Q2 2021 Russel Metals Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the second quarter 2021 results conference call for Russel metals today's call will be hosted by Martin Jurafsky 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 are.
Have a question. Please press star 1 on your telephone keypad.
I will now turn the meeting over to Martin <unk>. Please go ahead.
Great. Thank you. Thank you operator, and good morning to everyone.
Plan on providing a brief overview on the Q2 results. If you want to follow along I'll be using the slides that are on our website. Just go to the Investor Relations section and you can find it.
If you go to page 3 you can read our cautionary statements on forward looking information.
Let's begin on page 5 to start with a bit of an overview.
The results for the quarter were exceptionally strong and built on the back of the really strong Q1, the underlying theme behind the results is doing more with less we are very focused on maximizing returns and over the past several quarters, we made a series of changes within our portfolio.
Not only resulted in exceptional performance, but also positions us very well for the future. We look very different today than we did a year ago, and we have significant financial flexibility to pursue opportunities that will further enhance value.
To begin there is 2 items to discuss.
On a very broad based basis, the strong market conditions and the status of our portfolio realignment initiatives.
In terms of the strong market conditions we.
We saw gains in demand that resulted in higher volumes higher prices and higher margins in Q2 versus Q1, the favor of Mark conditions from Q1, and Q2 are continuing on into Q3 demand is good on the supply chain remains inventory constrained the number of months of supply across the industry remains well below the historical average.
The bottom line is that the fundamentals for supply and demand are continuing to be strong. Therefore, we remain optimistic on the business outlook in.
In terms of the portfolio realignment initiatives the objective behind the changes that we have made over the last the well was the boats enhance revenue rich excuse me enhanced returns as well as reduce risk and this has really resulted in the transformation of the portfolio in a fairly short period of time, the oce TG <unk>.
The pipe part of our energy business had over a cycle fairly low margins low returns and tied up a lot of capital and was fairly volatile.
As such the elimination of that part of our business should both enhance our overall returns reduce risk and free up capital to redeploy in other ways. We publicly set of target to reduce <unk> line pipe inventories by $100 million by the end of this year, we have far exceeded that goal, we reduced inventories by $30 million in Q2.
And it's $120 million $129 million since this time last year.
In July we closed the transaction with <unk> for Canadian OTT G line pipe business that transaction will repatriate a sizable amount of our invested capital which was around $142 million at the closing the deal.
We continue to make good progress with our orderly liquidation of our U S. <unk> line pipe inventories there is around $23 million remaining and this should be mostly sold by the end of the year. If you aggregate. These initiatives will have repatriated almost $300 million of capital that is tied up in our OCG line pipe.
<unk>.
In terms of capital reinvestment, we've been focused on value added projects and its part of the multi year process for us where share very good results from the recent investments and we'll be adding other projects over the next several years as we've talked about before these projects generally have around a 3 year payback, so very attractive from a financial perspective.
In terms of free cash flow and capital structure with a $110 million of cash from operating activities in Q2 and liquidity of over $500 million. We're in really good shape. Our credit metrics are strong and were recently upgraded by Moody's in Q3, we will realize additional cash proceeds from the Canadian of CTG line pipe transaction.
Further enhance our financial flexibility.
If we go to our financial results on page 6.
From an income statement perspective, the continuing positive momentum between Q1, 2021, and Q2.2021 was across pretty much all of our business segments.
Revenue of over $1 billion was the highest level in over 2 years in EBIT EBITDA EPS Service Center EBIT on returns. We're all all time records gross margins EBITDA and bottom line results all improved dramatically versus Q1.
There were a few items of note that I just wanted to flag inventory.
Inventory reserves came down by about $3 million and this is really a reflection of the reduced risk profile of the inventory given market conditions and various other initiatives stock.
Stock based comp had a mark to market impact of about $8 million of an expense in Q2 due to the increase in our share price.
And there was no P&L benefit from the wage subsidies in the quarter versus $3 million in Q1 for.
From a cash flow perspective, we used about $42 million.
To an increase in working capital. This was of build within the service centers and distribution segments and it was somewhat offset by continuing downsizing of other energy working capital.
This condition improvements led to an increase in inventory, which was somewhat offset by an increase in accounts payable.
Capex of $7 million continues to be relatively modest.
From a balance sheet perspective towards the bottom of the page. The strong cash flow has led to a reduction of net debt by a further $83 million in the quarter and was around $119 million as of June 30.
Since this time last year, our net debt has declined by about $250 million as I mentioned earlier, our liquidity is very strong, it's north of $500 million $500 million and our credit metrics are all in good shape.
We have declared a quarterly dividend of <unk> 38 per share for the quarter.
We go to page 7 and look at our segmented P&L information, Let's go segment by segment for a minute. The service centers did exceptionally well as the market improved revenues were up $132 million in Q2 versus Q1 or 23% and this was the relative both higher.
Volumes and higher prices, our volumes are above pre pandemic levels.
We look over gross margins the averaged around the same level of 33% as they were in Q1, but the margin dollars per ton increased as prices kept moving up 1 of the interesting things for US is when we look at the month over month trends. This has been a continuation of that has been taking place for some time and for.
Fact, this trend has evolved probably over the last 9 or 10 months. We've continued to see improvements in price improvements in margins for 9 months of sequential period of time.
Our business model gives us a lot of flexibility of maximize margins in an industry constrained environment like we're seeing right now that being said, having the strong inventory turns and a diverse and frankly, mostly contract of non contractual customer base also allowed us to manage through the down market that we saw in 2020 in addition to managing.
Through the upmarket that we're seeing in 2021.
1 of the keys for US also is that from an end market perspective, the improvements that we're seeing are fairly broad based and across most regions and end customers.
Within our energy segments revenues came down June due to spring breakup in Canada, but the overall conditions are improving as you can see with both the improvement in our gross margin percentage and operating profit.
As we are nearing the finish line on the retooling of our energy portfolio you can see the different margin profiles between our field stores and our <unk> line pipe business.
The store margins are north of 20% versus of the Oce TG line pipe margins, which are in the low teens and this has resulted in an overall energy margin that has averaged in the teens starting in Q3.
Youll be able to see that the average energy margins improved with the elimination of the Canadian both CTG line pipe business with.
Within steel distributors that had another exceptionally good quarter from a revenue margin and bottom line perspective looking forward the backlog of business remains pretty good going into Q3.
If we go to page 8 we want to put a little bit more context around our portfolio transformation.
And what that means from a return perspective.
When we benchmark ourselves against our competitors, we have generated top quartile returns over cycle with our overall goal being a 15% EBIT return as you can see 2021 has been well above that target for the first 6 months of 2021, we generate a return on capital of 40% in Q1 and <unk>.
57% in Q2, which is very good on both an absolute.
Basis, but it's also top decile when we look at it versus our competitors, perhaps equally important is that we have generated higher earnings with lower overall capital any of you see on the chart with the Green bars. The average invested capital over the last few years was around 1.4 billion.
And it's now closer to $1.1 billion.
And that goes to the doing more with less observation.
If we look at our actions in 2020 and through the first 6 months of 2021, we did a variety of things in retooling the portfolio overall, it was doing more with less and the combination of reducing the OCD line pipe capital what was the drag on our returns with the same time, adding capital.
Service centres in distribution of working capital investing in some value added processing projects and we made 1 small acquisition.
On a go forward basis, the value added processing as a multi year journey for us and we expect to add probably $12 million to $15 million of capex per year for several more years.
Going forward the focus is more along the lines of doing more with more as we see opportunities to redeploy capital we have a lot of financial flexibility consider opportunities, but we will remain disciplined with respect to those opportunities and they have to meet all of.
Our financial is operational metrics. We expect these opportunities will include both internal and external investments.
If we go to page 9 we of our segmented inventory information to provide a little bit more detail and context around those capital reallocation changes that I just mentioned.
Overall inventory is down around $200 million from the $862 million at this time last year.
Even though we have substantial substantially less capital invested in inventory we generated record results. The key is that our inventory composition has shifted to much higher and better uses.
The in service centres, which you can see on the left hand part of the chart.
We were at $401 million at the end of June versus $297 million at this time last year.
Inventory dollars has moved up but our tonnage remains relatively low our inventory turns are always strong and we've remained around that 4.8 times for the past, while even though sales of picked up inventory discipline remains a key focus.
Within steel distributors, it's a parallel situation to our service centers with an uptick in inventory dollars that aligns with business activity and higher prices. Our backlog is good and we expect this the translate into ongoing business activity in Q3 and Q4.
In energy as I've mentioned, a couple of times already we have repatriated capital our inventories have come down from the $470 million at this time last year to $149 million pro for the Canadian OCD line pipe transaction that closed in early July.
In the past few quarters, we benefited from improved market conditions, and our title procurement controls to manage down that capital.
Not only of we reduced our energy exposure in absolute dollars, but also as a percentage of our overall portfolio. When we look back a year or so ago was over 50%, but this time last year and is now around 23% also the remaining capital that is within our energy business will be mostly concentrating the field store segment.
Which does have attractive long term fundamentals.
In closing on behalf of John and other members of the management team I would like to express our appreciation to everyone within the Russel family for their tremendously hard work and commitment. There is no doubt that 2020 was very hard from a variety of perspective, but the resiliency of the team of the actions that were taken last year are having on.
Positive impact and we couldnt be prouder of how the team has worked together and how the business is performing on.
Operator that concludes my introductory remarks.
If you can now open the floor to 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 1 on your Touchtone phone you will hear with retail on prompt acknowledging your request and your questions will be pulled on the order. They are received should you wish to decline from the polling process. Please press star followed by 2 if you are using a speaker phone please lift the handset before.
For pressing any keys 1 moment. Please for your first question.
Your first question comes from Michael due May of Scotiabank, Michael. Please go ahead.
Hey, good morning, John Good morning, Marty.
Past the quarter.
Obviously.
First question.
Outlook.
You commented that gross margins are expected to moderate in Q3.
I Wonder if we should interpret that as a.
The lower gross margin percentage or lower gross margin dollar per ton.
And what so far has played out trading at early Q3.
Yeah. So.
The dynamic attached to that is it's probably a little bit of dollars per ton, but the dollars per ton is probably still going to remain at a pretty strong level and this is just the case of <unk>. We're continuing to see prices go up both in terms of input costs as wells prices from our customers.
But the pace between the 2 doesn't always move in lock step. So we're probably starting to see some of the the bit of of catch up between the stuff coming in and the stuff going out with that should translate into the margins in dollars per ton is likely to moderate but still moderate at a pretty high level.
Understood. So for acute for Q3, we should expect I mean, presumably again, depending on weather or where steel prices.
Through the quarter higher revenue, but lower gross profit dollars.
Okay.
Metal service centers right, that's the way to think of it.
From a from that part of it yes, I suspect, though that we will see volumes off of a little bit in Q3 versus Q2 because of the some of the seasonal dynamic.
Cash too, especially in July and August some holiday downtime things in Quebec in terms of construction.
The quality period.
But aside from that particular issue your observation I agree with okay.
Okay perfect Thats helpful.
And then can you elaborate on the drivers to the volume increase in steel distributors in the was that.
Driven by steel import arbitrage opportunities in Canada, just how sustainable is that to the second half.
Michael It's a couple of things on each side of the border in Canada, Youre hitting the <unk>.
The element there were some opportunities for that came in the wrong. So some delays with shipments coming in.
Keeping in mind of Canada, we pre sale most of that inventory so.
As that came in from shipping challenges that were out there again, we're starting to see that release in June we will see for releases in July and August.
In the U S again, more transactional business that we have in the us on theirs.
There's more opportunity there.
Buying through the full months of advance typically the alone.
The distribution business and so as that's coming that's come in.
And we're able to move that into the market with the increasing price whether it being transactional variable to achieve really nice margins off of the.
Very opportunistic.
Okay, Great and then maybe just 1 last line I mean, historically operating margins for the oilfield stores have been low double digits.
And given the <unk> on line pipe business has been largely divested of restructured is that where we should expect energy product margins to get back to you in the second and the <unk>.
Second half.
Yes, I think so.
We're seeing improvements in the rig counts, but they are modest improvements as we go forward.
We will continue to see just set up tick from the energy field stores back to the.
For the normalized level over time.
Again, it's still still a little challenge on the net of industry, but we are seeing nice volume pickups.
Alright, guys. Thank you.
Great. Thanks. Thanks, Michael. Thank you. Your next question comes from Michael to Palm TD Securities. Michael. Please go ahead.
Thanks, and congratulations on the quarter.
First first question just relates to some of the commentary on the outlook.
You talked about still seeing limited inventory on the supply chain and extended lead times I'm just wondering if you can.
If you can provide a little bit more detail on on specifically what youre seeing in both of those areas.
So so Brian again.
As we said last quarter.
Our mill partners of the tremendous job, giving us what we bought historically plus a little bit more.
As you go into Q3 and Q4, if you look there are several mill outages that are planned.
Month over month, and so we will have 3 to 4 mills out per month for an extended maintenance outage. So we think that will continue to restrict the supply chain, it's coming soon.
We're planning for those outages on deployment advances on for the rest of the market as well, but that will continue to keep pressure on we.
We are seeing imports come in to give some relief.
I think it's the timing issue.
It's not a long term projection here for the imports continued to come in as Youre seeing people visibility on their quotas.
Part of the $2.32.
The third again, bringing in and maximizing those quotas in this price environment give them a little bit of an arbitrage there on price. So there is some availability coming.
The last month, there was more of availability covenant.
June and July.
I think that in the coming.
Months as well so I think we will continue to sort of restricted supply throughout the balance of Q3 and well into Q4.
Okay. That's helpful maybe.
Just a little bit of a follow on to that John just in terms of the the lead times I was under the impression that maybe lead times had started too.
To come back kind of little bit I guess first question is can you can you tell me or confirm if that if that was the case for has been the case and.
And secondly, given the dynamics that you've just talked about would you expect lead times to to extend.
As we get into the second half from where we are right now.
So they have bounced around a little bit, but there's really been no material movement of lead times.
<unk>.
Again, the bouncing around a little bit with the.
Again with the seasonality of that Marty mentioned, obviously that from July and all of this maybe even a little exaggerated because everybody could take vacations, taking vacations have been cooped up for 18 months, so there'll be a little bit of catch up there that may help bring the lead times down, but then I think he'll expand back out as we go into this period of shutdowns. So I, just really don't see a hold of.
The change.
The lead times that are running at 85% capacity, which is basically full.
In the half to shutdown for maintenance for periods of times the nature of the steel mills. So just don't see a whole lot of out there that's going to change from our.
The lead times on the North American Mills that are out there.
Okay, and I know when historically when you've provided outlook commentary given the nature of.
The steel industry and there can obviously be meaning.
Meaningful volatility in prices you tend not to want to look out too far when commenting on on pricing trends, but.
I guess given everything you're talking about is it.
Are you do you have some visibility are you would you be comfortable.
Sort of suggesting that the kinds of pricing. We can we're seeing right now given everything you're talking about with respect to <unk>.
Lead times and outages.
Some sustainability here to the kinds of prices, we've been seeing at least.
Sort of through the back half of the year or just any commentary on that on that front would be helpful.
The total so indefinitely for the third quarter, I mean, thats already booked and so on.
Much of availability out there so I think through third quarter.
Going into the fourth quarter, I think were pretty firm as well there is some availability late fourth quarter of its out there right now, but again I just don't see any reason for when you look at Canada and the U S Mills predominantly North American Mills, they are full and so I just don't see a whole lot of negotiation room, there for those prices to slip.
We'll watch the world market closely to see what continues to have on the world market.
Barring any unforeseen demand drops that are out there in the black Swan events I, just don't see anything of leading to the prices chosen of.
Probably see some modest increases throughout Q3, and then as we go into Q4, we'll watch for the increases closer but every product that we are.
We buy right now in the last week as soon as other increase.
Okay. No I appreciate that thank you John and then I guess, just lastly on on the subject of capital allocation. The obviously the balance sheet is in extremely good.
Shape at the end of the second quarter and will improve further with the closing of the the.
The OTT G line pipe transaction early in the third quarter.
So how are you thinking about capital allocation priorities now and what should should we expect on I guess as part of that.
What is the current M&A environment look like and are the opportunities there.
So it's a good question Mike.
For us our capital allocation priorities remain pretty much the same which is we're looking at internal opportunities for investments and we are.
Pursuing a variety of projects this year and those are going to continue on for several years and I suspect we're going to of a bit of an uptick in some of those internal opportunities next year.
As businesses continuing to remain strong there's an internal need for capital just within the working capital part of our business.
Dividends has always been front and center for us through the cycle through good times or bad in maintaining that dividend has always been important and for your last point extra.
The external growth, we look at acquisitions, all the time and we'll continue to look at acquisitions.
If we can find the situations that make good financial and operational sense for us we have a lot of dry powder to deal with those so and I know thats very.
Superficial in terms of kind of of motherhood statement, but we are seeing a lot of deal flow activity.
We look all the time.
<unk>.
Not.
Looking to grow just for the sake of growth growth if it makes good financial sense for us.
We have more than enough financial capability of operational capability to deal with it so I suspect that over a couple of year period. When you look at capital allocation priorities, it's going to be pushing on all of those levers we're going to find some acquisitions that makes sense, we're going to continue to push on our internal reinvestments, both within our equipment as well as within our working.
Capital.
As well as returning capital to shareholders via the dividend I think it's all of the above over a multi year period.
Okay, maybe if I can just push you a little bit on this.
That makes sense, but in the event that.
It takes a little bit of time to find an acquisition opportunity.
Some of these internal investment initiatives sound like they're into next year.
Given where the balance sheet is I mean would you look at historically of the dividend that's been sort of maintained at the current level, but would you.
Prioritize our look more seriously out of ahead of potential dividend increase.
So if you look at us over the recent cycles.
We're hovering right at our 80% payout that we've always talked about over cycles. So we're hovering at the something we evaluate each quarter very closely with our board.
We're not we're not beholden to an increase again 12 months ago, everybody was asking if we're going to decrease so.
We're very disciplined on how we look at the going forward.
I want to understand where we are on the cycle. So it's not something that's out of the realm of possibility, but again it is not.
And that we would say we're definitely looking at the time.
Okay, and then just lastly, I guess just to close the loop on all of this you Didnt mentioned it specifically.
But I think I know your philosophy on this but but where the buybacks fit into this.
Yes, it's a good.
Good question, but it hasnt been a priority for us historically.
To the extent that.
There was an opportunistic reason to be buying back shares we could consider that down the road, but it hasnt been the priority in the past and it's not front and center today.
Okay. Thank you.
Thank you. Your next question comes from Alex Jackson, RBC capital markets. Alex. Please go ahead.
Hey, Thanks for taking my question guys.
Just in terms of capital allocation and looking at potential acquisitions curious if theres been any changes in the criteria of Youre looking for.
And talking to businesses out there sort of what their sentiment as are the sellers out there are they wanting to continuing operations.
And not solid in this current market environment. Thank you.
We're definitely still of lot of activity. So there are sellers out there.
He has his valuation expectation.
Looking at it over a cycle of not looking at it over the last 6 months.
Making sure the buyer and the silver reasonable meeting of the minds.
Again, it's something where the seat.
The seat changing the strategy, we're very disciplined on our strategy when it comes to acquisitions on what they do over the long haul for us.
We work very diligently to free up underperforming capital. It was on our balance sheet on the OCC J line pipes. So we want to make sure we redeploy that in the.
A disciplined framework the continues to add to our existing portfolio.
So we'll go with our continued disciplined approach.
<unk>.
Really puts us the balance sheet net is really gives us tremendous flexible.
Positioned where we can take advantage of opportunities as they present themselves, but we don't have to do anything.
Does it make sense for us.
And then maybe just 1 more on corporate expenses. Those obviously moved up this quarter and I was just curious is that really just driven by variable compensation and things that are really moving with the market.
Short answer is yes.
That goes to our direct drive and variable compensation model.
And that flexibility actually played itself out in a down market like we saw last year in keeping our costs in check and people benefit within our the Russel family as the market improves as profitability improves so it's directly correlated to that and it is the variable compensation expense.
Got it. Thank you that's all for me guys. Thanks.
Great. Thanks, Alex Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star 1 on your Touchtone phone.
Your next question comes from Frederic Bastien Raymond James Frederick Please go ahead.
Thank you and good morning, guys.
I wanted to push you further.
On the M&A and are the other guys have as well but.
I know you are looking at a lot of files every quarter.
You have the same kind of answers.
But our expectations.
When you look at your kind of confidence levels.
Potentially closing an acquisition over the next 6 months versus where you were maybe 12 months ago.
Are you confident you can bring.
Bring a couple of M&A or whether it's tuck in or the mid size acquisition, perhaps the goalposts.
Yes, so I wouldn't put a timeframe on anything because of that in many ways that puts us in a box and we don't like being in a box to say, we're going to do something regardless and Thats just not our philosophy, we like having the flexibility that we have right now for financial flexibility, we like the the deal flow.
That is inbound.
But we're not going to the hard wired to say, we're going to do something regardless of that being said I do have a degree of confidence that over an extended period of time, we're going to find stuff that meets our financial and operating criteria I just wouldn't want a hard wire in the artificial timeline around it.
I appreciate that but I mean are you more excited.
Today about acquisition potential than say you were 6 months or 12 months ago.
Okay.
I would say, yes. It is.
The good good way to characterize it for it I am we're seeing more stuff and.
We're seeing more stuff that has potential interest.
Okay. Thanks for that additional color now.
Obviously, the industry has had to make a lot of adjustments to deal with all of these supply chain constraints.
With today.
Do you think these adjustments are going to be sticky meaning that.
Wayne.
Price is and supply does ease of debt.
There's some lessons learned from the last couple of years that the industry can take into the next several years.
Okay.
Fred I think the link to the industry as a whole.
Is learning how to manage inventory better.
Something we've done for a long time, and working capital management, and obviously the scope as well.
See the downturn at some point in the cycle on pricing comes out of the interesting things we haven't seen in the past as of the inventory at the levels. They are in the industry. So.
Turning to the historic high levels for the service center industry.
The distribution again.
The Canadian side of being all back to back.
Really helps limit exposure, depending on the pace at which it comes off of Paul.
As for it quickly or if it's a slow slope for it should allow the industry the reset very quickly.
2 of the bottom of where we don't see the dramatic drops.
Exiting those CTG in line pipe against those.
The largest areas, where we have exposure in the patents that we think that really limit our exposure.
Comparatively on the downturn. So overall I think the industry has learned how the turn better.
Again, it's been part of our DNA for a long long time.
You can sort of turns of $4.8 of the service centers.
Youre getting to a point, where again, it's not going on.
Hold on we will start kind of stock outs, we're very comfortable operating the net world repetitive basis of feel like the others, who are learning how to do that are suffering in some areas.
Awesome Thanks for the.
On the color, Thanks, John and the body have a great day.
Thanks for taking.
Thank you. Your next question comes from our new pre <unk> Stifel. Please go ahead.
Yes. Good morning, guys 2 questions first Marty just a point of clarification on the comments you made at the gross margin for second half of the year, perhaps feeling a little bit of compression. When you guys talk about the outlook Youre seeing pricing is strong demand is strong.
And the inventory levels remain low.
To me that would suggest that we're not for price increases you are incurring and pass it all through so I'm a little confused as to why we should be expecting a little bit of pressure on the gross margin.
Got it.
This is John but I think with 40% of that we'll see just slight pressure I don't think it is.
Anything that.
As we see balancing come in into the plug in third quarter from throughout the early part of the first quarter, we have not seen blood pressure frankly.
So.
It's slight pressure that will come in agencies the balance of the inventory.
Getting the little bit more aggressive.
And the marketplace throughout 2 the other thing that the trend.
Really get our head of around and pin this down completely.
In our in our inventory gross margin gains when you've looked at those over the quarter over quarter. We continue to grow that value added piece. So we think that for its definitely sticky for us.
Returned back to a more normalized level on time, it will be interesting for us to see what the gross margin profile looks like but we think it's probably a couple of basis points.
Don't see it I understand your point I don't see a tremendous amount of pressure I just like you said.
As we stabilize and get closer to the flattening as the top line with price increases are modest price increases I think you'll see more pressure from the marketplace on time.
Okay, Alright, well thats helpful. So okay, and then secondly, just coming back to the question around the dividend. It seems to me that the issue with the dividend relates more to what youre going to do with your bondholders on it goes with anything else in your balance sheet is as strong as it's ever been so should you choose to you do it seems to me you have the flexibility financial.
Steel with the bondholders, which would allow us to bump the dividend so.
Is that or is that an unrealistic expectation.
So I wouldn't connect those 2 things together of new.
Because we have <unk>.
<unk> ability within our existing covenants to change the dividend. So the existing notes are not a constraint on that we have baskets that allow us to do that so I wouldn't connect those 2 points together.
That being said.
There is the situation for us where it makes sense to take out the notes somewhere down the road because of the 2026 notes are callable. They are callable at a 4.5% premium today that premium comes down to 3% in March of next year. That's something we will monitor is the potential capital allocation as well, but right now that's not something we're doing.
<unk> today, but I also get back to my earlier point I wouldn't connect.
What we do with our debt to what we're doing with our dividend.
How much flexibility you have with those remaining baskets.
Most of the dividend higher.
There is on $80 million baskets.
Okay. Thank you.
Okay.
Thanks, Nick thank.
Thank you there are no further questions at this time. Please proceed.
Thank you operator and look I appreciate everybody for joining the call I. Appreciate the really good questions. If you have any follow up questions. Please feel free to reach out at any time.
Otherwise, we look forward to staying in touch during the quarter.
Have a good day 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.
Okay.