Q1 2021 Russel Metals Inc Earnings Call
Good morning, ladies and gentlemen.
Welcome to the first quarter 2021 results conference call for Russel metals today's call will be hosted by Martin Drosky Executive Vice President and Chief Financial Officer, and Mr. John Reid, President and Chief Executive Officer of Russel metals, today's presentations will be followed by a question and answer period.
Anytime if you have a question. Please press star one on your telephone keypad and I would like to turn the meeting over to Mr. Martin Jurowski. Please go ahead Sir.
Great. Thank you operator, good morning, everyone.
I plan on providing a brief overview of the Q1 results. If you want to follow along they'll be using the Powerpoint slides that are on our website and just go to the Investor Relations section of the website.
If you go to page three you can read our cautionary statement on forward looking information.
Let's start on page five.
You're an overview.
The past four quarters illustrate a full economic cycle and it's important to note that our financial performance has been robust in both the challenging times and now on the stronger markets that strong market performance is both absolute as well as when we benchmark ourselves against our service center peers and the challenging quarters, we generate a lot.
Cash flow from working capital by many managing inventories in a very prudent manner.
One results reflect how well and quickly our business can't adapt to and benefit from strong market conditions also as we look back on 2020. It was a really busy year as we advanced the series of initiatives like value added Capex portfolio changes head count capital structure et cetera, and the impact of those initiatives.
He is translating into our 2021 results.
In terms of market conditions.
We saw gains in demand that resulted in higher volumes prices and margins in Q1 versus Q4.
Those market conditions are continuing into the early part of Q2 demand is good and the support supply chain is inventory constrained.
Look at the industry data that is compiled by the MSCI. It shows service center inventories are at their lowest levels in many many years at the same time demand is improving the result is that the number of months of supply across the industry is 30% to 40% below normal levels the bottom.
Line is that the fundamentals for supply and demand are continuing to be strong. Therefore, we are very optimistic on the business outlook.
In terms of the OTT G line pipe changes, we set a target to reduce inventories by $100 million by the end of 2021.
We accomplished our goal early and there is more on the come.
In Canada, we recently announced the transaction with mirror Bunni Atoll cheat to combine our Canadian CTG line pipe business with theirs.
Transaction will create a larger and better positioned platform, but we also structured the deal in a way that allows russel to repatriate a sizable amount of our invested capital.
To be more specific we currently have invested capital to around $170 million in that business and the transaction will result in around 80% of it being realized in cash in the near term.
In addition, we will have a carried interest in the form of $32 million of preferred shares that will have an attractive 7% dividend yield we expect that transaction to close Q2 or early Q3.
On the U S side or CTG, we've made good progress with our orderly liquidation of the inventory in this business inertia on $40 million remaining and there should be substantially sold by the end of the year.
If you take all of these initiatives in aggregate them together in terms of what we've been doing on the OTT G. In line pipe front. When we're done we'll repatriate around $250 million of capital that has been tied up in that business segment. The exiting of that segment will reduce our business volatility and enhance our margins and most importantly.
Improve our returns on capital at every stage of the cycle.
Liquidity and capital structure improvements with $96 million of cash from operating activities in Q1 and liquidity of $440 million. We're on a really good shape from a capital structure perspective.
So we go to page six I'll give you some highlights of our financial results.
Turning to the top of the page from an income statement perspective, the changing results between Q4 2020 in Q1 2021 involved improvement across all of our segments revenues of $885 million was the highest level since before the pandemic gross margins EBITDA bottom line results all improved.
Dramatically some of our Q1 income statement results were higher than what we generated in all of 2020.
That's a positive to EBITDA wage subsidies were $3 million in the quarter, but that was down from $8 million in Q4.
Said in the past this program worked wells provided nice cushion in that transition as business conditions recovered and are supported on employment base during that transition period, we don't expect to realize any material benefits going forward as a negative to EBITDA stock based compensation had a mark to market impact of around $2 million from Q1 due to the increase.
In our share price.
Financing expense was down noticeably from last quarter. This is primarily a result of last year's refinancing initiatives that were done late in Q3 and early in Q4 last year.
From a cash flow perspective, we used about $17 million due to an increase in working capital. The key was that the increase in accounts receivable from improved business conditions was mostly offset by a corresponding increase in accounts payable inventory only went up by a small amount to around $11 million.
And this is a result of an increase in the service center and steel distributors inventory being mostly offset by our initiatives to reduce the energy inventories cash.
Capex at $6 million continues to be modest and below our DD&A level and we see this $6 million ish type level continuing over the balance of 2021.
From a balance sheet perspective, our net debt declined from $267 million at the end of Q4, the $202 million at the end of Q1 or $65 million reduction our liquidity is well north of $400 million and our credit metrics are very strong and lastly, we have declared a quarterly.
Dividend of <unk> 38 per share for the quarter.
If we go to page seven I've included some segmented P&L information.
The service centers did exceptionally well as the market improved revenues were up 40% versus Q4, and this is a function of both higher volume and higher pricing or volumes are now above prepayment pre pandemic levels.
As we've discussed in the past our business model was transactional nature transactional in nature as we don't tie ourselves into contracts with our customers. This gives us a lot of operational flexibility to quickly adapt to market conditions that flexibility allows us to pass steel price increases into the.
Markets.
Margin dollars per ton improved in Q1 and is maintaining into Q2 as we continue to pass those steel price increases into our markets.
One of the keys is that from an end market perspective, the improvements are really broad based across regions across end customers.
And energy revenues margins operating profit improved versus Q4, both field stores <unk> line pipe generate positive EBITDA EBIT contributions, we're seeing some improved tone to the energy market and notwithstanding the seasonal issues typically.
Occur in Q2 for spring breakup, we expect continued improvement in the back half of 2021.
Distributors distributors had a really good Q1 as it also piggyback on the steel market strength. This was mostly driven by our U S business, which is more transactional in nature with our Canadian business is more of a back to back business.
Going forward the backlog for that back to back business remains good through Q2.
On page eight we are on.
Our segmented inventory information to provide a frame of reference for capital reallocation changes.
Over the past number of quarters, if you look at the.
Metal service center part of it to start with <unk>.
Inventories in dollars have ticked up but our tonnage remains low and this goes to my earlier comments about the MSCI data that showed limited inventory on the supply chain.
Our inventory turns are always pretty strong and have improved the sales picked up and our strict inventory discipline remains a key ongoing focus we don't speculate on inventory.
On distributors, it's a parallel situation with served with service centres in that inventories low lead time from procurement is extended beyond normal, especially logistic issues with the supply chain remain in place our procurement commitments that are back to back with custom orders have picked up in the last few months and we expect this to translate into business <unk>.
<unk> in Q2 and Q3.
In energy. This is a key area, we are well on our way to transforming this part of our business in the past few quarters, we benefited from improved market conditions and our tight procurement controls as a result, we reduced inventories from around $470 million at the middle part of 2020.
To $317 million at the end of this last quarter is $153 million reduction in inventories includes the $99 million permanent reduction in OCG line pipe that I mentioned earlier.
We've also illustrate on this chart the impact of removing the additional inventory.
T. G line pipe from day Mirror Binney Itochu transaction that we announced a few weeks ago.
Not only have we reduced our energy exposure as a percentage of the portfolio from over 50% to around a third but the remaining capital in the energy business will be concentrated in our field store segment, which has very attractive long term fundamentals.
If you go to page nine.
We have modified the chart that we've used in the past to show a return on capital over a cycle, we have industry, leading returns and we're constantly looking at opportunities to enhance our return profile.
As a reminder, this this metric is the driver to our variable compensation model. So everybody across the organization is very focused on it.
The Green Bar show on historical returns year over year include the very strong Q1 results.
Look on the right hand side of the page over the past five plus years, we generated an average roe of around 15%.
However, net average has been dragged down by the <unk> line pipe segments, which historically had an average ROE on a in the low to mid single digits and therefore brought down the weighted average return on our portfolio.
The downsizing of the <unk> line pipe business that is well underway would've resulted in a pickup of additional rona as illustrated by the Gray bar of around 300 basis points on average as we've said in the past our initiative to downsize. The CTG line pipe will reduce revenues, but it will be accretive to earnings and accretive to our returns.
In closing on behalf of John and the other members of the management team I'd really like to express our appreciation to everyone within the Russel family for their tremendous hard work, it's really nice to see the fruits of that hard work starting to pay off.
Operator that concludes my introductory remarks, we can now open the line for any questions certainly Sir ladies and gentlemen, if you do have a question. Please press star followed by a one on you touched on zone. You will then hear a suite on prompt acknowledging your request and if you wish to withdraw your question simply press star followed by two.
And if you are using a speaker phone we do ask that you. Please lift the handset before pressing any keys. Please go ahead on press Star one now if you have any questions.
And your first question will be from best day at Raymond James. Please go ahead.
Hi, good morning.
Oh, Paul as well with you guys.
Hey, Brett.
First question is we keep hearing from that product availability is tight so the question I have.
For you is.
Are you also feeling that pain are you managing.
Go for it.
And this definitely restricted.
If you look at product availability mill lead times are into the third quarter now some products are well into the fourth quarter.
But we're managing that fairly well as we've done in the past.
The mills are.
Low enough to have R. R.
Sure that we have requested that we bought in the past and also afforded us the opportunity to grow market shares so the 4% growth.
So were getting what we need them to do part of this due to our scale part of it.
Should we pay the bills on time.
So.
They work very very closely with us and our purchasing teams have done a phenomenal job on projected out further.
Typical mill lead times, so we're comfortable with what we're getting right now we're managing our inventory turns as well as we ever had.
So.
I think thats something that is a real credit to our people that are out there on how they're managing the cycle right.
And if we see that these conditions continue I suspect you will gain even more market share against the small amount of mom and Pops out there in San Francisco from fair to say.
So there's a real opportunity to do so again I think some of the smaller to medium service centers are probably struggling to get there.
But those two.
And I think it affords us the opportunity to continue to grow that share.
Not only just for all steel products, but where else is it.
Loan growth on our value added processing as well.
Okay.
Second question, I guess, where we're well into the second quarter so on Mike.
I was wondering when.
When these higher input costs will start eating into your service center margins are you starting to feel it now or is it something you won't feel on until the summer months potentially into the third quarter.
Yes, the higher input costs again with our turns obviously just rationally logically it will start to come in sometime during Q2, although we have seen increases this weekend a free product that we carry so the increases are still continuing to come in.
Early in the quarter, we've been able to maintain those margins and service centers and steel.
Distributors and so.
Again, there'll obviously be some normalization there or is the quarter lingers on it in the third quarter, but I think.
We're pretty bullish on Q2 remaining fairly stronger.
Okay.
Thanks for that John and then I wasn't I was on surprised to see steel distributors capture.
From some healthy spreads during the quarter, but I thought we might see slightly higher volumes and I think.
Just reading through the the slides you presented the inventories higher already so.
Q2 shaping up.
To be a stronger quarter in terms of volume and revenue.
Yes, a couple of dynamics there.
Very very professional groups within the industry 30, plus years and so.
Did early on in the quarter to just pass because they can get a higher price later.
So that limited some of the volumes, but again you can see that their margins skyrocketed.
Gross margin Scott, Rob did they were able to take advantage of that situation.
Also we've got some import material that's coming in into Canada, specifically, so back to back in Q2 on Q3 is as Marty alluded to earlier and so we anticipate those volumes to come in and get back out during the month again those are sold primarily back to back.
And again as demand in the U S. As it is more transactional market that will take advantage of the opportunities as they're presented to them.
That's great okay, thanks for that color and good quarter.
Thanks, Chris.
Thank you next question will be from Michael <unk> at Scotia Bank. Please go ahead.
Hey, good morning, guys.
Michael Good morning, Hey, I wanted to go to them.
Maybe at your MSC margin in a different way or maybe a little bit more specific just to get a better sense for the potential margin performance in Q2.
Can you talk about the delta between the average cost of inventory versus the selling price and whether that's increased or decreased through Q1, and just trying to get their derivative there.
Yeah.
Well in terms of.
I'm not sure. If this is answering your question, but at the end of the day costs were moving up as steel prices were moving up but our price realizations were moving up as well so effectively margins were moving up in the early part of the quarter and are holding.
Holding on to that level as we're into Q2, just because price realizations to our customers are continuing to move up and at the end of the day. The thing to remember is we're a cost plus business. So as we have tight inventory turns we're turning the inventory pretty quickly and given the nature of demand right now.
Basically flowing into our end markets.
Got you, Okay, and then I mean, just going back to maybe some of John's earlier comments.
Yeah.
I guess Q on margins.
Were a standout I mean, historically 800 basis points higher I think from the previous peak I'm, just trying to get a little bit of a sense for the pace of normalization into Q2.
Q3, I mean, just any comments that could help us out.
Okay.
Yes, you are.
Exactly right.
I mean, theres obvious holding gains that come into play on that but I think those are getting probably too much of the headlines.
Michael when we look at it I mean, you've got a group.
That <unk>.
Industry professionals at act on that opportunity in this transactional model that Marty mentioned earlier, where they were able to expand that ability and that margin.
And based on what's available in the marketplace.
Out there right now where some of the smaller service centers are struggling to get material, we have a mature.
On our breadth of inventory that's out there.
We have the ability to continue to maintain that margin are very similar to it. So it may come up slightly in Q2, but I don't see it coming off dramatically.
Okay. That's helpful. Thank you.
And then as it relates to potential M&A going forward.
How should we think about Russell's appetite.
For call it tuck ins versus platform deals.
Specifically on tuck ins I mean, do you anticipate a pickup in activity as the U S government contemplates increased capital gains taxes.
The short answer is yes, yes, and yes.
We're on we're looking at all of the above.
But as we've always approached it we're pretty disciplined in what we do but we have a lot of flexibility to look at stuff small medium and large.
The issues are does it meet our criteria from both a financial as well as qualitative operational perspective.
So I think theres going to be more and more opportunities, we're seeing more and more.
Opportunities that are out there, but the real test is small medium and large does it meet our criteria, but we look very very actively.
In terms of.
The dynamics in the U S. Right now again, it wouldn't be surprising with some of the changes that are unfolding in.
It's all speculated right now and who knows what comes into law, but with.
Capital gains modifications that is often in the past become a catalyst for people to rethinking about what they want to do with their private businesses. So we're all ears, if it meets our criteria terrific, but the way we're looking at it right. Now is we have a lot of flexibility and if we see the right opportunities.
Not to be a broken record, but small medium or large we have the opportunity to look at them.
Okay, that's great color.
Alrighty, Thanks for that and I guess just.
Comment on slide nine that exhibit.
Great I wonder Marty with the OTT business largely restructured.
Now russel resembling.
Metal service center pure play, which the market is showing that it is willing to pay higher multiple for.
Do you anticipate using potentially more equity versus historically when contemplating funding M&A.
Well.
In some ways I kind of look at our capital structure right now, which is we've got a boatload of flexibility and so we don't have to contemplate.
The use of equity at this point.
You never say never to anything but as we're currently structured with both current flexibility that we have layered on with incremental flexibility you talk about page nine.
The other piece that's not in the March financials is the capital that will be coming in once we close the mirror Binney Tokyo transaction. So we got a lot of <unk>.
Financial flexibility right now and we think we have the ability to look at growth opportunities without.
Incremental equity financing, but.
We're always open to it depending upon the circumstances, but right now we think we've got a lot of internal bandwidth.
Great well done guys. Thanks for answering the questions.
Thanks, Michael.
Thank you next question will be from Michael <unk> at TD Securities. Please go ahead.
Thanks, Good morning.
You've touched a little bit on steel availability I'm wondering if you can talk just a little bit more detail.
About what Youre seeing right now relative to the way things looked in Q1, just in terms of if you're on your ability to source product.
So there's not been a tremendous change as Q1 moved on January was a little bit more available.
But it starts to really tighten the February and March and so we're not seeing a whole lot of issues with availability again.
You have to be able to move with the metal manufacturing cycles and schedules, our ERP system set up to do so on our purchasing team is doing that on a daily basis. So we're booking out into the future.
Our bookings are a little bit further out.
<unk> historically have been again because people are moving into Q3 Q4 with certain products.
But again, it's just a function of our ERP system at what our historical purchasing trends have been.
And John just to supplement that a little bit.
If we look at our inventory in tonnage.
As I said in my comments, our inventory tonnage is relatively low, but it's been relatively low for the past 456 months. So theres not been a massive shift one way or the other in terms of our tonnage in the during Q1 and even frankly, a few months before that.
Okay and are there any particular products that you're having difficulty sourcing.
As far as that difficulty I would say no.
Can you get obviously on this market you would take more and so the products that are tight right now flat rolled coil or type.
That are out there.
A little bit of tightness in certain sections of plate, but again, we're getting our allocation of all of it and so we're able to fulfill all of our needs as Marty mentioned on earlier in his comments it allows us to grow our market share.
No that's helpful. Thank you.
John you, you've obviously lived through.
Steel price ups and downs over your career can you talk about what's different about this cycle and I mean, obviously I appreciate that we've just come through.
We're still going through the pandemic and then obviously that's.
But how do you see steel prices evolving over the balance of this year on into next and what's different about sort of what we're seeing now versus other cycles in the past.
So the big thing right now.
The extended lead times, which is typical of a big price relative to what we've seen historically.
But again the supply shortage going into this.
And it was spared.
The pandemic that was out there and so as you look back from the end user through the distribution channel named on the manufacturer from steel everybody that's in their inventories.
Thanks.
So that that went on there's really constrained the supply side and demand is moving at a much faster pace. So there's a lot of pent up.
Availability of cash people, we're not going out to the entertainment sector as much as they used to be cruises are trips, they're staying at home spending that on hone juncture in other areas. So we're seeing demand jumped back more to the industrial side. If you look across the board at all.
Commodities right now whether it be wood steel.
That's moving up in pricing in the <unk>.
<unk>, which is tremendous so we look at the architectural billing index is the purchasing manager index all of those are out as far as we've seen them on the long long term so the demand cycle looks extremely strong.
Coming into a thin supply chain.
And so we think that's just really expanded this out where it is.
In our opinion is going to remain higher for longer on the price and then we've seen in the past.
Okay.
You've had several questions about the strength of the gross margins and service centres and talked about.
How things have evolved so far in the second quarter.
Steel distributors do you expect to see a similar dynamic.
Going forward as is as you've talked about in service centers I mean, they have the steel distributors gross margins did they continue to hold in through the second quarter.
The way you have seen on the service center side and.
Or should we be thinking about that segment any differently.
That will probably normalize to some degree.
Just in the fact that we've got a lot coming on as Marty mentioned earlier in the second and third quarter that sold back to back that's at a little tighter margin than what we saw on first quarter.
First quarter is really led by our U S transaction I think they'll continue to do very well, but we will see an increase in revenue.
The slight decrease in their gross margins as we go into Q2 of.
Earnings overall should be fun.
The combination of the two should be in the somewhere buttery.
Okay.
Turn it over thank you.
Okay. Thanks, Mike.
Thank you next question will be from Devin Dodge at BMO. Please go ahead.
Alright, Thanks, good morning, guys.
Kevin.
I wanted to say congratulations on a good quarter, but I think calling out a good quarter, probably under sales. What you guys just delivered so but congrats anyway.
Thank you maybe can.
Can you walk us through maybe how demand is trending a cross across your regions and end markets. I'm. Just wondering you know what markets. There may be further ahead in net recovery and where others may still be.
On an earlier stage.
Yes, so devin we're really seeing a general economies across the board GDP is really strong in both Canada and the U S cash.
Destruction economy remains robust right now, which we participate in very well equipment manufacturing.
Out there general Oems that are out there are all very busy right now energy is improving it does some room to go obviously, but we're seeing good signs of energy from the back half you can run it at 60 to $75.
WTO on the oil price, that's going to generate some drilling activity. So we're pretty bullish on the back half.
2021, as we come on a breakup.
And into 2022 on the energy sector, but it's been it's definitely lagging the other sectors that are out there automotives is under some pressure.
Units I think last month.
This is chip and continues to linger on and now we're seeing more and more shutdowns. We don't participate in automotive with that may create some supply availability in an area. That's been very constrained. So I don't think it affects pricing, but I think it will just help with availability, maybe frankly towns back too.
More palatable level from the manufacturer side.
So overall, it's really firing on all cylinders right now we're sitting across the board, especially on the general pickup.
Okay, Okay good to hear.
And maybe a question for Marty obviously lots of moving parts on the energy products Division.
Just when we think about 2022, it's largely going to be and oilfield store business just trying to get if can you give us a sense as to what maybe what the gross margins of that oilfield business generated pre pandemic and where they are currently.
Yes.
It's interesting Devin.
If I should get two graphs historically, one of our field store business in one of our service center business and they didn't tell you, which is which you probably couldn't tell the difference.
They followed very similar paths historically, followed very similar paths in terms of gross margins relatively low volatility in gross margins as well if youre talking about stuff in that Kenneth <unk>.
<unk> 2021 'twenty, 2% range in terms of gross margins. That's what we've typically seen out of our field store businesses. It does move up and down a little bit like all components, but it has a very similar margin profile to our service center business historically.
Okay and is there much of a difference between the U S and the Canadian operations for the field stores not really no.
Okay. Okay.
No that's definitely helpful.
I was about to say.
Our steel business is much more skewed to Canada. So we've got if.
If you look across some of the numbers.
80% of our business activity is on the Canadian side of the border with infield stores.
And David just to add on to Marty when you think about that margin profile.
A little less volatile.
And the field stores, because the parts such a highly engineered court, there's just not a lot of material.
Percentage of the cold finished components.
Okay. That's good color I appreciate it guys I'll turn it over.
Okay. Thanks, Doug.
Thank you next question will be from Anoop.
Stifel GMP. Please go ahead.
Hi, Good morning, guys. Just a quick question, John we've talked quite a bit on the call so far on the inventory.
Kind of looking at it from on the other side of it which is that we're hitting all time high debt levels for pricing on a bunch of different products. So I'm curious to know inventories tight, but given what pricing is doing like how eager you to actually continue to add to that inventory.
Yes.
Really not speculating on this morning Tucker tonnage is not moving up a lot.
A few percentage points that you saw our gain in market share. So our turns on the end of March from much better than we had for the quarter. So again, we're maintaining that turn level very high level of appetite speculate.
Historically, when you've looked at some of our challenges when theres been a big downturn. It's typically been the write offs have been in line pipe CTG, which we're addressing.
And then it's also you've seen some of that in the distribution business, particularly in the United States, where we've taken some of those kits.
And the inventory write downs.
They've grown their inventory theyre, just maximizing their margin right now so we're taking a very conservative approach to this just based on what you said we are trading at all time highs.
So we will continue to flow.
Sure.
Run our business on a day to day basis, but we're not taking any speculative on an aggressive stance on inventories.
Okay, Alright thats helpful. Thank you and Marty just a quick question for you for the balance of the year.
Can you give us a bit of color as to how we shouldnt be adjusting our outlook for the energy business given that we are on the process of winding down on a substantial piece of that.
Yeah, So I would see for.
For purposes of Q2, there is always a seasonal dynamic associated with that so that's just going to run. Its normal course. If you are basically model N are closed or closing at the end of Q2 beginning of Q3.
Secondly, all of that stuff comes off the balance sheet and out of the income statement starting in Q3, if you use that timeline.
On the accounting for our equity interest in the joint venture will be a one line item that comes over on the income statement on one line item that comes over on the balance sheet. So it's going to be fully consolidate debt.
What was the legacy triumph business.
Okay. Thank you.
Alright, thank you.
Thank you once again as a reminder, ladies and gentlemen, if you do have any questions. Please press star followed by one on you touched on the phone.
And your next question will be a follow up from Craig Best Day of Raymond James. Please go ahead.
I don't think I've seen a normal year for the steel sector in some time.
Not sure by too John but.
You've been at this longer than I have but assuming assuming we get a steady mid cycle year end 2022 on that's a big if what sort of earnings potential could russel will be looking at.
Well. Thank you are right I think this is the second time I've been reference to experience or old on this call. So I'll take that growth is a positive.
Yeah.
In 32 years, I'm, not saying what that would consider a normal cycle for a year. So it's difficult to project debt.
What's the price of steel is going to be what's our gross margin going to be at that timeline. So.
Again not to be evasive for you, but it's just so difficult to project what normal is.
The swings have gotten more compressed.
Compressed over the last few years. So the biggest thing I think we focus on is just managing the return at a superior level at both the downside and the upside of the cycle on our transactional model allows us to do that so we will continue to focus on that again I hate to be evasive not be able to give you a specific number but it's.
It's really a it would be a wild guess at this point.
Okay, maybe I'll ask differently historically.
If you look at on where five six year period, you've you've managed to keep sort of the dividend.
I mean, you've historically targeted a payout of about 80% on EPS for your dividend and.
That's kind of been maintained.
Maintain over like the last five six years.
Do you feel that on a go forward basis, youre going to grow into that dividend and we will see the on sort of this this payout of EPS going down from 80 to 70 to 60.
Alright.
Is the plan and I am just curious what the plans are there.
We'll continue to watch it over the cycle and we've always tried to get to 80% over the cycle, sometimes from broker hundreds sometimes around fifty's and sixty's, but we'll continue to watch it on a quarterly basis with our board, but I would say that theoretically that will continue to look at that 80% over the cycle.
I don't see any big changes there.
Yes.
Okay. Thank you.
Thanks, Rick.
Thank you next day to day follow up from Michael come home at TD Securities. Please go ahead.
Thank you just a question about.
Thoughts on expectations for changes in noncash working capital over the remainder of the year, if we maybe set aside the.
The mayor of any <unk> transaction.
I think Marty you said theres, probably another $40 million reduction in inventory to go in energy.
If you can just clarify that and is that all coming sort of over the next quarter or so and and then how do we.
Think about.
Changes in noncash working capital stemming from from the rest of the business over the rest of the year.
Yes, you are $40 million assumption on the <unk> line pipe.
Correct.
That makes reference to our U S. CPG line pipe business and will substantially get through that in Q3 and Q4, so that we should get there by the end of the year.
So the rest of the business to be honest with you, it's going to be really a function of market conditions.
If we look back over the last year and the changes that have happened in working capital inventories within our service Center business, we adapt really really quickly. It goes back to the same old theme about inventory turns disciplined approach to inventory management, it's a key metric for us and what all of our folks on the ground ground level.
Focus on.
If we continue the house.
Robust pricing and pricing is continuing to go up.
Our inventory.
Tonnage might not go up our inventory dollars might go up proportionally with whatever steel input prices going up by and steel input prices continue to go up but again as I said earlier, we're keeping our inventory volume relatively control our inventory turns is a big focus so I don't see.
Our inventory volumes changing a whole ton, it's really going to be a function of what flow through from steel pricing.
Okay, and what was the if we if you're able to disaggregate.
What what was the impact in service centers in the first quarter in terms of the portion of the change in non cash working capital that debt.
Related to service on it because that wasn't that was a negative so that was an investment grade.
In terms of how much inventory changed in the service centers.
Sorry on the inventories side and service center, because I know when you look at the when you look at the cash flow I mean, there's there's there's a few things going on with the reduction in net inventories in energy, but if we focus on service centers what happened with inventory.
Oh, yes.
In that area.
It went up by about $50 million to $60 million energy came down by about a similar amount.
Okay.
And then just one other question on a on a different matter you were asked earlier about M&A I'm just wondering in this in this environment the steel price environment, we're in right now, which which is obviously unprecedented.
Is it is this an easier or harder environment.
On to contemplate and consider M&A.
You know if we put aside the tax potential tax changes that that's a separate issue, but just in terms of when.
When you're assessing businesses in this environment does this is this an easier time or a harder time for Ya.
I wouldn't characterize now is easier or harder because it's always hard when the hit ratio on stuff that we see and when you look at vs stuff that we transact on.
It's not a great batting average, but that's just nature of the Beast, We don't chase stuff for the sake of chasing it and just because stuff becomes available doesn't mean, we do it and sometimes theres stuff that's available at a pretty cheap price.
Net it sometimes.
Price is too expensive if it's a massive turnaround situation. So I think it's always hard.
That being said, it's nicer to see more activity because there's more stuff to choose from.
But we tend to have a pretty low batting average because we're very very selective on what works for us.
Okay. That's helpful. Thank you.
Alright. Thanks.
Thank you.
And at this time gentlemen, we have no further questions. Please proceed.
Great well thanks operator.
Thank you very much for joining our call. We appreciate you are focusing on on the quarter. If you have any questions. Please feel free to reach out anytime this afternoon or going forward during the quarter and we look forward to staying in touch on reconnecting at the end of Q2, thanks very much.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
Wow.
[music].