Earnings Call: Q2 2021

Aug 6, 2021

Morning, ladies and gentlemen, and welcome to the Second Quarter 2021 Results Conference Call for Russell Metals. Today's call will be hosted by Martin Jurafsky, Executive Vice President and Chief Financial Officer and John Reed, President and Chief Executive Officer of Russell Metals, Inc. Today's presentation will be followed by a question and answer period. Jurafsky. Please go ahead. Great. Thank you, operator, and good morning to everyone. Gereff. I 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 Giraffe. If you go to Page 3, you can read our cautionary statements on forward looking information. Let's begin on Page 5 Giroff. To start with a bit of an overview, the results for the quarter were exceptionally strong and built on the back of a really strong Q1. Giraffe. 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 Girov. Changes within our portfolio that not only resulted in exceptional performance, but also positions us very well for the future. Girov. 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. Giroff. To begin, there's 2 items to discuss on a very broad based basis, the strong market conditions and the status of our portfolio Girofte's Realignment Initiatives. In terms of the strong market conditions, we saw gains in demand that resulted in higher volumes, Giraffe. Higher prices and higher margins in Q2 versus Q1. The favorable conditions from Q1 and Q2 are continuing on into Q3. Gereff. Demand is good and the supply chain remains inventory constrained. The number of months of supply across the industry remains well below the historical average. Gereff. The bottom line is that the fundamentals for supply and demand are continuing to be strong. Therefore, we remain optimistic on the business outlook. Giraffe. In terms of the portfolio realignment initiatives, the objective behind the change that we have made over the last little while Giraffe. Enhance returns as well as reduce risk, and this has really resulted in a transformation of the portfolio Giraff. The OCTG line pipe part of our energy business had over cycle fairly low margins, low returns and tied up a lot Giraffe Capital and was fairly volatile. As such, the elimination of that part of our business should both enhance our overall returns, reduce risk Gereff. We publicly set a target to reduce OCTG line pipe inventories Gereff. $100,000,000 by the end of this year. We have far exceeded that goal. We reduced inventories by $30,000,000 in Q2, and it's Gereff, dollars 129,000,000 since this time last year. In July, we closed the transaction with Giraffe for our Canadian OCTG Line Pipe business. That transaction will repatriate a sizable amount of our invested capital, Gereff, which is around $142,000,000 at the closing of the deal. We continue to make good progress with our orderly liquidation of our U. S. Giroff. There's around $23,000,000 remaining and it should be mostly sold by the end of the year. Gereff. If you aggregate these initiatives, we'll have repatriated almost $300,000,000 of capital that has been tied up in our OCTG Line Pipe segment. Giraffe. In terms of capital reinvestment, we've been focused on value added projects and it's part of the multiyear process for us. Giroff. We're sharing 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 Girof. In terms of free cash flow and capital structure, with $110,000,000 of cash from operating activities Giroff. In Q2, in liquidity of over $500,000,000 we're in really good shape. All of our credit metrics are strong, and we are recently upgraded by Moody's. Gereff. In Q3, we'll realize additional cash proceeds from the Canadian OCTG line pipe transaction, which will further enhance our financial flexibility. Gereff. If you go to our financial results on Page 6, from an income statement perspective, the continuing positive momentum between Giroff. Q1 2021 and Q2 2021 was across pretty much all of our business segments. Revenue of over $1,000,000,000 was the highest level in over Giraffe. 2 years in EBITDA, EPS, Service Center, EBIT and returns were all all time records. Gross margins, EBITDA and bottom line results Giraffe. All improved dramatically versus Q1. There were a few items to note that I just want to flag. Inventory reserves Giraffe. Came down by about $3,000,000 and this is really a reflection of the reduced risk profile of the inventory given market conditions and various other initiatives. Gereff. Stock based comp had a mark to market impact of $8,000,000 of an expense in Q2 due to the increase in our share price. Gereff. And there was no P and L benefit from the wage subsidies in the quarter versus $3,000,000 in Q1. Gereff. From a cash flow perspective, we used about $42,000,000 due to an increase in working capital. This was a build within the service centers and distribution segments, Giraffes. And it was somewhat offset by continuing downsizing of our energy working capital. Business condition improvements led to an increase in AR inventory, Gereff, which was somewhat offset by an increase in accounts payable. CapEx of $7,000,000 continues to be relatively modest. Gjeraff. From a balance sheet perspective, towards the bottom of the page, the strong cash flow has led to a reduction in net debt by a further $83,000,000 in the quarter and Gereff. And it was around $119,000,000 as of June 30. Since this time last year, our net debt has declined by about $250,000,000 Giroff. As I mentioned earlier, our liquidity is very strong. It's north of $500,000,000 and our credit metrics are all in good shape. Gereff. We've declared a quarterly dividend of $0.38 per share for the quarter. If we go to Page 7 Giraffe. And look at our segmented P and L information. Let's go segment by segment for a minute. The service centers did exceptionally well as the market improved. Gereff. Revenues were up $132,000,000 in Q2 versus Q1 or 23%, Gereff. And this was a result of both higher volumes and higher prices. Our volumes are above pre pandemic levels. If we look over gross margins, they averaged around the same level of 33% as they were in Q1, but the margin dollars per ton increased Giraffe as prices kept moving up. One of the interesting things for us is when we look at the month over month trends, this has been a continuation that's been taking place for some time. Giraffe. In fact, this trend has evolved probably over the last 9 or 10 months, we would continue to see improvements in prices, improvements in margins Giraffe for a 9 month sequential period of time. Our business model gives us a lot of flexibility to maximize margins Giraffe. In an industry constrained environment like we're seeing right now. That being said, having the strong inventory turns in a diverse Giraff. And frankly, mostly non contractual customer base also allow us to manage through the down market that we saw in 2020 Giraff in addition to managing through the upmarket that we're seeing in 2021. One of the keys for us also is that from an end market perspective, Giraffe. The improvements that we are seeing are fairly broad based and across most regions and in customers. Within our energy segments, Girof. Revenues came down due to spring breakup in Canada, but the overall conditions are improving as you can see with both an improvement in our gross margin percentage Giraffe. As we are nearing the finish line on the retooling of our energy portfolio, you can see the different margin profiles Giraffes between our field stores and our OCTG Line Pipe business. Field store margins are north of 20% Giraffe versus the OCTG Line Pipe margins, which are in the low teens, and this has resulted in an overall energy margin that is averaged in the teens. Giroff. Starting in Q3, you'll be able to see that the average energy margins improved with the elimination of the Canadian post EPG line pipe business. Gereff. Within Steel Distributors, it had another exceptionally good quarter from a revenue, margin and bottom line perspective. Looking forward, Giroff. If we go to Page 8, we want to put a little bit more context Giraffe. And what that means from a return perspective. When we benchmark ourselves against our competitors, we have generated Giraffe. Top quartile returns over cycle with our overall goal being a 15% EBIT return. As you can see, 2021 has been Giraffe. Well above that target. For the 1st 6 months of 2021, we generated return on capital of 40% in Q1 Giraffe and 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. Gereff. Perhaps equally important is that we have generated higher earnings with lower overall capital. Giraff. And if you see on the chart with the green bars, the average invested capital over the last few years was around $1,400,000,000 Giraffe, and it's now closer to $1,100,000,000 And that goes to the doing more with less observation. Gereff. If we look at our actions in 2020 and through the 1st 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 Giroff. Reducing the OCPG line pipe capital was a drag on our returns, but at the same time adding capital in service centers and distribution working capital, Gjeraff, investing in some value added processing projects, and we made one small acquisition. On a go forward basis, the value added processing is a multiyear Giraffe. And we expect to add probably $12,000,000 to $15,000,000 of CapEx per year for several more years. Gereff. Going forward, the focus is more along the lines of doing more with more as we see opportunities to redeploy capital. Gereff. We have a lot of financial flexibility to consider opportunities, but we remain disciplined with respect to those opportunities and they have to meet Giroff. Our financial is operational metrics. We expect these opportunities will include both internal and external investments. Giroff. If you go to Page 9, we have our segmented inventory information to provide a little bit more detail and context around those capital reallocation changes Geraaf. Overall, inventory is down around $200,000,000 from the $862,000,000 at this time last year. Girov. Even though we have substantially less capital investment in inventory, we generated record results. The key is that our inventory composition has shifted Girof. In service centers, which you can see on the left hand part of the chart, we were at $401,000,000 at the end of June versus Giraffes. Inventory in dollars has moved up, but our tonnage remains relatively low. Giraffe. Our inventory turns are always strong and we've remained around that 4.8 times for the past while. Even though sales have picked up, inventory discipline remains a key Giraffe. 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 to translate into ongoing business activity in Q3 and Q4. Giraffe. In Energy, as I've mentioned a couple of times already, we have repatriated capital. Our inventories have come down from the $470,000,000 at this time last year Gereff. $149,000,000 pro form the Canadian OCTG Line Pipe transaction that closed in early July. Gereff. In the past few quarters, we benefited from improved market conditions and are tied to procurement controls to manage down that capital. Gereff. Not only have we reduced our energy exposure absent dollars, but also as a percentage of our overall portfolio. When we look back a year or so ago, it was over 50%, Giraffe at this time last year and it's now around 23%. Also, the remaining capital that is within our energy business Giraffe. We'll 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'd like to express our appreciation to everyone within the Russell family for their tremendously Girov. There's no doubt that 2020 was very hard from a variety perspective, but the resiliency of the team and the actions that were taken last year are having Giraffe. And we couldn't be prouder of how the team has worked together and how the business is performing. Operator, that concludes my introductory remarks. Gereff. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Gereff. Gerecht. Gereff. Your first question comes from Michael Doumet, Scotiabank. Michael, please go ahead. Giraff. Hey, good morning, John. Good morning, Marty. Fantastic quarter, obviously. Gerecht. First question, in the outlook, you commented that gross margins are expected to moderate in Q3. Giraffe. I wonder if we should interpret that as a lower gross margin percentage or lower gross margin dollar per tonne Giraffe. And what so far has played out during early Q3? Yes. So Giraffe. The dynamic attached to that is it's probably a little bit of dollars per tonne, Giroff. But the dollars per ton is probably still going to remain at a pretty strong level. And this is just a case of we're continuing to see prices go up, Giraffe, both in terms of input costs as well as prices from our customers. But the pace between the two doesn't always move at lockstep. So we're probably starting to see some of the bit of a catch up between the stuff coming in and the stuff going out. What that should translate into Giraffe. The margins in dollars per tonne is likely to moderate, but still moderate at a pretty high level. Understood. So Gerecht. For Q3, we should expect, I mean, presumably, again, depending on whether or where steel prices move through the quarter, Giraffe. Higher revenues, but lower gross profit dollars at metal service centers, right? That's the way to think about it? Giraffe. From that part of it, yes. I suspect though that we will see volumes off a little bit in Q3 versus Giraffes. Q2 because of the sum of the seasonal dynamic attached, especially in July August, some holiday downtime, Giraffe. Things in Quebec in terms of construction of quality period, but aside from that particular issue, your observation, I agree. Gereff. Okay, perfect. That's helpful. And then can you elaborate on the drivers to the volume increase in steel distributors? I mean, was that Giraffe. Driven by steel import arbitrage opportunities in Canada and just how sustainable is that to the second half? Michael, it's a couple of things on each southern border. In Canada, you're hitting the nail on the head there that there were some opportunities Giraffe. So that came in, there were also some delays with shipments coming in. So keeping in mind, in Canada, we pre sell most of that inventory. So Giraffe. As that came in from shipping challenges that were out there, again, we started to see that release in June. We'll see further releases in July August. Giraffe. In the U. S, again, more transactional business that we have in the U. S. And there's just more opportunity there as they begin to Giroff. Eying 3 4 months in advance typically on our distribution business. And so as that's coming that's come in and we're able Gereff. Move that into the market with the increasing price, with it being transactional, they're able to achieve really nice margins off of that being very opportunistic. Gereff. Okay, great. And then maybe just one last one. I mean, historically, operating margins for the oilfield stores have been low double digits. Gereff. And given that the OCTG and line pipe business has been largely divested or restructured, is that where we should expect energy Giraffe. Yes, I think so. And it's Giroff. We're seeing improvements in the rig counts, but they're modest improvements as we go forward. So I think we'll continue to see just that uptick in the energy field stores Giroff back to a normalized level over time. Again, still a little challenging in that industry, but we are seeing nice volume pickups. Gereff. Your next question comes from Michael Tupholme, TD Securities. Gereff. Thanks and congratulations on the quarter. First question just relates to some of the commentary in the outlook. Gereff. You talked about still seeing limited inventory in the supply chain and extended lead times. I'm just wondering if you Girov. If you can provide a little bit more detail on specifically what you're seeing in both of those areas. Gereff. So right now, again, as we said last quarter, our mill partners have done a tremendous job getting 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. Giraffe. And so we have 3 to 4 mills out per month for a standard maintenance outage. So we think that will continue to restrict the supply chain that's coming in. We're planning for those outages and trying to plan in advance as I'm sure the rest of the market is as well, but that will continue to keep pressure on. Giraffe. The imports to continue to come in as you've seen people that have availability in their quotas that are not part of the 232, that they're Giroff. Again, bringing in and maximizing those quotas in this pricing environment to give them a little bit of an arbitrage there on pricing. So there is some availability coming Giraffe. Last month, there was more availability coming in, in July. But again, I think that will wane in the coming months as well. Giraffe. I think we'll continue to see restricted supply throughout the balance of Q3 and well into Q4. Okay. That's helpful. Maybe Gereff. Just a little bit of a follow on to that, John. Just in terms of the lead times, I was under the impression that maybe lead times have started Giraff to come back in a little bit. I guess, first question is, can you tell me or confirm if that was the case or has been the case? Giraffe. And secondly, given the dynamics that you've just talked about, would you expect lead times to extend Gereff. So they've bounced around a little bit, but there's really been no material movement Giraff. Again, they're bouncing around a little bit with the seasonality that Marty mentioned. Giraffe. Obviously, I think July August maybe even a little exaggerating because everybody could take vacations, taking vacations since they've 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 they'll expand back out as we go into this period of shutdowns. Giraffe. So I just really don't see a whole lot of change in mill lead times. They're running at 85% capacity, which is basically full. Giroff. And they have to shut down for maintenance for periods of time, the nature of the steel mills. So I just don't see a whole lot out there that's going to change Giraffe. Okay. And I know when historically when you've provided outlook commentary, Gereff. Given the nature of the steel industry and there can obviously be meaningful volatility in prices, you tend not to want to look out Giraff. Too far when commenting 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 Gereff. There's some sustainability here to the kinds of prices we've been seeing at least sort Giraffe through the back half of the year or just any commentary on that front would be helpful. I'd be comfortable saying definitely through the Q3. I mean, it's already booked Gereff. And so there's not much availability out there. So I think through Q3, going into Q4, I think we're pretty firm Gereft. There is some availability late Q4 that's out there right now. But again, I just don't see any reason for Giraffe. When you look at Canada and the U. S. Mills, predominantly North American mills, they're full. And so I just don't see a whole lot of negotiation room there for those prices to slip. Gereff. We'll watch the world market closely to see what continues to happen on the world market. Barring any unforeseen demand drops Giraffe. That are out there, any black swan events. I just don't see anything leading to those prices. Caitlin off probably see some modest increases throughout Giraffe. Q3 and then as we go into Q4, we'll watch for the increases closer. But every product that we buy right now in the last week has seen another increase. Giraff. Okay. And I appreciate that. Thank you, John. And then I guess just lastly on the subject of capital allocation, obviously the balance sheet is in extremely good Giroff. Shape at the end of the second quarter and will improve further with the closing of the OCTG line pipe transaction early in the Q3. Gereff. So how are you thinking about capital allocation priorities now? And what should we expect? And I guess as part of that, Gereff. What is the current M and A environment look like and are there opportunities there? So it's a good question, Mike. Giroff. For us, our capital allocation priorities remain pretty much the same, which is we're looking at internal opportunities for investments and we're Giroff Pursuing a variety of projects this year and those are going to continue on for several years and I suspect we're going to have a bit of an uptick in some of those internal opportunities Giroff. As business is continuing to remain strong, there's an internal need for capital just within the working capital Girov. Dividends has always been front and center for us through the cycle, through good times or bad, and maintaining that dividend has always been important. Giraffe. And to your last point, external growth, we look at acquisitions all the time, and we'll continue to look at acquisitions. Gereff. 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 that's Giraff. Very superficial in terms of kind of a motherhood statement, but we are seeing a lot of deal flow activity. Giroff. We look all the time, and we're not looking to grow just for the sake of growth. If it makes good financial sense for us, Gereff. We have more than enough financial capability and operational capability to deal with it. So I suspect that over a couple of year period, Giraffe. When you look at capital allocation priorities, it's going to be pushing on all those levers. We're going to find some acquisitions that make sense. Gereff. We're going to continue to push on our internal reinvestments, both within our equipment as well as within our working capital, Giraffe as well as returning capital to shareholders via the dividend. I think it's all the above over a multiyear period. Okay. Maybe if I can just Giroff. 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 Giraffe. And 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 Giraffe. Historically, the dividend has been sort of maintained at the current level, but would you prioritize or look more seriously at a potential dividend increase? Giraff. If you look at us over the recent cycles, we're hovering right at our 80% Giroff. We always have talked about over cycle. So we're hovering at that. It is something we evaluate each quarter very closely with our Board. Gereff. We're not beholden to an increase. Again, 12 months ago, everybody was asking us if we're going to decrease. So we're very Giraffe. Disciplined in how we look at that going forward. We want to understand where we are in the cycle. So it's not something that's out of the realm of possibility, but again, Giraffe. It's not something that we would say we're definitely looking at either. Okay. And then just lastly, I guess, just to quote the loop on all this. You didn't mention it specifically, Girov. Marty, but and I think I know your philosophy on this, but where do buybacks fit into this? Yes. Giraffe. It's a good question, Mike. It hasn't been a priority for us historically. To the extent that Girov. There was an opportunistic reason to be buying back shares. We could consider that down the road, but it hasn't been a priority in the past and it's not front and center today. Girov. Okay. Thank you. Thank you. Your next question comes from Alex Jackson, RBC Capital Markets. Alex, please go ahead. Gereff. Hey, thanks for taking my question guys. Just in terms of capital allocation and looking at potential acquisitions, Giraffe. Curious if there's been any changes in the criteria you're looking for. And if in talking to businesses out there, Gereft. Sort of what their sentiment is? Are there sellers out there? Or are they wanting to continue operating and not sell in this current market environment? Thank you. We're definitely seeing a lot of activity. So there are sellers out there. The key is this valuation expectation Giraffe. Looking at it over a cycle and not looking at it over the last 6 months and making sure that the buyer and seller have a reasonable meeting of the minds. Giroff. Again, it's something we won't see changing our strategy. We're very disciplined in our strategies when it comes to acquisitions and what they do over the long haul for us. Giroff. We worked very diligently to free up underperforming capital that was on our balance sheet in the OCTG and line pipe side. So Gerais. We want to make sure we redeploy that in the disciplined framework that continues to add to our existing portfolio. So again, we'll go with our continued disciplined approach, Giroff. It really puts us the balance sheet now has really got us in a tremendous flexible Giraffe. Positioned where we can take advantage of opportunities as they present themselves, but we don't have to do anything different. It just doesn't make sense for us. Thanks. And then maybe just one more on corporate expenses. Those obviously moved up this quarter. I Giraffe. 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. Giraffes. That goes to our direct drive and variable compensation model. And that flexibility Giroff. Actually played itself out in a down market like we saw last year in keeping our costs in check and people benefit Giraffe. Within our Russell family as the market improves, as profitability improves. So it's directly correlated to that and it is the variable compensation expense. Giraffe. Your next question comes from Frederic Bastian, Raymond James. Frederic, please go ahead. Giraff. Thank you and good morning guys. I want to push you further Giraffe. I know you are looking at a lot of files every quarter. I mean, you have the same kind of answers Giraff. Our expectations, when you look at your kind of confidence levels Girov. Potentially closing an acquisition over the next 6 months versus where you were maybe 12 months ago. I mean, Giraffe. Are you confident you can bring a couple of M and A or whether it's tuck in or midsize acquisition past the goalpost? Yes. So I wouldn't put a timeframe on anything because that in many ways that puts us in a box Giroff. And we don't like being in a box to say we're going to do something regardless. And that's just not our philosophy. We like having the flexibility that we have right now, Girof. Financial flexibility. We like the deal flow that is inbound, but we're not going to be Giraff. That being said, I do have a degree of confidence that over an extended period of time, we're going to find stuff Gereff. I just wouldn't want to hardwire an artificial timeline around it. Giraffe. I appreciate that. But I mean, are you more excited today about acquisition potential than, say, you were 6 months or 12 months ago? Giraffe. I'd say, yes, that's a good way to characterize it, Fred. I am. We're seeing more stuff Gereff. Okay. Thanks for that additional color. Now, Gereff. Obviously, the industry had to make a lot of adjustments to deal with all these supply chain constraints that we're dealing with today. Gerecht. Do you think these adjustments are going to be sticky, meaning that when prices and supply does ease a bit, Gereff. There's some lessons learned from the last couple of years that the industry can take into the next several years. I think the industry as a whole Giraffe. Is learning how to manage inventory better. It's something we've done for a long time in working capital management. Gereff. And obviously, as this goes, as we see a downturn at some point in the cycle and pricing comes off, the interesting thing that we haven't seen in the past Giraffe. The inventory levels that they are in the industry. So we're turning to historic high levels for the service center industry. Giraffe. Distribution again with the Canadian side being all back to back really helps limit exposure depending on the pace at which Giraffe. This thing comes off, if it falls very quickly or if it's a slow fall, it should allow the industry to reset very quickly Giraffe. To the bottom where we don't see the dramatic drops exiting those CTG and line pipe, again, those were Giraffe. Largest areas where we had exposure in the past. So we think that will really limit our exposure Giraffe. So overall, I think the industry is learning how to turn better. Giroff. Again, it's been part of our DNA for a long, long time. And you can even say returns at 4.8 and service centers Gereff. You're getting to a point where again, it's not going to get it's not going to get a whole lot higher. We'll start to have stock outs, but we're very comfortable operating in that world on Giraffe. I feel like others are learning how to do that and are suffering in some areas. Gereff. Awesome. Thanks for the color. Thanks, John and Marty. Have a great day. Thanks, Fred. Take care. Giraff. Your next question comes from Anoop Prihar, Stifel. Anoop, please go ahead. Yes. Good morning, guys. Two questions. First, Marty, just a point of clarification on the comments you made about gross margin for second half of the year, perhaps feeling a little bit of compression. When you guys talk about the outlook, you're saying pricing is strong, demand is strong and the inventory levels remain low. So Gereff. To me, that would suggest that whatever price increases you're incurring, you can pass it all through. So I'm a little confused as to why we should be expecting a little bit of Giraffe. And I think and Nick, this is John. But I think what Marty was saying that we'll see just slight pressure. Giraffe. I don't think it's anything that's as we see balancing coming into play in Q3 throughout the early part of Q1. We've not seen a lot of pressure, frankly. Giraffe. So I think it's slight pressure that will come in as you see some balancing of inventory, maybe people are getting a little bit more aggressive Giraffe. The other thing that we're trying to really get our head around and pin this down completely is Giraffe. In our inventory, our gross margin gains, when you look at those over quarter over quarter, we continue to grow that value added piece. So we think that part is definitely sticky for us. And so as we return back to a more normalized level in time, it will be interesting for us to see what that Giraffe. Gross margin profile looks like, but we think it's probably added a couple of basis points. So I don't see it and I understand your point, I don't see a tremendous amount of pressure. I just think it's a Girov. Okay. All right. Well, that's 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 you're going to do with your bondholders than it does with Gjeraff. And your balance sheet is as strong as it's ever been. So should you choose to, you do, it seems to me, have the flexibility financially Girov. Deal with the bondholders, which would allow you to bump the dividend. So is that an unrealistic expectation? Giraff. So I wouldn't connect those two things together, Anoop, because we have flexibility within our Giroft. To change the dividend. So the existing notes are not a constraint on that. We have baskets that allow us to do that. Giraffe. So I wouldn't connect those two points together. That being said, if there's a situation for us where it makes sense Giroff. To take out the notes somewhere down the road because the 2026 notes are callable. They're callable at a 4.5% premium today. Gereff. That premium comes down to 3% in March of next year. That's something we'll monitor as a potential capital allocation as well. Girov. But right now, that's not something we're doing today. But I also get back to my earlier point, I wouldn't connect How much flexibility you have with those remaining baskets to move the dividend higher? There's an $80,000,000 basket. Okay. Thank you. Giroff. Thank you. There are no further questions at this time. Please proceed. Giraff. 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, Gereff. 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. Giraffe. 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.