approach the company instant intends to target and net debt to EBITDA ratio between two and 2.5 times.
This target leverage ratio should allow us to return capital to shareholders and take advantage of internal growth and acquisition opportunities, while maintaining a healthy financial position.
This concludes our prepared remarks, we will now be pleased to answer any questions you may have.
Thank you if you'd like to ask the question Press Star one on your telephone to withdraw your question pressed Stefanki Faceplates probably compiled the question.
Your first question comes from like the line of Smart Neville with Scotiabank. Please go ahead.
Hi, good morning, Thanks for taking good margins.
Good morning, or just somebody again, obviously very strong quarter.
I guess my question is just around the guidance.
At the midpoint do would imply roughly flat EBITDA in the back half, whereas Europe north of 25% in Q2.
So maybe just trying to understand the puts and takes a sort of whats in the guidance or how you're thinking what buckets to reconcile the difference between the two periods.
Yes, certainly so I think the way to look look at the range. In this particular contacts is to see the lower end.
As being I guess negatively impacted our continued to be impacted by the current pandemic and uncertain economic conditions and you Doug we could view there with a higher range of the guidance more a return to historical historical demand and business activity. That's the best way I could describe it.
So using the middle point might not necessarily be the the best way to look at a depending on how you know general economy and the depend emeka balls in the next six months.
Sure.
Just to help us again get a better sense of quarter in.
The quarter and I guess recent trends, maybe just talk about the.
Pace of improvement there, it's sort of the cadence through the quarter of demand through your various product lines on this I guess I'm curious if residential is tinkering tapering off a bit are flattening out I'm, just trying to get a better again understanding of ties where you've talked about some of them maintenance activity being pulled forward sort of what that means for the backup.
Okay. So.
Just to be clear you're talking about the Q2 results or did the second half of the or.
No sorry, the yeah through the quarter and I guess into July sort of the pace of improvements across ties in residential is going is it sort of moderated a bit sort of is no you spoke to some pull forward and ties.
So I was thinking the quarter July but if you want to talk in the second half it'd be pretty good as well.
So I mean during the quarter to forego product category, one at a time.
So for utility bills as we indicated although most of the growth has come from a from a year over year pricing.
Which was driven to some extent by.
Increased costs related to the products.
What we've seen with regards from demand from customers a lot of for certain utilities across North America has been cautious in deploying there'd or maintenance crews.
In the context of the pandemic and that has curtailed.
Domestic certain extent for certain utilities, so that has slowly been resolving itself throughout the quarter. If I think about in early April to what we're seeing today that has a the volume piece has a has improved.
With regards to the railway business, a real with high sales.
Were positively impacted from pull forward from certain class ones as nor the saw an opportunity with lower traffic on their network to choose not to be maintenance forward that being said.
In general terms class ones have not necessarily changed or their annual program. If you want so it's essentially taking.
Three Q4 sales into the second quarter would just we're always grateful to see those are our expectation on sale materializing. This gets materialize a bit earlier, we also saw healthy demand into non class one business.
As there has been significant into for has been significant quoting activity in the first half of the year.
Has been very very interesting for us and we're very fortunate to have proper levels of untreated ties to the will to support the support settlements.
Last but not least the residential lumber as our result.
Sure. This morning demand has been very strong throughout the second quarter.
I would say no we.
We actually depleted some of our finished goods inventories.
And looking forward our customers are telling us that these still see some some healthy demand going forward into h. too.
Okay, maybe just two quick follow ups of cement pricing and polls.
Can you just is that something that we continue through the second up.
I can just based on prices are up.
Year over year, and then just on the residential just confirm it it doesn't really sound like the demands tapered off that.
Maybe just one clarification them up and that's a note.
No the demand is not tapered off you know.
I guess, maybe flattish or slightly up but the demand has not tapered off and note due to costs. They were due to pricing dynamics will really depend on on the case by case, depending on the but actual agreements, but most often it is driven by the cost profile of the products and also the profile of that of the product with the customers ordering.
Yeah, Thanks ill get back to you and I guess two quarter.
Good my pleasure.
And your next question comes from the line of America, Tao, Let's see IVC capital markets. Please go ahead.
Hi, good morning.
Eric.
The tight ties side do you have a sense yet as to how your class one customers are thinking about their 2021 volumes. It sounded like that 2020, there's theres been no change so far.
So thats a composition will be having in in the next few months with our class one customers.
I guess the best I can I can provide at this point is we're sort of expecting status quo or.
Otherwise no one no one has come out to Seo expect lower levels were 2021, but as we're now preparing our 2021 budget and thinking about starting our procurement program for inventories for next year.
Conversations or will be ongoing most often it is through August September and in October.
Great. That's so that's helpful and just on the pull side one of your out your peers was pointing to risks of some projects slipping into 2021 and.
Kinda rationale, they're giving was procurement issues for line hardware and Transformers are you seeing that as a potential headwind as well.
We haven't heard much about product being delayed because of a supply of.
[music].
I guess at a record complimentary, but other accessories that go into the into the.
The data did the network infrastructure.
No I think best I can say with regards to our to our demand is.
We've always says when the last few years guided to mid single digit growth for utility Poles, and that's where we see will be most likely be ending up here.
Fair enough and not so then it could you give us a breakdown for the 32% growth in red lumber how much of that was volume and how much was was price.
Essentially all volumes.
On the land, Okay. So given that you know.
We would you guys expect the 32% growth rate to be even higher in Q3, just given the huge rally and we've seen in lumber prices and it sounded like volumes, having haven't really changed sequentially.
Well no so.
Based on into a historical pattern into Q3 is usually a bit lighter than than doing than the second quarter.
So, although we had a great second quarter. This year I do expect our third quarter to be higher at least volume wise than the than last years last year sales.
So that's the best way I can describe it for now this is based on what our customers are indicating.
Okay, Okay, and Eric maybe put a different way just lumber prices hold steady where they are and based on your pass throughs, what would that maybe year over year.
Pricing improvement in Q3 be for Red lumber.
Yeah.
So I.
I won't quantify it but you are completely right that.
Lumber being.
Commodity item there is a you know.
Agreements with our customers and collaboration as when we see the price increases see to your point there was a pass through where the cost decrease.
Get gets moved over to to a customer their customers expected the themselves in most cases are purchasing what lumber on the market. So they understand the challenges we have into current context, so you're right that in the second half of the year, we could see some effect on.
Being attributable to the pricing.
Okay Fair enough Ah, that's that's only idle I'll turn it over thanks.
Thank you I'm here.
And your next question comes on line of Walter Spracklin Butt RBC.
Please go ahead.
So if I were to come back to visibility.
You issued guidance previously and kind of brought it down could you point and now bringing it back up just curious as to what was the area. It sounds like it was residential them or be you tell me what was the area of the biggest delta in terms of what you're expecting three months ago and what's happening here today.
And is that visibility.
Improved now now that were a little bit into the third quarter here as you give guidance for the rest of the year or are you in kind of the same situation where things can can can.
Can change abruptly to lead to that to that led to that guidance change.
So you're completely you're right the bump for the major part of the bump, but the guidance comes from the strong performance from from residential lumber.
So no based off of all of our previous forecast, we need to acknowledge that the great results. We had this year and I don't expect to pull back on residential lumber in the back half of the year that being said in my comment with regard to our guidance on.
If the lower end of the range being potentially impacted by current virus.
It really depends how things will play out as we're seeing cases increase in the U.S. due to where we see more lockdowns or will we see some pull backs as I mentioned certainly utilities are.
Very cautious with their employees.
So so thats I guess the double repair the raised at a higher part of the ranges that.
Some labor day, we knew we see cases drop and you know we know a lot of customers have plans and projects where maintenance and it just depends really feel comfortable enough to be able to executed safe to say that I strongly believe into guidance we provided today.
And.
I really sincerely believe that we will realize.
We will realize that guidance in the second half of the year.
Yes, I mean back the merchant original question, even if we use the high end of your guidance I mean, you're up even going first half compared to last half your up 16% over 20% in the second quarter, but at the high into your guidance, you're implying only a four.
For the rest of the year, so I'm just curious whether.
The pull forward. We've seen is now completely done and our again back to the question on lumber or you are you assuming assuming some kind of bearish scenario in your high high into your guidance here because.
As it looks from this this at this point forward it seems like given you've done you're trending at about 25% for.
For the rest of the year, you could probably do better than for.
For the preferred for second quarter second half.
So.
I don't disagree with that with your comment and I think one thing we didnt talk about.
As you mentioned to into term pull forward, we did see pull forward in railway Tei sales.
Into the second quarter. So obviously those are sales that outside of that will come into second half of the year. So that's also part of the consideration.
Hi.
I know looking out to 2021 is a difficult task.
If we look at the impact to covert 19 in the gyrations from pulling forward and.
And all that is it is it safe to take to take your 2020 is there anything wrong with.
Taking 2019 in putting your long term growth rates that you had back then.
In each of these divisions to come up with a 2021 number is that.
Is that how we should look at 2021 or could there be a lower level of activity in 2021 because of the pull.
Revenue that was pulled into 2020.
It's a difficult.
Difficult question to answer, but you know if you're going to build the model using ourselves into 2019 and building in.
So growth off of that mix makes sense.
Well one thing I believe is the current.
Pandemic context has demonstrated our strength as a company, especially in the residential lumber business. We know we show the strength of our our vendor network to supply raw material, we showed our customers or ability to to continue to deliver into produce and I think we will get some some tailwinds out of that next year as weve.
Trading that were I'd like to believe that were to partner that a lot of a lot of retailers should be partnering up with so there's there's I guess theres that aspect to it.
And after that I mean for you for the other product categories were always either from.
You are correct I would expect if volumes don't entirely resumed for utility Poles. This year, we should we should see things.
Hopefully get better by the end of the year and hit or a bit of and normalized trend or growth trend into 2021.
Okay. That's all my questions. Thanks, very much thank you.
Your next question comes online and then all plucky with Desjardins. Please go ahead.
Yes, thanks, very much and congrats for the good quarter.
To come back a bit on residential lumber could you talk a little bit above the ability to meet stronger residential those strong residential demand in the back half given the depleted inventory and maybe also talk about the ability.
To replenish the the inventory level.
For residential lumber.
Thank you been lots of great question, So you're completely right.
[music].
The man from our customers in the second quarter was very strong and we did have to.
Dip into our in finished good inventory reserve, if you want to call it two to be able to satisfy demand.
As I mentioned earlier.
We have a very strong.
Vendor supply group.
Rick outstanding people that are willing to support Stella Jones.
We today have a constant flow daily flow of what would raw material coming into our plants. We're currently pushing capacity to be able to treat the inventory and you know.
Supply the market so.
I'm quite confident when it when I talk about us being able to exceed the volumes of 2090 in the second half of 2020, it really stems from my confidence in our procurement team to be able to.
Procure sufficient would in our operations into relative to treat it that being said, we're very mindful about finishing the year with.
Healthy inventory levels to be able to address the the 2021.
You know.
Year with regards residential lumber so that's top of mind and right now there's no indications that we were we will not be able to achieve that.
Okay, and given the strong improvement in lumber prices at it could you talk a little bit the about how margins could be impacted in the back half and maybe 2021 as there could be a lag.
Before passing through the price increase due to customers though.
Well in the current context.
As mentioned previously.
A lot of our customers.
Procured their own what would for construction purposes in a weaker to be able to treat it so the product or the lumber being a commodity and.
Right, that's not into market our customers know what's going on so we are able currently to pass through those increases. So I don't expect margin erosion thats, probably the best way I can put it Uh huh okay.
Okay.
That's very good and given the big movement in inventory, how should we be thinking about via the working capital movements for the full year and maybe if there's any change in big Capex expectation for 2020.
Yes, certainly I'll, let Phil then to answer that one.
Yes, so basically for the for the working capital of we're still a pretty much at all expecting as we have mentioned to the market probably a 50 million dollar.
[noise] trial for the year, just to be able to always maintain a chicken level of build of inventory for us for the next step for the next year, obviously in the second half with all the residential lumber sales being so strong there will be.
Significant inflow. So you know that might change a little bit, but just generally because I still am we're still targeting in forecasting that amount and the second question for the Capex, yet we're still that.
Aiming for the Oh.
Between to put aside of 65 million, we're comfortable that that's where we're at 2020.
Okay. Thank you very much more defined.
My pleasure bundle.
[noise] and your next question comes on line of my call top home with TD Securities. Please go ahead.
Thank you good morning.
Good morning, Michael.
Eric just first of all.
What I understand a little more clearly the breakdown between your organic growth and ties in polls, you've given some commentary, but but on ties and post can you give the volume versus price break down.
In the quarter in terms of the composition of the organic growth you saw.
In the quarter, so broad strokes spin and why.
Broad strokes of Michael.
So for utility Poles, we're talking.
Essentially pricing was driving.
What's driving the organic growth and you know with regards to railway tie. It was a combination of both but obviously since there is a pull forward there's different from certain class ones are definitely a stronger volume impact.
Okay, and then if we look forward with a pull forward and ties that you've talked about.
I understand you said earlier sort of no change in full year expectations.
Can you help us understand what that means for.
Volumes in the second half for ties.
Does that mean, they're down year over year or they are they fly them just it's hard to necessarily appreciate what happened in the last in last year's second quarter. So just looking for some.
Help there.
Yes, So I think you Youre your comment is right we could expect.
Lower volumes in the second half year over year simply because we pulled forward into the second quarter. So I guess sort of class when maintenance programs you need I guess, we need to look at.
The whole year maintenance program really to appreciate what happens with the volume there. The other piece of it is really the non class one where that environment is getting very competitive on the pricing. So both.
Our competitive in the sense of obtaining the of the winning to quotes and then again seeing some pressure because a lot of a lot of treaters and in this and this gives a smaller treaters and the industry that don't have class one contracts are aggressively trying to get business.
Okay. So so so down year over year in the second half in both in both class one and on class one is that what you're suggesting yes, yes exactly.
Okay, and sort of order of magnitude like mid single digit.
Where is it more significant than the.
Just.
Yes, I think maybe mid single as maybe a bit high but yes.
Yes, Hi, my neighbor too.
Sure Hi, meaning to two negatives right, yes, yes, yes, yes, but it's not.
So I hesitate because it's always the difficult under that was going to have it was a non class ones, but if you want to use a an assumption I think there would be here.
Okay, and then on the pull side it sounds so mainly price driven in the second quarter.
It sounds like you, maybe you're seeing some of the volume that that was.
The Didnt show up in the second quarter because of caution around coal that sort of maybe coming back if I'm hearing correctly.
Thank you talked about mid single digit growth for pulls on a full year basis. If we look at what you've done through the first half.
Yes, the math that I'm seeing sort of suggests maybe flattish organic growth in the back half that gets you to that kind of mid single digit numbers I'm not I'm not sure I'd kind of reconcile that like do you expect some positive organic growth and calls in the second half, yes, but not yes, but not as strong as a for first half driving us driving that.
For your percentage of it down.
Okay. So sounds like maybe in the second half something on the order of mid single digit proposals is maybe not unreasonable is that fair to say nothing that that's fine Yep that's fine.
Okay.
And then just back on the on the guidance you've got a few questions.
Appreciate that the sort of the commentary you've made around but the difference between the lower end of the EBITDA range versus the upper end.
Just to be clear at the lower end it sounds like there's sort of a deterioration in the broader.
The broader covert situation and things sort of really pull back and there are lockdowns again like it sounds like there's quite a.
Yeah that would that would be sort of I really negative outcome relative to where we sit right now in terms of coal that.
And then on the upper end like I'm, just not sure because that come to kind of a continuation of what you're seeing or are there some.
Is there some negativity and caution built into the upper end as well around potential.
Lockdowns or or or or sort of.
So I think.
Michael you're looking at the right way. So we are looking at the due to lower it as being you know stronger headwinds that we're not seeing today appear in the general market being quoted or.
Economic dynamics or financial dynamics, the upper end of a of the range also has a bit of conservatism you know as.
If I use it as a starting point, we would see things progressively.
Get better in the next few months. So obviously, we would hit our stride later in the second half.
In the second half of the year. So to your point there was a bit of of conservatism in in that in in the upper range.
But not a headwind thats.
That's just to reflect the fact that theres still a lot of uncertainty.
In the World right now and in the markets that you're serving and you're just you're trying to you're trying to capture that in the upper end of the ranges that that what's happening.
Yes, exactly as you know to treat that as they I know it was talking earlier about certain utilities in North America, you know being prudent with their maintenance program because of pointing to protect the safety of their employees were still seeing certain utilities still you know slowly getting out of that modes. So that's why I'm, referring to things picking.
Gradually so.
Cases, I mean cases in Canada, our have increased a bit but there is sort of hopefully stabilizing but we're seeing gets in the U.S. increase but.
It seems they view us economy, the term into to want to take off and to keep supporting activity. It's just very hard to read where it's going to go. So I guess, we didn't want to commodity fully bullet that after labor day, we're back to historical level. Then we'll be doing all of these great percentage of growth. So, we're just being a bit cautious and understanding that.
Theres lot of dynamics at play within obviously, some uncertainty a bit of uncertainty ahead ahead of us.
Okay do you see I think the uncertain trying to trying to factor in that uncertainty makes a lot of sense in this environment I guess just to just around this all out.
It seems as though thus far through the first half you really have not been affected by all of that uncertainty in factors theres actually been sort of a tailwind pretty significant one in the residential lumber business. So.
Like you just again just to be clear you are building and some uncertainty and some risk, but but thus far you have not really been affected by that to a material degree is that fair to say.
Well the degree performance is obviously, we had a strong first quarter, which really helped us start started a year and we were quite.
Great upbeat about our 2020 year, the second quarter, obviously got positively impacted by residential lumber, but as I mentioned, we did we did see some softening on volume on the volume side for utility Poles, and we're fortunate to see a pull forward on the on the railway ties. So when you factor all these you're right. All these great thing you know.
It's a it's a great first half of the year, but I don't want to.
Abstract the fact that we're still living in a world, where there's corona virus and certain economic pullback in either I'm, we're just being being cautious and considering those aspect.
Okay that makes sense, okay, I'll leave it there and in turn it over thank you.
Thank you.
Your next question comes from the line of non Sackey, Laura Laurentian Bank. Please go ahead.
Good morning, everyone I still am I hearing things its Mona.
Just just going back to the margin question.
Don't isn't as good improvement there I understand you you don't give a breakdown each segment I'm just wondering if it was a broad based improvement or if there was one but I think when our segment that clearly going onto that update.
[noise]. So just to clarify your question you're talking about EBITDA margin margin as a percentage that's correct.
So.
Well, yes, obviously, we we do we did benefit from pricing from railway ties as I mentioned pricing for railway ties utility bolt had a certain effect on the on the general margin also the fact that we got a lot of volume. It also helps you will general economies of scale within our facilities in particular.
Further the residential lumber.
Fair enough and just to follow up on that well when you see that the pricing we're up I am assuming the costs was also also will there be a lag effect in the second half on margins for that.
Hello.
I don't think so I think right now what we're seeing is reflective of what we can expect into second half of the year.
Fair enough and just on even dimension lumber side, assuming of course, there is that primarily from the big box customer and if that is against you see any potential opportunity if I'm not a big big box customer incoming quarter.
So the so we do have big box customers and smaller.
Would qualify as a dealer network so.
The strong demand has come from all fronts.
And you know all of these all of our customer base is sort of projecting strong overall strong strong a strong demand for the second half where at least a third quarter.
Okay, Thats, great and just one last from my end I know this M&A remains focused you guys and you said in your commentary that there's a strong pipeline, but given in the call. It environment do you think that anything Nickelodeon will probably be drag to 2021, rather than twentytwenty.
The timing is always difficult to two two to establish I mean, I'm quite a quite excited about the conversations we've had with a few customers or customers are free target in the last several weeks I think things are sort of picking up on the discussion front.
But then we need to go through the discussion on valuation.
And set forth the process. So the timing at this point is hard to predict but obviously, we our goal is to his too you know to bring to the finish line.
In the best possible or as soon as we as as we possibly can.
Transactions and obviously there is always the consideration of fair valued in multiples. So in the negotiating a deal that is favorable party, but I'd like to think that we we we'd like to <unk>.
Being bring to the table deal that are accretive for us diligence.
So thats the great color on Thats, all from my end and congrats on the great quarter.
Thank you.
Hi, Dan if you like to ask the question Press Star one on your telephone. Your next question comes on line of Max Vijay National Bank. Please go ahead.
Hi, This is levy I'm, calling from Alex. Thanks for taking my questions are I have a coupon question regarding that I think I'd be conciliation.
Historically, the depreciation of right at the asset light added back to reported EBITDA numbers, but I wasn't the case for this quarter I would just wondering why and the right views depreciation metric went up almost $9 million on a sequential BISA.
You could provide any color on how to think about that honestly at your run rate basis would be very helpful. And finally, how should we think about appetite guidance of between 25 million midpoint.
Does that in Q. The right have you thought that for the remainder of the yard.
So perhaps I can answer that Ah. So all our depreciation is added back and and the amount you know could definitely be inferred from my thoughts on the cash flow, where it's pretty consistent so depreciation of the fixed assets, a 6 million into first quarter 6 million in a in the second quick.
Yes, so 12 million year to date thinking for the amortization of intangibles, you know 3 million into first quarter for a in the second a quarter and depreciation of the right of use assets again fairly consistent nine in the first quarter nine in the into second quarter and you have the year to date amounts like I said that you could get.
I'm not an insight by going through that to the cash flow.
And actually we do provide the reconciliation in R&D any as well for the three month period and the six month period, and you could titles numbers back to their cash flow.
Okay. Thank you.
Welcome.
Thank you.
And your next question comes from comes from day, one of my call top hole with TD Securities. Please go ahead.
Hi, Thanks for taking the follow ups Ericsson one of the.
One of the recent questions were asked about M&A and it sounds like sounded like you said things were maybe picking up a little bit I understand the heart timing is hard to predict but.
Have the travel restrictions bedded hampered.
Your ability to advance discussions earlier in the year of those ban lifted and are you now sort of able to engage in more discussions.
Questions more easily.
Yes.
Obviously into yes, we're engaging in discussions however, travel restrictions have not been lifted port for sellers on anyhow.
We still believe that.
We want to keep our employees safe and we're not.
We're not allowing our employees to two to five they can definitely drive so depending on you know who we're talking to him makes things a bit more complicated but no the current context.
In certain regions of North America also make it more public it it to get consultants out at a different facilities to support due diligence and you know.
M&A process so.
I would sort of agree to what you just said hopefully gigabit more insight there.
Okay. Thank you and then sorry, just one or two others here. The you're asked about this but from a cost pressure perspective is there anything going on right now.
In terms of cost pressures that that you see as sort of.
Potentially threatening to margins or that you don't see inability to offset through pastors.
Not particularly Michael so there's nothing that comes top of mind.
If there you know increases to be seen in fiber preservative cost you know and as you know we often have the opportunity to reset and you know have discussions with our customers I don't see anything anything significant a ahead.
Okay, and then just lastly on the.
Buyback announcement.
Im just curious if you can provide any commentary is that simply to had in place.
And therefore to be opportunistic with if.
If you see an opportunity that you think represents good value where is the idea to be quite active with that into two essentially.
I'll try try to.
Try to fully utilize that buyback.
Good well. Thank you for asking that question. It gives me the chance to give a bit more more more insight on the thought process. So as sylvana explained and we we disclose our net debt to EBITDA leverage midyear sitting at 1.9.
For a mid year for US is you know pretty actually pretty low we usually see that occur more at year end, so looking forward with with our healthy.
Free cash flow this should that will be upcoming into next in the next few months.
We felt that you know if we want to keep a certain leverage on our balance sheet idmc I'd be would be a great opportunity to have in place and to be able to use to your point opportunistically.
To be able to too.
A big proper use of of our free cash for available cash and industrial turn no value to shareholders that being said you know if in M&A opportunity.
Presents itself would be very much willing to liver above the range that we discussed knowing very well there are careful help us replenish it. So I guess, it's another tool in the box for us to be able to to deploy capital.
Okay. That's helpful. Thank you Eric.
Thanks.
And there are no further questions at this time I will turn the call back over to the presenters for closing remarks.
Well. Thank you for joining us on this call today, we look forward to begin with you again in our next quarterly call.
This concludes today's conference call you may now disconnect.
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