Russel Metals' (RUSMF) CEO Brian Hedges on Q4 2015 Results - Earnings Call Transcript

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Russel Metals Inc. (OTCPK:RUSMF)

Q4 2015 Earnings Conference Call

February 17, 2016 9:00 AM ET

Executives

Brian Hedges - Chief Executive Officer

John Reid - President and Chief Operating Officer

Marion Britton - Executive Vice President and Chief Financial Officer

Analysts

Michael Tupholme - TD Securities

Frederic Bastien - Raymond James

Julian Shadow - RBC Capital Market

Edel Kento - BMO Capital Markets

Anthony Zicha - Scotiabank

Phil Gibbs - KeyBanc Capital Markets

Operator

Good morning, ladies and gentlemen. And welcome to the 2015 Year End and Fourth Quarter Results Conference Call. Today’s call will be hosted by Mr. Brian Hedges Chief Executive Officer; Mr. John Reid, President and Chief Operating Officer; and Ms. Marion Britton, Executive Vice President and Chief Financial Officer of Russel Metals Inc. [Operator Instructions] I will now turn the meeting over to Ms. Marion Britton. Please go ahead.

Marion Britton

Good morning, everyone. I will begin by reading the cautionary statement on Page 3. Certain statements made on this conference call constitute forward-looking statements or information within the meaning of applicable securities laws, including statements as to our outlook, future events or our future performance. All statements other than statements of historical facts are forward-looking statements.

Forward-looking statements are necessarily based on estimates and assumptions that while considered reasonable by us inherently involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Our actual results could differ materially from those anticipated in our forward-looking statements, including as a result of the risk factors described below in our MD&A and in our annual information form.

While we believe that the expectations reflected in our forward-looking statements are reasonable, no assurance can be given that these expectations will prove to be correct and our forward-looking statements included in this call should not be unduly relied upon. These statements speak only as of the date of this call and except as required by law, we do not assume any obligation to update our forward-looking statements.

I'll now turn to Page 5 of the slide deck that we have sent out, start by going through the many adjustments that we did make in the quarter. I will remind everybody that we did do our filings on SEDAR yesterday so included in this package and also in the earnings press release with only our summary quarterly statement but our full set of financial statement have been filed for anybody that looking for them.

So starting here we did report a loss of $135 million or $2.19 in the quarter, $1.42 for the year. The adjustment that we have to come to adjusted earnings relate to inventory write-down. We had inventory NRV write-down in prior quarters but in addition in this quarter we had a net after tax of $32 million or $46.8 million. Pretax write-down in the Q4 mainly related to energy and steel distributors and particular heavy in our US operations. One of the things that happened in the quarter was the price of steel continue down and at a certain point the price met to our average cost and prior to that we still had a margin built into it, so the NRV is taken to the quarter are heavier than it was anticipated and was taken earlier in the year.

In addition because of the price of oil and the low price of steel, typically we do our asset impairment test in the fourth quarter. We had to take non-cash charge of $123.5 million, pretax $115 million, after tax what is relate to is goodwill on acquisition that we had previously done. The largest amount being related to Apex Distribution, Apex Monarch that was acquisitions in 2012-2013 heavily involved in the oil industry. The other areas where there were smaller goodwill adjustments was Quebec and Siemens and both of those based on steel pricing and Siemens doing a little bit by Ag industry and customer base that they serve having had a tough year.

The other adjustment which is going the other way is the change in the fair value contingent consideration so this is the amount we anticipated paying in the future related to Apex Distribution and Apex Monarch. Obviously with the reduced outlook for the energy operations and further capital expenditure reduction that are been announced Q4 and Q1 of 2016 are anticipated payouts there are now nil for future years and we've taken back our liability that we had on the balance sheet.

We also took a product warranty claim, it was $20 million pretax, $15 million after tax related to a claim that has come to us from a customer in the energy segment. We also and this one was mentioned on our call last quarter. We made people aware that we were -- redeemed our convertible debentures in November and the remaining accretion and cost related to the convertible debenture was a hit out in the quarter almost of $4.8 million pretax and $4 million after tax. Bringing our adjusted earnings to $10 million in the quarter, $0.16 EPS and $0.99 for the year.

Turning to the next page, some of the positives in the quarter. We did have huge cash from operating activities, $188 million. Strong reduction in AR some of that caused obviously by the drop in revenue which I'll speak to a little bit more later and good collections by our credit team. The also strong reductions in inventory if you note point three on there. We reduced inventory $73 million in Q4, $215 million annually and does not include the FX movement or the NRV.

Also we are also cash less bank indebtedness or as we call it net cash positive of $49 million at the end of the year and in that we had also redeemed our $174 million convertible debentures and I'll just highlight that little bit more when we get to our five year summary.

Flipping to page 7, sorry page 6 I guess. Sorry page 7. Sorry about that. Metal service center tons were down 14% in Q4 and 9% for the year compared to 2014. Tons have come also little more in the last half of the year in Western Canada and in the US and that's why we are stronger in the Q4 or down more in Q4 than we are for the year. Steel prices seemed to have stabilized in January 2016, January, February at this point, some concern about whether it's going back up but it seems to have stabilized on the service center side. Energy revenues year-over-year declined 43% for the quarter and 32% for the year similarly our revenues in the energy sector off more in the fourth quarter than they were in the first quarter which 2015 compared to 2014 which is what driving the larger revenues we would think that our Q4 run rate is little more representative of our go forward in 2016.

The next two items obviously people read in the paper everyday rig counts low, continued low pricing, it causes concern on our revenue line and our activity level. We did declare our dividend of $0.38 per share.

Let's incur to Page 8. Wanted to just met how people look across the line account receivable as you can see our receivables are at the lowest level they have been on this chart and that would include acquisitions in that period and FX increases in that period. So it's a trough you can see how much we've reduced AR, our revenues are actually up a bit compared to 2011 which was our other lowest but some of that is FX driven. Similarly inventories are at very low levels and I'll do a little further discussion when we get into the MD&A and inventories.

Also want to bring your attention to the line down under capitalization. The total interest bearing debt so we have outstanding our long-term debt $300 million at 6% and then our net cash which I mentioned previously up $49 million positive, so our net borrowings at this point in time are $247 million, down significantly from the $432 million at the end of 2014.

Flipping forward to Page 9. On here is our quarterly and our annual income statement. Just wanting to highlight the revenues. You can see the difference in revenues in the quarter is $340 million, approximately $100 million a month down from the same quarter last year that would -- there were some FX improvement in this year or higher FX on our US operations so that is a significant drop and where the annual numbers are down $758 million, so we are -- revenue drop is stronger as I've already mentioned.

Now turning to Page 11. Our statement of cash flow. Highlight there the cash from operating activities in the quarter $188.1 million and $366.2 million for the year. The account receivable obviously a huge driver of the cash flow down $112 million in the quarter, $258 million for the year. The inventory similarly have shown of cash of $73 million in the quarter and $215 million in the year and those numbers do not include you will see on the next line the reduction in inventories from the NRV.

Now turning forward to Page 14. I am not going to go through this in any detail but this is where we outline all of the adjustments which were on the first slide that I spoke to. So you can see the discussion on each of those adjustments.

Now flipping forward to Page 17 which has our segment numbers. The biggest drop in our revenues in the year being our energy at 32%. The metals and steel distributors at both 9% and 10%. We highlighted on this chart for this page and in the quarterly page so it is at the back the write-down by segment. You will note that metal service center only had a $2 million write-down in the year. That's what was taken at point in time month end when we do the calculations. Their margins at 19.3% obviously include pressure in relation to inventory being higher than anticipated selling prices at that time but they did a very good job in turning their inventory in the year. And you will note the last two quarters when see they get to there were 4.7 turns and that's why their write-downs were much lower than other two segments. The energy segment has largest write-down, they also has the largest decline in revenues, weren't able to turn their inventory or move it out due to customers who just started stopped operating drilling and we had no place to take that and then its prices started down, we took some hits there.

Similarly steel distributors in the Houston area the amount of excess inventory caused us to take significant write-downs on product that was sitting in that area when the price in the fourth quarter dropped so much.

Flipping forward to Page 19. Highlight a couple numbers under the metal service centers. Tons were down 9%, manpower in the segment is down 8% and you see that under the operating activity area and above that we have given your our average number of invoices and the price for inventory price, you will see that our actual invoices were only down 5%. So we did have activity going on so the ability to get our workforce down 8% was pretty good on our planning side of our operations considering we only had a 5% drop in the invoices or transactions on a daily basis.

In the next page I'll just also highlight that we had 17% drop in our workforce in our energy group. We never like to lay off our employees but we've been proactive and trying to get our expenses in line with where we see our activity. This group is very highly paid for performance while all others are but so you will note that similarly our operating expenses are down by 18%.

Turning to the next page, Page 21, corporate expenses are down $5 million which is a combination of no bonuses due to the no EPS and then the lower share price impacting paid for performance type compensation.

Turning to Page 22, other finance expense and income -- sorry actually interest expense and income I wanted to highlight the net interest expense was $41 million which included the $4.8 million of debt redemption cost compared to $37 million in 2014. But we remind you that we did retire our convertible debentures so our anticipated rate based on our current borrowing is around $22 million per interest for the current year.

Turning to Page 24, speaking just slightly on the inventory numbers. Comparing last year in $931 million to the $712 million, we have given you the reductions that are on the cash flow the $215 million reduction non FX and the $61 million which was the NRV number. The number did go up slightly because we acquired -- we did an acquisition and have $14 million of inventory and the estimated FX increased is $43 million. So if you compare $931 million to $712 million we actually did better than it may look at first blush.

And as I mentioned before metal service centers did a great job and getting their turn from 4.4 earlier in the year to 4.7 for the last half of the year which really helped them on their NRV.

Now turning to Page 29, just wanted to highlight that we've given our quarterly numbers here, similarly the quarterly NRV by segment and the change in revenue by segment and you can see both steel distributors and energy at this point is down 43% and service center is down a little bit more because of the 14% lower tons and lower selling price at 6% compared to Q4.

Those are my comments. I am going to turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Thank you. Your first question comes from Michael Tupholme from TD Securities. Please go ahead.

Michael Tupholme

Thanks. Good morning. First question Marion that the corporate expenses in the quarter were nil, more typically you see about $4 million and I know you commented on the full year number being down due to no bonuses and the stock based comp but so in the quarter specifically in the fourth quarter were there reversal or prior accrual so that what you got to zero and I guess secondly what would be the expectation for corporate expenses in 2016?

Marion Britton

Well, there would have been some reversals because if you remember at Q3 we were at $0.77 so anticipating making our threshold of a $1 and our internal first stop of $0.75 at that point. So yes there were some reversals but there are also was a fair drop in the price of our stock from September 30 to the end of the year which impact the -- in our use pricing. I would say at this point I would use the current annual number for our compensation for this year.

Michael Tupholme

2016 being flat with full year 2015?

Marion Britton

Yes. We are taking measure that we can to keep the cost down; obviously we are concerned about the top line.

Michael Tupholme

Okay. And how comfortably are you with your current inventory position. I guess in the current environment particularly as it relates to energy products, would you expect to potentially incur additional inventory write-downs over coming quarters?

Marion Britton

John can address that.

John Reid

I think we are as comfortable as where we are with the market right now. There could be continued drop as we look at the market and pricing. I mean the market is down $400 to $500 a ton so far. I think as the rig count drops the ENP is continue to cut CapEx we may see that there some further drifting in price but overall we think we got the large majority of anything to do with pricing now with.

Michael Tupholme

Okay. So despite the improvement we've seen in hot rolled coil and plate prices since late last year beginning of this year, you are still concerned about OCTG prices given what's happening in the broader energy space?

John Reid

Usually there are lag there with it, so we are seeing some of the lag and the inventory that still on the ground. So we've seen so much foreign coming, so much in the pipeline. A lot of mills that are idle that can bring on capacity. So there are still probably eight to nine months inventory on the ground that has to flush from the energy side. Service center of the business is in a lot better shape so those should go in quickly. This all increase comes through on the service center side.

Michael Tupholme

Okay. Thanks. And then on the dividend, your target is to payout approximately 80% of earnings in the form of dividends over the cycle. Obviously still a very challenging backdrop and on earnings basis your payout ratio is still quite elevated here obviously in excess of that target. How much further into the cycle do we need to get before you would thinking maybe appropriate to reduce the dividend?

Brian Hedges

I think as evident is two areas we go out. First of all we go like, can it always the dividend impacting our financial condition. And right now our debt to equity is level 0.3. So the working capital countercyclical or nature of working capital has generated lots of cash and we have a very little debt on the balance sheet. And we are continuing to throw off cash which is actually a poor indicator because that means we are still not coming out of the bottom as we come into this quarter. We then look at what should it be and I don't like to make that decision but I think it is probably the very bottom of the cycle. We did that last time when we cut much deeper than we needed to in 2009. And I -- so right now we are at the bottom. If we stayed flat like this, we probably don't mind returning capital a little bit because we don't need this capital. If it is the net market for the next two three years as where we are today. If we get a bit of an uptick we'll get a better idea out there what the right levels are. And I am not sure whether where we are is the right level or I am down a little bit. But we will review it every quarter but right now we are sitting at the very I think the very bottom of this trough. And this is the wrong time to be trying to decide what the right level is. But we don't -- we have no fiscal reason for cutting the dividend at this point. Our balance sheet is perfectly strong.

Michael Tupholme

Okay. That's great color. Thank you. And then just lastly for me. Again given the challenging market conditions can you talk about your level of comfort with your financial covenance as you move through 2016? I know you have a number of covenance but I guess it looks to me like maybe the one we need to watch is the interest coverage covenant and then so just level of comfort with I mean with all of the covenance but that one in particular I suppose. And secondly how does that impact your thoughts around the dividend probably notwithstanding what you just mentioned about healthy balance sheet and being at the bottom of the cycle.

Brian Hedges

I think you got to look at -- the industry uses for the most part asset backed financing. We've always had a secured facility with our banks. At the current time we are not drawing anything. We are getting up closer to $100 million positive cash. So at the end of the day I don't believe there would be a problem, even if we needed a way but I think the banks would give it to us. But secondly if we really wanted, if we thought it was an issue, we can go to an asset backed facilities which is probably marginally cheaper anyway. And go ahead and finance the balance sheet that way. So I don't think the covenant although it's a fact when we look at it, to step around that is not an issue for us at all. So it's not a big factor when we look at what the dividend is right now.

Operator

Thank you. Your next question comes from Frederic Bastien from Raymond James. Please go ahead.

Frederic Bastien

Hi. Good morning. Your working capital releases were lot higher than I was expecting during the quarter. And based on your earlier comments sounds like you maybe expecting more of that in a current quarter. Where do you stand on that?

Marion Britton

I think that we will continue to work on bringing inventories down in steel distributors and in energy segment. I think we are almost at the bottom in service center segment. So there will be some come out at inventory. I do hope that AR doesn't come down much more because that means revenues coming down much more so I am not hopeful a lot there. But as we start to buy in service center we will have a little bit more payable. So I suspect a small relief in the quarter or additional cash out in the quarter.

Frederic Bastien

Okay. Great. Steel prices seemed to have stabilized for your metal service centers in Q1 but how is demand these days?

John Reid

US demand and Eastern Canada demand is up over Q4, it's approaching Q1 levels from 2014. Western Canada is not back to the Q4 level. We are really struggling to get Western Canada back up again, it so dominated by the oil and gas sector. So we would expect that but overall we are seeing some uptick there but it's gradual.

Frederic Bastien

Okay. Just little notice, we notice that your quarterly numbers were restated a bit going back few years what's that related to again?

Marion Britton

Well, we did adjusted earning, they weren't really restated but we made the -- we hadn't put the NRV adjusted in the prior quarter so we made them consistent for comparison purposes.

Frederic Bastien

Okay. And then sorry if I don't beat dead horse here but your dividend obviously been quite topical subject concern for some. Sure -- I am sure it was discussed at length by the Board yesterday. Is there more I guess it's review quarterly , was there focus or emphasis given in this particular quarter because it's year end or because of the situation right now in the market.

Brian Hedges

Well, there is more emphasis because of the situation in the market. Year end is not impact on this. You got to look at what's going on out there.

Frederic Bastien

Okay. And despite fact that a lot of energy related news have been using the fourth quarter obviously and the outlook span that they have been using that as a premise to basically cut the dividend and you are still comfortable with your cash position right now and the fact that you've got lots of time in your hands. Is that a fair assessment here?

Brian Hedges

I don't like the fair assessment. We don't need to drill or develop or do anything that the energy companies do. So we don't have a drain on cash to get started again. So we can sit here, we can sit here and run at a breakeven or higher but doesn't really impact us. They have capital projects and everything else to do. We don't have that. I mean that nice things were being the guy in the middle. So that's all part of it. The other thing that -- one of the things we did look at, when you look at our shareholder base, our top 15 shareholders actually increase their hold last year. So it's easy to say the market says it should -- either should cut your dividend because our yield is so high. But we have a lot of shareholders in this company that have been here for several years. And have shown their confidence in the way this team is manages the money. And that's where I keep my perspective. We are trying to return capital to our shareholders that are here today. And most of whom and majority of whom have been here for a long time.

Frederic Bastien

Okay. And where do you stand on share buyback right now?

Brian Hedges

There is a number we will have a serious look at it. We are not there right now.

Operator

Thank you. Your next question comes from Julian Shadow [ph] from RBC Capital Market. Please go ahead.

Julian Shadow

Hi, guys. How comfortable do you feel right now in this environment using credit for acquisition?

Brian Hedges

This is small tuck there, it is not - I am not worried about that. We've always said that any one of any size that we would look at, we would have to do debt and equity. And we would have to do debt and equity a year ago; we would have to do debt and equity two years ago. I don't think that changes. So we are not going to walk away from an acquisition that we think is a good one for us. Because this is the right time to be buying company, is at the bottom of the cycle. And so we won't let that taking on little bit of debt stop us. We might -- that to our fund.

Julian Shadow

I guess as a follow on. How are the opportunities right now like you mentioned its spot under cycle, opportunities still available and how is your interest level have been?

John Reid

We started to see some small opportunities pop up in the service center sector. There has been several pop up particularly related to flat roll. We did the acquisition in the fourth quarter, an asset acquisition that was just opportunistic in our JMS region that allowed us to continue to grow with our processing area which is something we sat for two years. We want to continue to expand our engineer type services and processing abilities. On the energy side there are probably a lot of things that are available. Let's take a look at each one of them and evaluate on them case by case basis.

Operator

Your next question comes from Edel Kento [ph] from BMO Capital Markets. Please go ahead.

Edel Kento

Hi, this is Edel Kento on the behalf of Bert Powell.

Can you comment on steel imports and how do you see that impacting the markets in 2016?

John Reid

The import of steel area is still at a very high level, if you look at where we close 2015 it was down from 2014 but it was one the highest years we've seen in the last 10 years. And they are still there, they are still very available. Without going product by product again the availability on the world market and the supply in the world market is still ahead of demand. And so the imports will be available very quickly. There is unsold import sitting in the docks right now in North America.

Edel Kento

Okay. And my second question. Could you also comment on the lead time at mills and service centers like has they have been improving the past couple of quarters? Like how do you see a lead time at mills this year?

John Reid

On hot roll coil the lead time is still two to three weeks, so they are still pretty scarce. If you look at the coated products, galvanized and coil roll both products are starting to extend out. They have some success there with other dry tube. And so they extended out, on bar product, long products that your lead times are still pretty stable where they have been for the last several months. We are not seeing any huge improvement there.

Operator

Thank you. Your next question comes from Anthony Zicha from Scotiabank. Please go ahead.

Anthony Zicha

Yes, good morning. Brian are you satisfied with your cost structure flexibility? Is there more room to improve?

Brian Hedges

There are two things we've been addressing. If you look at the cuts we've made in energy because they are not really human capital intensive. We've cut some people and some structure cost out of that which is permanent changes so those are changes or improvements to our operating structures that will be there and when we go back up again we won't have that people. Those are permanent savings. The service centers are taking a lot of what I call cycle cut where we go from three shifts to two shifts et cetera. And we bring those that people back when the market turns up again. So we've done a lot of that. Beyond that we are still doing structural changes and that will continue through this year if we continue to have a trough in the energy prices. So there will be more coming for sure. There will be -- on the service center side we will continue to be cutting out already people probably and then some odd admin person. But in energy there will be more structural change if we have to make them.

Anthony Zicha

Okay. And could you give us some color on the competitive landscape? Are they -- any potential disruptors that we haven't seen yet that could occur during the year if the market conditions persist?

Brian Hedges

Anthony we got oil and gas, it's all time low, it's just about rig counts close to all time lows, trying to think, I don't know I think we've identified them. China obviously the amount of excess steel in the world market John just alluded too; those are still the things that I would worry about. I mean obviously any kind of political stuff in the Far East is a-- would be positive but its concern.

Anthony Zicha

Okay. With reference to these challenging times do you expect some of the competitors to seize operations? Do you expect to increase your market share? Are you seeing tough conditions over the previous cycle? So is it hugely different?

Brian Hedges

This one wasn't, but it lot different from in one 2009 because we were -- by the end of 2009 we were already out of it, flat roll was back up into the $500 and we've sort of peaked our trough in the summer. This time we are sitting on the bottom. There isn't yet and the input to say we now sees what's going to happen, it's going to go back up. With yesterday's meeting held for energy, it wasn't -- if that continues we might get finally get better recovery in energy. But I think overall there is just not, there is not much visibility on what we are seeing out there.

John Reid

You just owe me.

Anthony Zicha

And one last question. Are you seeing some positives in some markets? What about Quebec, Ontario, Maritimes or other spots in the US?

John Reid

Eastern Canada we've seen lot of positive things going on. Again we are continued to grow there. We are back to level similar to Q1 of 2014. The construction is definitely strong in those markets. Ship building is going on. If you go into the US, we are seeing positive there as well. So we are seeing growth back to the similar growth levels of Q1, 2014. So we are heading in the right direction. Construction has gotten better but it continues to inches way forward. Automotive is absolutely strong. We don't play in that market directly, we do indirectly. But we are seeing signs of things starting to pick back up. But again it's just a slow rate.

Operator

Thank you. Your next question is follow up from Michael Tupholme from TD Securities. Please go ahead.

Michael Tupholme

Thanks. So just a couple of quick follow up. So just a pick up on that last question, John. You are talking obviously specifically about metal service center there right.

John Reid

That's right. That's right. Yes, energy is still difficult right now.

Michael Tupholme

If we include the Western Canadian peace of metal service centers into the mix, so Eastern Canada is good, US is good, Western Canada is obviously -- when you put altogether where you at -- where does that shakeout in terms of how you are fairing now compared to prior positions?

John Reid

We will be better than Q4. But when you blend them all together we won't be as good as Q1 of 2014 but we be cogs in the service center side. So the downturn in Western Canada we won't be able to offset that completely with Eastern in the US pick up.

Michael Tupholme

So when you keep mentioning Q1, 2014, is that what you mean or do you mean Q1, 2015?

John Reid

2015, Q1, 2015, I am sorry.

Michael Tupholme

Okay, perfect. Marion there was email comment when you were going through your remarks about the energy products segment and I didn't fully catch it. But you mentioned something about -- I think you were talking about the revenues energy products, you mentioned something about a good run rate. Can you just remind me or explain me what you were saying?

Marion Britton

So when you look at the Q4 level it's probably more representative of what you are going to see in Q1 than Q1 2015 is because we had a fairly strong specially driven by Canadian activity in Q1, 2015, supplement my comment.

Michael Tupholme

I think specifically about the Q1 quarter not necessarily some sort of run rate throughout the full year.

Brian Hedges

Yes. No. So you need to look more at the revenues in the Q4 as which are down approximately $100 million a month as our run rate at this point.

Michael Tupholme

Okay. Can you talk about your expectations for CapEx in 2016? And then also you're thinking around free cash flow and changes in non cash working capital?

Marion Britton

In relation to CapEx we had two high years being 2014 and 2015 due to specific projects that we including adding processing facility that we least replacing, the lease facility with our own facility in Edmonton and so we anticipate CapEx this year to be below our depreciation level and depending on how badly year is, it will be more below our depreciation levels let me just say it that way. Because we don't see a lot of need to add equipment or repairs at this point in time.

Michael Tupholme

Is that just below depreciation or below the full DNA number that you --

Marion Britton

No below depreciation. We end so look at the depreciation level excluding the amortization. We had indicated back couple of years ago that we did have to see things we wanted to do, expanding facilities and equipment that would take us above. But now with this turn we expect to be below worth $5 million, $7 million something like that below depreciation at this point depending what happens in the year.

Michael Tupholme

And then just in terms of free cash flow and working capital reversals.

Marion Britton

Well, I spoke to a little bit working capital that we will need to build, have put some inventory into our service centers, the other unit should be continue to come down or minimum be flat. And working capital ways we start to buy again the AP will go up. I think that's kind of we will have some recoup of cash taxes paid in the year. So that will bring back in some cash either by installments made that were needed at the end of the year and secondly there will be some loss carry back. There is I think $24 million is receivable number we have which by the end of the year should be recouped.

Michael Tupholme

Okay. And then just lastly for me. Can you -- there was comment in MD&A about I guess just signaling that the potential risk around increased bad debt expenses doesn't seem like at this point it's up that much year-over-year but what are you -- what are you seeing there? What's your comfort level with that?

Marion Britton

Well, it's probably our number one risk now that we've addressed our inventory issues going in, that's probably our number one risk in 2016 that someone in our customer base little larger than we would hope for does not have the banking. We typically not had issues in our energy segment with bad debts of any size. Obviously they are some of our larger receivables are typical bad debt which had been at a very low level have come out of our service center little pot shot that decide they are going to close and don't have enough cash to pay the bad debt off. We've a strong credit department. We will manage through but we do believe that’s one, our number one risk for to manage in 2016.

Operator

Thank you. Your next question comes from Phil Gibbs from KeyBanc Capital Markets. Please go ahead.

Phil Gibbs

Good morning. Thanks for taking my question. Just had a question on your volumes. Did you say that you expect your Q1, 2016 volumes to be almost at the level of 1Q, 2015 but not a quite given the continued energy headwinds?

Marion Britton

Yes. I think service center will be similar level but energy will be down compared to Q1 and steel distributors will be down.

Phil Gibbs

Okay. That's helpful. And when do you see the pricing, your level of pricing you are leveling out. Is Q1 going to be another step down versus Q4 or is Q2 going to be the quarter where we see it?

John Reid

Service center I think where they are now and I think we went through the inventory so we are clean on the energy side. We makes another quarter through depending now where the pricing goes. But right now steel distributors I think we found the bottom there as well.

Phil Gibbs

Do you think your pricing in Q1 will be pretty consistent with Q4 then as well is what you are thinking?

John Reid

On the service center and steel distributor side, yes. On energy we may see some more production.

Phil Gibbs

Okay.

Marion Britton

So it will come through the margin side say as opposed to additional NRV if there is more pressure down.

Operator

Thank you. There are no further questions at this time.

Marion Britton

Okay. Thanks everyone for participating and we will talk to you next quarter.

Operator

Ladies and gentlemen, this concludes today's conference call. We thank you for participating and we ask that you please disconnect your line.

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