Good morning, ladies and gentlemen. Welcome to the First Quarter 2021 Results Conference Call for Russel Metals. Today’s call will be hosted by Mr. Martin Juravsky, Executive Vice President and Chief Financial Officer; and Mr. John Reid, President and Chief Executive Officer of Russel Metals. Today’s presentation will be followed by a question-and-answer period. [Operator Instructions] And I would now like to turn the meeting over to Mr. Martin Juravsky. 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, I will be using the PowerPoint slides that are on our website and just go to the Investor Relations section of the website. And if you go to page three, you can read our cautionary statement on forward-looking information. Let’s start on page five, to give you 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 in a stronger market, that strong market performance is both absolute, as well as when we benchmark ourselves against our service center peers. In the challenging quarters, we generate a lot of cash flow from working capital by managing inventories in a very prudent manner. Q1 results reflect how well and quickly our business can adapt, given benefit from strong market conditions. Also, as we look back on 2020, it was a really busy year as we advanced a series of initiatives like value-added CapEx, portfolio changes, headcount, capital structure, et cetera and the impact of those initiatives 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 supply chain is inventory constrained. If we 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 bottomline 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 OCTG 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 to come. In Canada, we recently announced the transaction with Marubeni-Itochu to combine our Canadian OCTG line pipe business with theirs. The 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 of 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, OCTG, we have made good progress with our orderly liquidation of the inventory in this business. There is around $40 million remaining and this should be substantially sold by the end of the year. If you take all these initiatives and aggregate them together in terms of what we have been doing on the OCTG and line pipe front, when we are done, will repatriate around $250 million of capital that has been tied up in that business segment. Exiting of that segment will reduce our business volatility, 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 are in a really good shape from a capital structure perspective. If we go to page six, I will give you some highlights of our financial results. Starting at the top of the page from an income statement perspective, the changing results between Q4 2020 and Q1 2021 involved improvement across all of our segments. Revenues of $885 million was the highest level since before the pandemic. Gross margins, EBITDA, bottomline results, all improved dramatically. Some of our Q1 income statement results were higher than what we generated in all of 2020. As a positive to EBITDA, wage subsidies were $3 million in the quarter, but that was down from $8 million in Q4. As we have said in the past, this program worked well as it provided a nice cushion and a transition as business conditions recovered and has supported employment base during that transitionary 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 in 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 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. 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 balance sheet perspective, our net debt declined from $267 million at the end of Q4 to $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. Lastly, we have declared a quarterly dividend of $0.38 per share for the quarter. If you go to page seven, I have included some segments with 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. Our volumes are now above pre-pandemic levels. As we have discussed in the past, our business model is 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 market. The 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 and across regions, across end customers. In energy, revenue, margins, operating profit improved versus Q4, both field stores and OCTG line pipe generated positive EBITDA -- EBIT contributions. We are seeing some improved tone to the energy market, and notwithstanding, the seasonal issues that typically occur in Q2 for spring breakup, we expect continual improvement in the back half of 2021. Distributors, distributors had a really good Q1 as it also piggybacked on the steel market strength. This was mostly driven by our U.S. business, which is more transactional in nature, whereas our Canadian business is more of a back-to-back business. Looking forward, the backlog for that back-to-back business remains good through Q2. On page eight, we have our segmented inventory information to provide a frame of reference for capital reallocation changes over the past number of quarters. If we look at the metal service center part of it to start with, inventories and dollars have ticked up, but our tonnage remains low. This goes to my earlier comments about the MSCI data that shows limited inventory in the supply chain. Our inventory turns are always pretty strong and have improved as sales picked up and our strict inventory discipline remains a key ongoing focus. We don’t speculate on inventory. In distributors, it’s a parallel situation with service centers and that inventory is low. The lead-time for procurement is extended beyond normal, especially as logistic issues with the supply chain remain in place. Our procurement commitments that are back-to-back with customer orders have picked up in the last few months and we expect this to translate into business activity 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 have 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. This $153 million reduction in inventories includes the $99 million permanent reduction in OCTG line pipe that I mentioned earlier. We have also illustrated in this chart the impact of removing the additional inventory in OCTG line pipe from the Marubeni-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 is very attractive to long-term fundamentals. If you go to page nine, we have modified the chart that we have used in the past to show our return on capital over cycle. We have industry leading returns and we are constantly looking at opportunities to enhance our return profile. As a reminder, this will -- this metric is the driver to our variable compensation model, so everybody across the organization is very focused on it. The green bars show our historical returns year-over-year include the very strong Q1 results. If you look on the right-hand side of the page, over the past five plus years, we generated an average RONA of around 15%. However, that average has been dragged down by the OCTG line pipe segment, which historically had an average RONA in the low- to-mid single digits, and therefore, brought down the weighted average return on our portfolio. The downsizing of the OCTG line pipe business that is well underway would have resulted in a pickup of additional RONA, as illustrated by that gray bar of around 300 basis points on average. As we said in the past, our initiative to downsize OCTG line pipe will reduce revenues that 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. [Operator Instructions] And your first question will be from Frederic Bastien at Raymond James. Please go ahead.

Hi. Good morning. I hope all is well with you guys.

Hi, Fred.

First question is, we keep hearing that product availability is tight. So the question I have for you is, are you also feeling that pain or are you managing?

Fred, it is definitely restricted. And if you look at product availability, mill lead-times are into the third quarter and have some products are well into the fourth quarter. But we are managing that fairly well as we have done in the past. The mills are allowing us to have our share that we have requested and we bought in the past and also afforded the opportunity to grow market share as we saw a 4% growth. So we are getting what we needed to do, part of that’s due to our scale, part of that’s due to, obviously, we paid the mills on time. And so, they are working very, very closely with us and our purchasing teams have done a phenomenal job in projecting out further than typical mill lead-times. So we are comfortable with what we are getting right now. We are managing our inventory turns, as well as we ever had and so I think that’s something that is a real credit to our people that are out there and how they are managing the cycle right now.

And if we see these conditions continue, I suspect you will gain even more market share against the small mom-and-pops out there, is that fair to say?

Yeah. There’s a real opportunity to do so. Again, I think, some of the smaller to medium service centers are probably struggling to get their allotment of steel and I think it affords us the opportunity to continue to grow that share, not only just raw steel products, but we are also seeing strong growth in our value-added processing as well.

Okay. Second question, I guess, we are well into the second quarter. So I was wondering when these higher input costs will start getting into your service center margins, are you starting to feel it now or is it something you won’t feel until the summer months, potentially into the third quarter?

Yeah. The higher input cost again with our turns, obviously, just rationally and logically, it will start to come in sometime during Q2, although, we have seen increases this week in every product that we carry. So the increases are still continuing to come in. So early in the quarter, we have been able to maintain those margins in service centers and then steel distributors. And so, again, there will, obviously, be some normalization there as the quarter lingers on and in the third quarter, but I think we are pretty bullish on Q2 remaining fairly strong there.

Okay. Thanks for that, John. And then I wasn’t surprised to see steel distributors capture some healthy spreads during the quarter. But I thought we might see slightly higher volumes. And I think, I mean, just reading through the slides you presented, the inventory is higher already. So is Q2 shaping up to be a stronger quarter in terms of volume and revenue?

Yeah. There are a couple of dynamics there. One, we are getting very professional groups within the industry 30-plus years and so they elected early on in the quarter to just pass, because they could get a higher price later and so that limited some of the volumes. But again, you can see that their margins skyrocketed -- gross margins skyrocketed. They were able to take advantage of that situation. Also, we have got some import materials coming in into Canada specifically, sold back-to-back in Q2 and Q3, as Marty alluded to earlier and so we anticipate those volumes to come in and get back out during the month. And again, those are sold primarily back-to-back, and again, as demand in the U.S. is, it’s more transactional market. They will take advantage of the opportunities as they are presented to them.

That’s great. Okay. Thanks for that color. Good quarter.

Thanks, Fred.

Thanks, Fred.

Thank you. Next question will be from Michael Doumet at Scotiabank. Please go ahead.

Hey. Good morning, guys.

Hey, Michael.

Good morning.

Hey. I wanted to get maybe your MSC margins 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 the inventory versus the selling price and whether that’s increased or decreased through Q1, just trying to get the derivative there.

Well, in terms of -- I am 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 on to that level as we are 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 are a cost plus business. So as we have tight inventory turns, returning the inventory pretty quickly and given the nature of demand right now, it’s basically flowing into our end markets.

Got you. Okay. And then, I mean, just going back to maybe some of John’s earlier comments. I guess, Q1 margins were a standout. I mean, historically, 800 basis points higher I think in the previous peak. I am just trying to get a little bit of a sense for the piece of normalization into Q2 and into Q3, I mean, just any comments that could help us out?

Yeah. No. You are exactly right. I mean, there’s obvious holding gains that come into play in there, but I think those are getting probably too much of the headline. And Michael, when we look at it, I mean, you have got a group that -- industry professionals that act on that opportunity in this transactional model that Marty mentioned earlier where they were able to expand that ability in 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 the material and in that relative inventory that’s out there. We have the ability to continue to maintain that margin or very similar to it. So it may come off 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 Russel’s appetite for, call it, tuck-ins versus platform deals? And specifically, on tuck-ins, I mean, do you anticipate a pick-up in activity as the U.S. Government contemplates to increase capital gains taxes?

The short answer is yes, yes and yes. We are looking at all the above. But as we have always approached it, we are pretty disciplined in what we do, but we have a lot of flexibility to look at stuff, small, medium and large. The issues are do, does it meet our criteria from both the financial, as well as qualitative operational perspective. So I think there’s going to be more and more opportunities. We are 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, who knows what comes into law, but with capital gains modifications, that has often in the past become a catalyst for people to rethinking about what they want to do with their private businesses. So, we are all ears, if it meets our criteria terrific. But the way we are 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.

Yeah. That’s great color. Marty, thanks for that. And I guess just a comment on slide nine that exhibits, it’s great. I wonder, Marty, with the OCTG business largely restructured and now Russel resembling a metals service center pure play, which the market is showing that it is willing to pay higher multiple for. Do you anticipate using essentially 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 have 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 are currently structured with both the current flexibility that we have layered on with incremental flexibility, you talked 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 Marubeni-Itochu transaction. So we have got a lot of financial flexibility right now and we think we have the ability to look at growth opportunities without incremental equity financing. But we are always open to it depending upon the circumstances. But right now we think we have got a lot of internal bandwidth.

Great, guys. Well done, guys. Thanks for answering the questions.

Okay. Thanks, Michael.

Thank you. Next question will be from Michael Tupholme at TD Securities. Please go ahead.

Thanks. Good morning. You have touched a little bit on steel availability. I am wondering if you can talk just a little bit more detail about what you are seeing right now relative to the way things looked in Q1 in terms of your ability to source product.

Yeah. So there’s not been a tremendous change as Q1 moved on. January was a little bit more available. But it started really tight in February and March and so we are not seeing a whole lot of issues with availability. Again, you have to be able to move with the mill manufacturing cycles and schedules. Our ERP system set up to do so and our purchasing teams doing that on a daily basis. So we are looking booking out into the future. So our bookings are a little bit further out than they historically have been, again as those people are moving into Q3 and Q4 with certain products. But again it’s just a function of our ERP system and 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 four months, five months, six months. So there’s not been a massive shift one way or the other in terms of our tonnage during Q1 and even, frankly, the few months before that.

Yeah. Are there any particular products that you are having difficulty sourcing?

As far as difficulty, I would say, no. And can you get -- obviously, in this market, you would take more and so the products that are tight right now, flat-rolled coil are tight that are out there and a little bit of times in certain sections of plate. But again we are getting our allocation of all of that and so we will be able to fulfill all of our needs. As Marty mentioned earlier in his comments, it allow us to grow our market share.

That’s helpful. Thank you. John, you have obviously lived through many steel price ups and downs over your career. Can you talk about what’s different about this cycle, and I mean, obviously, appreciate that we have just come through or are still going through the pandemic and then obviously that’s different? But how do you see steel prices evolving over the balance of this year and into next and what’s different about sort of what we are seeing now versus other cycles in the past?

So the big thing right now, I mean, we are -- the extended lead-times, which is typical of the big price run-up that we have seen historically. But again there’s supply shortage going into this and it was spurred by the pandemic that was out there and so as you look back from the end user through the distribution channel linked to the manufacturer of steel, everybody had thinned their inventory. And so the depth of that, that went on has really constrained the supply side and demand is moving in a much faster pace. There’s a lot of pent-up availability of cash, people are not going out to the entertainment sector as much as they used to be, cruises or trips, they are now staying at home, spending on their own home gyms or in other areas. So we are seeing demand jump back more to the industrial side. If you look across the board at all commodities right now, whether it would be wood, steel, everything is moving up in pricing and the backlog is just tremendous. So we look at the Architectural Billings Index, as you look at the Purchasing Managers Index, all those are out as far as we have seen them in a long, long time. So the demand cycle looks extremely strong coming into a thin supply chain and so we think that’s just really expanded this out. In our opinion, it’s going to remain higher for longer on the pricing than we have seen in the past.

Okay. You have had several questions about the strength of the gross margins in service centers and talked about how things evolved so far in the second quarter. Steel distributors, do you expect to see a similar dynamic going forward as you talked about in service centers? I mean, how are 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 or should we be thinking about that segment any differently?

Yeah. That one will probably normalize to some degree just in the fact that we have got a lot coming in, as Marty mentioned earlier, in the second quarter and third quarter that’s sold back-to-back, that’s in a little tighter margin than what we saw in the first quarter. First quarter is really led by our U.S. transaction and I think they will continue to do very well. But we will see an increase in revenue and probably a slight decrease in their gross margins as we go into Q2. Earnings overall should be fine and the combination of the two should be in a somewhere better earning .

Okay. I will turn it over. Thank you.

Great. Thanks, Mike.

Thank you. Next question will be from Devin Dodge at BMO. Please go ahead.

All right. Thanks. Good morning, guys.

Hey, Devin.

Good morning.

I wanted to say congratulations on a good quarter, but I think calling it a good quarter probably undersells what you guys just delivered, so but congrats anyway. Just maybe…

Thank you.

… can you walk us through maybe how demand is trending across your regions and end markets? Just wondering what markets are maybe further ahead in that recovery and where others may still be at an earlier stage?

Yeah. So, Devin, we are really seeing general economies across the Board. GDP is really strong in both Canada and the U.S. Construction economy remains robust right now, which we participate in very well, equipment manufacturing out there, general OEMs that are out there, all very busy right now. Energy is improving, but it still has some room to go obviously. But we are seeing good signs of energy for the back half running at $60 to $75 WTI on the oil price. That’s going to generate some drilling activity. So we are pretty bullish on the back half of 2021 as we come out of breakup and into 2022 in the energy sector. But it’s definitely lagging the other sectors that are out there. Automotive is under some pressure. They had 17.5 million units I think last month. This shipment continues to linger on and now that we are seeing more and more shutdowns. We don’t participate in automotive, but that may create some supply availability in an area that’s been very constrained. So I don’t think it affects pricing. I think it will just help with availability, maybe bring lead times back to a more palatable level from the manufacturer side. So, overall, it’s really firing on all cylinders right now. We are seeing across the board as we are seeing the general pickup.

Okay. Okay. Good to hear. And maybe a question for Marty, obviously, lots of moving parts in the energy products division. Just when we think about 2022, it’s, I mean, largely going to be an oilfield store business. Just trying to get -- just 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?

Yeah. It’s interesting, Devin, because if -- I showed you two graphs historically, one of our field store business and one of our service center business and I 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. So if you are talking about stuff in that kind 20%, 21%, 22% range in terms of gross margins. That’s what we have 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. Now that…

And Devin...

I was about to say, our field store business is much more skewed to Canada. So we have got -- if you look across some of the numbers, 80% of our business activity is on the Canadian side of the border with field stores?

And Devin, just to add on to Marty, when you think about that margin profile, a little less volatile in the field stores, because the part’s such a highly engineered part. There’s just not a lot of material in it as a percentage of the finished component.

Okay. That’s good color. Appreciate it guys. I will turn it over.

Great. Thank, Devin.

Thank you. Next question will be from Anoop Prihar at Stifel GMP. Please go ahead.

Good morning, guys. Just a quick question, John, we have talked quite a bit on the call so far about inventory availability. But kind of looking at it from the other side of it, which is that we are hitting all-time high levels for pricing on a bunch of different products. So I am curious to know inventory is tight, but given what pricing is doing, like, how eager are you to actually continue to add to that inventory?

Yeah. So we are really not speculating. As Marty talked, turn is not moving up a lot. Just a few percentage points that you saw our gain there in market share. So our turns going at the end of March were much better than we had for the quarter. So, again, we are maintaining the turn level to a very high level. We are not taking an appetite to speculate. Historically, when you have looked at some of our challenges, when there’s been a big downturn, it’s typically been -- the write-offs have been the line pipe and OCTG, which we are addressing. And then it’s also you have seen some of that in the distribution business, particularly in the United States where we have taken some of those hits in the inventory write-downs. Again, they have not grown their inventory. They are just maximizing their margin right now. So we are taking a very conservative approach to this just based on what you have said. I mean we are trending at all-time highs and so we will continue to, firstly, run our business on a day-to-day basis, but we are not taking a speculative or an aggressive stance on inventory.

Okay. All right. That’s 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 should be adjusting our outlook for the energy business, given that we are in the process of winding down a substantial piece of that?

Yeah. So I would say, for purposes of Q2, there’s always a seasonal dynamic associated with that. So that’s just going to run its normal course. If you basically model in a closing of the end of Q2, beginning of Q3, effectively all that stuff comes off the balance sheet and out of the income statement starting in Q3, if you use that time line. The accounting for our equity interest in the joint venture will be a one line item that comes over an income statement or one line item that comes over on the balance sheet. So it’s going to be fully deconsolidated that what was the legacy trial business.

Okay. Thank you.

Right. Thanks, Anoop.

Thank you. [Operator Instructions] And your next question will be a follow-up from Frederic Bastien at Raymond James. Please go ahead.

I don’t think I have seen a normal year for the steel sector in some time. I am not sure about you, John, but you have been at this longer than I have. But assuming we get a steady mid-cycle year in 2022 and that’s a big if, what sort of earnings potential could Russel be looking at?

Well, Fred, I think, you are right. I think this is the second time I have been referenced too experienced or old on this call. So I will take that as a positive. But in 32 years, I have not seen what I would consider a normal cycle for a year, so it’s difficult to project that, what’s the price of steel going to be, what’s our gross margin going to be in that timeline. So, again, not to be evasive for you, but it’s just so difficult to predict what normal is and the swings have gotten more 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 that our transactional model allows us to do that. So we will continue to focus on that. Again, I hate to be evasive not to be able to give you a specific number. But it’s -- again, it’s really a -- it would be a wild guess at this moment.

Okay. Maybe I will ask differently. Historically, if you look at over a five-year, six-year period, you have managed to keep sort of the dividend. I mean, you historically targeted a payout of about 80% on EPS for your dividend and that’s kind of been maintained over like the last five years, six years. Do you feel that on a go forward basis, you are going to grow into that dividend and we will see the sort of this payout of EPS going down from 80% to 70% to 60% or is the plan -- well, just curious what the plans are there?

We will continue to watch it over the cycle and we have always tried to get 80% over the cycle, sometimes we are over 100%, sometimes we are around the 50%s and 60%s, but we will continue to watch it on a quarterly basis with our Board. But I would say that theoretically that we will continue to look at that 80% over the cycle. I don’t see any big changes there.

Okay. Thank you.

Thanks, Fred.

Thank you. Next is a follow-up from Michael Tupholme at TD Securities. Please go ahead.

Thank you. Just a question about thoughts and expectations for changes in non-cash working capital over the remainder of the year, if we may be set aside the Marubeni-Itochu transaction, I think, Marty, you said there’s 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 then how do we think about changes in non-cash working capital stemming from the rest of the business over the year?

Yeah. Your $40 million assumption on the OCTG line pipe, that’s correct and that makes reference to our U.S. OCTG line pipe business and we will substantially get through that in Q3 and Q4, so that we should get there by the end of the year. For the rest of the business, to be honest with you, it’s going to be really a function of market conditions. We -- 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, goes back to the same old theme about inventory turns, disciplined approach to inventory management, it’s a key metric for us and for all of our folks right down to the ground level focus on. So if we continue to house have 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 is going up by and steel input prices continue to go up. But again, as I said earlier, we are keeping our inventory volume relatively controlled. 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 flows through from steel pricing.

Okay. And what was the -- if we were able to desegregate, 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 related to service center, because that was a negative -- that was an investment, correct?

Sorry. In terms of how much inventory changed in the service centers?

Yeah. Sorry. On the inventory side in service center, because I know when you look at the cash flow, I mean, there’s a few things going on with the reduction in inventories in energy. But if we focus on service centers, what happened with inventory…

Oh!

… in that area?

Yeah. 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 different matter, you asked earlier about M&A. I am just wondering in this environment, the steel price environment we are in right now, which is, obviously, unprecedented. Is this an easier or harder environment to contemplate and consider M&A? We -- if we put aside the tax -- potential tax changes, that’s a separate issue. But just in terms of when you are assessing businesses in this environment, is this an easier time or a harder time for you?

I wouldn’t characterize now is easier or harder, because it’s always hard. If we hit ratio on stuff that we see and we look at versus stuff that we transact on, it’s not a great batting average, but that’s just the 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. I mean, sometimes there’s stuff that’s available at a pretty cheap price and sometimes a cheap price is too expensive if it’s a massive turnaround situation. So I’d say, 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 are very, very selective of what works for us.

Okay. That’s helpful. Thank you.

Great. Thanks.

Thank you. And at this time gentlemen we have no further questions. Please proceed.

Great. Well, thanks, Operator. Well, look, thank you very much for joining the call. We appreciate you focusing 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 and 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.