Stella-Jones' (STLJF) CEO Brian McManus on Q2 2016 Results - Earnings Call Transcript

| About: Stella Jones (STLJF)

Stella-Jones, Inc. (OTC:STLJF) Q2 2016 Earnings Conference Call August 10, 2016 10:00 AM ET

Executives

Brian McManus - CEO

Analysts

Mark Neville - Scotiabank

Benoit Poirier - Desjardins Capital Markets

Sarah O'Brien - RBC

Michael Tupholme - TD Securities

Chris Martino - Laurentian Bank

Brian Pow - Acumen

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Stella-Jones' Second Quarter 2016 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions [Operator Instructions].

Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Wednesday, August10, 2016.

I will now turn the conference over to Brian McManus, President and CEO. Please go ahead.

Brian McManus

Thank you. Good afternoon, everyone. Thank you for joining me for this discussion of the financial and operating results for the Company’s second quarter ended June 30, 2016. Unfortunately, our CFO, Éric Vachon, could not be with us today due to a travel conflict. Stella-Jones’ press release reporting Q2 results was published earlier this morning, our MD&A for the quarter has been posted on our Web site at www.stella-jones.com and will be available on SEDAR. Let me remind you that all figures expressed on today’s call are in Canadian dollars unless otherwise stated.

Stella-Jones experienced a strong second quarter with revenue of $563.1 million, a 31.5% increase over the second quarter of last year. The contribution from our October 2015 acquisition of Ram Forest Group and Ramfor Lumber was $51.7 million. The acquisitions made early in the month of June of this year, Lufkin Creosoting and Kisatchie contributed combined sales of $5.6 million. The acquisitions we made in the South Eastern United States in the latter half of 2015 added sales of approximately $7.4 million.

Additionally, the conversion effect from fluctuations and the value of the Canadian dollar had a positive impact of $13.2 million on our U.S. dollar denominated sales. If we exclude the contributions from acquisitions and the currency exchange effect, organic growth totaled approximately $57.2 million or 13.4%. Looking at our results by product category, railway site sales reached $216.3 million, an increase of 11.1% over the second quarter of last year. If we exclude the currency conversion effect, sales in this category rose by approximately 7.3%, primarily as a result of healthy industry demand.

Turning to the utility poles category, sales amounted to $142.8 million, representing an increase of 4.5% over last year’s second quarter. If we exclude the contribution from acquisitions and the currency conversion effect, this figure represents a 6.7% decline over the comparable period last year. While sales of transmission poles remained stable during the quarter, we saw lower demand for distribution poles as a result of reduced maintenance activity in some regions.

In the residential lumber market, we saw robust growth in sales amounting to $152.1 million, an increase of over 149% from last year. This major increase includes the contribution of $51.7 million from the Ram acquisition. It also reflect the positive impact of the transition from treating services only for wholesalers to a value added full service direct offering for retailers. Industrial product sales amounted to $27.0 million, up 6.3% over last year. As the currency conversion effect more than offset the decline in sales related to the timing of orders for rail related products in the United States.

Logs and lumber generated sales of $24.8 million during the quarter. This was more than double the amount last year due to procurement efforts to support residential number requirement and the timing of timber harvesting.

In reference to the going expansion of our network I should mention that the construction of our new Wood Treating facility in the State of Wisconsin is progressing as scheduled. This plant which represents an investment of approximately $27 million will be used to service the utility pole market and the facility should be ready for production in the first quarter of 2017.

Gross profit for the second quarter reached a $109.6 million or 19.5% of sales compared with $84.1 or 19.7% of sales a year ago. The increase in dollars resulted from greater business activity, the contribution from acquisition and currency translation. The gross profit margin held relatively steady as economics of sale from greater residential number volumes were offset by increased sales in the log and number category which were affirmed at a value close to their costs. As a result of higher gross profit operating income amounts to $83.2 million or 14.8% of sales versus last year’s $61.1 million or 14.3% of sales.

Net income for the second quarter of increased 40.4% to $54.7 million or $0.79 per diluted share compared with $38.9 million or $0.56 per diluted share in the second quarter of 2015. Reflecting this increase in net income cash flow from operating activities before changes in non-cash working capital components and interest in income tax paid was $91.1 million compared with $69.6 million last year.

The company’s long term debt at the end of the second quarter stood at $731.7 million compared with $628.1 million three months earlier. The increase mainly reflects larger borrowings to finance Lufkin and Kisatchie acquisition as well as greater working capital requirements. Our board of directors also declared a quarterly dividend of $0.10 per common share to be paid on September 23, 2016 to shareholders of record at the close of business on September 2, 2016.

Looking ahead, to the remaining months of 2016 and beyond, the general momentum of the North American economy indicate that demand for our products should remain healthy. In the railways tie market North American railroad operators are continuing to maintain a continental network. This said, we expect year-over-year tie demand to be down in the second half of 2016 following a strong first half of the year. Despite slight softening in the market utility poles during the first half this year we expect the market to reflect steady demand for the balance of 2016.

As for the residential number category, we will see year-over-year growth continue as we capitalize on our Ram acquisition as well as the transition from treating services only for wholesalers to value added full service direct offering for retailers. Our broader reach in this market has positioned us to benefit from continued demand across the continent from new construction and outdoor renovation projects in both the residential and commercial sectors.

The company’s growth plan supported by the strength of our financial position allowed for continued expansion through acquisition. We will act whenever opportunities arise that complement our core mission and strategic vision. Furthermore, in the interest of building further shareholder value, we are focusing efforts on the integration of recent acquisitions into our network to achieve the highest possible economies of scale and efficiencies.

I would now be please at this point to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mona Nazir with Laurentian Bank. Your line is now open. Mona Nazir, your line is now open.

Your next question comes from the line of Mark Neville with Scotiabank. Your line is now open.

Mark Neville

Just first on ties, you’re saying a weaker second half. But I believe previously you were talking flat for the year. Is that still the expectation just given the strength from the first-half?

Brian McManus

Yes, I think this is pretty consistent with the guidance we gave at the beginning of the year. I would say we’re above where we thought we’d be. We had a strong first-half of the year probably pull forward there, but we are seeing some softening as we move into the second half of this year. And bear in mind too on a comparison basis the backend of 2015 was a strong one. So I just think we’re comfortable that we’re flattish for the year, would be a way to look at it.

Mark Neville

If I am not mistaking Q4 last year wasn’t there some, wasn’t it a bit weaker just with the timing?

Brian McManus

Towards the tail-end of Q4.

Mark Neville

And then on the poles, the weakness in the maintenance that you cited, is there really anything there or is this just typical quarter-to-quarter fluctuations?

Brian McManus

Quarter-to-quarter fluctuations. What we’re also seeing is -- and it is regional but there is -- some of our larger utilities that have not been successful in getting rate increases that they require in order to continue the capital programs or increase the capital programs. And so there is a bit of a further delay if you want to say. We certainly stick to the medium long-term -- the requirement to change out the poles, continue to grow. And so it's an unfortunate delay or a bit of a pullback in certain regions, but I suspect this will -- it’s going to have to change. We’ll see it in the quarters to come or in the years to come for sure.

Mark Neville

On the residential, it's obviously lot stronger than we thought. Can you just maybe -- is there any sort of goal post or some idea to give us a sense of the seasonality in that business? I mean, again, we’re just trying to learn as we go here. Just like how the quarter looked?

Brian McManus

Great question, and I am glad you asked it. Q3 will -- Q2 is usually the strongest quarter, and again its weather related. If you have a good healthy spring, lot of projects start early, if summer gets a little delayed or gets extended for instance last year we had a nice Q4 in residential lumber just because of the weather in the East particularly was nice right up until late October-November. I’ve never spent more time watching the weather channel lately. They’re going to roll out. But in general Q2 is always the strongest and then you’re followed by Q3 with Q1-Q4 being your weakest ones. But seasonality definitely Q2 rolls a bit into Q3 and then by -- and this is again it will vary year-to-year, but generally as you tail off towards the end of August things start to soften up.

Mark Neville

And then maybe just sneak one last one in, just the transition of the business to full service. Is there any major investments that you have to make into your business or changes to the business to do that? And if so, would that be done or no?

Brian McManus

Really the biggest change was, as it relates to working capital, in terms of an investment, that’s actually, most of that was done as we built it up in Q4-Q1, Q2 started to see a lot of that start to change and as we further go along in Q3 we’ll see the further positive cash generation from that standpoint. So, the Ram acquisition gave us -- combined with our current capacity gave us what we needed in terms of the service that market. We are looking to increase the capacity a bit to capture more market out there but that’s a little bit more medium term.

Mark Neville

Okay. All right thanks a lot.

Brian McManus

Thanks Mark.

Operator

Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Your line is now open.

Benoit Poirier

Yeah, just to come back on the railway ties I was wondering if you could provide more color on what you foresee so far 2017 in terms of railway tie demand?

Brian McManus

Still a little early Ben I think I suspect all of 2017 will be a little softer than what we’ve seen in 2016, but we haven’t gotten all the guidance yet from our major customers that usually tends to happen a little later this year in terms of what are their projects are going to be for 2017. I think just based on sort of what we’re seeing happening in the railway sector in terms of their demand starting to soften themselves in terms of the effect of crude by rail and other things I think 2017 could be a little softer than 21016, but it’s really it’s a little early to say for sure.

Benoit Poirier

Okay, perfect and for the utility pole am I right to say you’ll start to be facing some easier compare and lot tough comps later this year, so just want to ring what we should kind of expect in terms of organic growth for utility pole in the back half of this year.

Brian McManus

I think where we will see easier comps will definitely be on the transmission pole side as it relates to special projects and things like that. In fact we’re starting to see some uplift of some projects reigniting out there that’s probably going to be offset by the fact that we have seen maintenance demand pull back a bit. Again, I am not, I think some of it may actually be just related to the uncertain politically right now in our biggest market down in the U.S. this will fix itself as we move along. So I am, at this point I am looking at rather flattish for the balance of the year.

Benoit Poirier

Okay. Flattish utility pole for the second --.

Brian McManus

Year-over-year.

Benoit Poirier

Okay. That’s perfect. And on the margin standpoint EBITDA for the year I mean you were kind of guiding for a range of 15%-15.5% and more likely toward the high end. So given what you have reported so far and what you foresee in the back half is it fair to say that the outlook remains unchanged or you might even exceed a little bit the high end of the range?

Brian McManus

No, I think with the drop in volumes Benoit that we’re seeing I will give full credit to our operating teams we’re doing everything we need to do in terms of adjusting costs at plants shifting production where that makes sense to get the greatest economies to scale and really driving out costs which we on a normal basis and are always looking at. But in an attempt to offset the softening market so we’ve got two things at play better going to affect us both on railway side and a bit on the poles is the softening bit of a softening market and we’re seeing pricing pressures in certain regions.

So that will put a bit of pressure on our margins in the back half of the year.

Benoit Poirier

Perfect, and when I look on the free cash flow basis, the working cap especially with the latest acquisition will start to turn positive in the back half. So, just wondering from a debt to EBITDA standpoint, where would you expect to end in 2016, Brian?

Brian McManus

I think we’re going to be right around 2.5, little bit below.

Operator

Your next question comes from the line of Sarah O'Brien with RBC. Your line is now open.

Sarah O'Brien

Brian, you just talked about pricing pressure in some regions. Was that on the poles you were talking about specifically?

Brian McManus

Railway ties, actually. More railway ties and certain regions for poles too. But I would say I was more relating it to the fact that we’re seeing, sort of call it, in the commercial market just again because of demand softening, one would expect that we’ll see some pressures in certain areas.

Sarah O'Brien

What’s the outlook on the Class 1s now going into the fall when you do your budgeting? Is there any pricing pressure you expect there?

Brian McManus

Most of that is contract driven, so it will adjust accordingly with what we’re seeing in terms of input cost. In terms of the pricing pressures, I was more referring to the contractor markets and again it's regional.

Sarah O'Brien

And then just on the back of some weakening in the pole demand recently and your comments about utilities not being able to pass on CapEx and the rate base. How does that tie into your expansion of capacity in Wisconsin? I am just wondering if you still feel like do you need extra volume to make that work, or is that something that can drive efficiencies regardless of what’s going on with volumes?

Brian McManus

Actually, great question and then glad it got asked. Actually, the plant is certainly something we fully stand by because it's really going to give us access to a market we just haven’t been able to competitively attack, or get into. In terms of the ability to drive further efficiencies, it also bring back to us as well as we’ll be able to shift some production from other facilities because of their location they’ll be closer to other clients. So, it's not necessarily to increase our capacity from an overall network standpoint but rather to make us a stronger player in that market region. And that’s really was the original intent when we decided to go along and build it in that area.

So, I realize when you have a slightly softening market that if adding more capacity may look a little strange, but it still makes a lot of sense for us and of course, we hold to our belief that over the medium and long-term there is still a big replacement cycle to come. So, we’ll be even better positioned when that happens.

Sarah O'Brien

And then maybe just going back to the tie side, I mean, given there is some weakening of demand expected in the back half of the year and the outlook for ’17 might be softer. How does that impact your production scheduling right now? And given the long drying times for ties, I am just wondering if you’re already reacting and producing less? Or is it, steady as she goes on that front?

Brian McManus

We’re adjusting -- and again it's regional because there is certain regions where we’re still needing to put ties up because of a tight supply market in certain areas, but there is other ones where we have backed off. And we’re starting to see the input costs coming down as well in certain areas. So, yes we’re adjusting both production and inventories as a reflection of what we anticipate the market to be but -- I don't see a material change let's say at this point at all Sarah.

Sarah O'Brien

And then maybe just lastly on your comments for a consumer lumber about the expansion opportunity in North America or the continent, does that imply that Stella is seeing more opportunities in the near term for expansion on the consumer lumber front or is that again through a medium to longer term opportunity in the U.S. market in particular?

Brian McManus

Well, I think in the U.S. it'll be more medium to longer term, as it stands in the Canadian market I think we're seeing some additional opportunities there outside of our big box client. So, that would be more the shorter term opportunities that have actually developed and we'll continue to be pushed upon, but the move more into the U.S. would be I call it a little bit more medium term and still under investigation.

Operator

Your next question comes from the line of Michael Tupholme with TD Securities. Your line is now open.

Michael Tupholme

Brian with respect to utility pools, in the quarter am I'm correct to understand that transmission pools were essentially flat year-over-year and therefore when we think about the year-over-year change on the distribution side it was effectively equivalent to that 6.7% drop you reported overall?

Brian McManus

Correct.

Michael Tupholme

And then as we get into the back half you're signaling -- you think we're actually starting to see some year-over-year pickup in transmission sales?

Brian McManus

I suspect we will see a bit in the back half, but I also suspect the maintenance demand to be a little softer, so that's why we're kind of guiding towards flattish on a year-over-year basis overall -- organically I mean I'm not including obviously the affects from FX or the effects of acquisitions that we've done.

Michael Tupholme

Perfect, right, all my -- everything I was asking about was on an organic basis.

Brian McManus

I assumed that and just wanted to make sure it was quick.

Michael Tupholme

With respect to the integration of your most recent acquisitions and I guess also just your overall pursuit of an enhanced network efficiencies, can you give a bit of an update as to where you're at on innovation front and then sort of how much more room you think there is to go on the efficiency front given the current footprint you have now?

Brian McManus

We're going away still relatively new given that the recent acquisitions were at the beginning of June. The team's done a great job in a very short period of time. But I would say most of those will be in place by the end of the year in terms of rolling out the necessary changes that we want to do. We've already done some shifts production and have other ones planned as well. But I would say we can expect between now and the end of the year a large majority of it will be looked after.

Michael Tupholme

So, I guess just as an extension of that question, your answer there, going back to one of the other questions about EBITDA margins, are you still guiding towards the top end of that range or you're just suggesting you're not as still going to break through that but we should still be looking at the top end of that, 15% to 15.5% range?

Brian McManus

I would -- at this point, I tend to guide more towards the lower part of that range, just given what we’re seeing right now I’d rather be a little conservative and have to explain that I was wrong in Q3. But just we are seeing some pricing pressures in certain markets and our ability to drive the efficiencies and the costs is working at pro pace. But it's still takes time to work through the system.

Michael Tupholme

And then I guess just specifically looking at Q3 and the margin expectation for that third quarter, historically we would have seen a bit of sequential margin improvement as you went from Q2 to Q3 on the EBITDA margin line. With the change in mix of the business with residential lumber now a bigger part, is that seasonal improvement from Q2 to Q3 from EBITDA margin perspective? Is that still the right way to think about this? Or is that changed as a result of mix or other factors?

Brian McManus

It’s a combination of mix and volume, so as the volumes start to pair off on the residential lumber you will see the -- your economies of scale start to come down a bit or really your ability to absorb your overall fixed cost, being selling costs and things like that do tail off. So you would see it come down a bit as you go from Q2 to Q3. And that of course with the selling price pressure as well as further have an effect on that.

Michael Tupholme

And for logs and lumber, I mean really it's just not a big revenue contributor, but given that it's nominal margins it’s still important. Should we expect that to also be down in Q3 relative to Q2 given your comments about the seasonality in the residential lumber business?

Brian McManus

Slightly yes and it's the same on the residential. And again it's not on a year-over-year basis because this is all going to be definitely way up over last year, it's just moving from Q2 to Q3. And I think that is what your question is, but I wanted to make sure that I was clear.

Michael Tupholme

Yes, I know, exactly on a sequential basis. Okay, that’s all from me. Thank you very much.

Brian McManus

Great, thanks Michael.

Operator

Your next question comes from the line of Mona Nazir with Laurentian Bank. Your line is now open.

Chris Martino

Good morning. It’s Chris Martino slipping in for Mona. On the M&A front you’ve been reactive on the pole side and the Southern Yellow Pine. I am just wondering, how’s the landscape looking right now, are you seeing more opportunities out there?

Brian McManus

We continue to see opportunities really in all of our markets in terms of both pole and even the odd potential tuck in on the railway tie side. So we continue to see opportunities and sometimes a little softening in the market can motivate people that it maybe the time to step out. So it could work to our advantage. We’ve seen that in the years past. So, we’re certainly still looking for opportunities that fit within our network.

Chris Martino

And going back to the residential, obviously, it was very strong. Did it surpass your internal expectations? And what kind of synergies specifically are you seeing from Ram?

Brian McManus

I would say actually it was surprisingly very close to our internal expectations from a budgeting standpoint we were close in what we expected. Really the synergies from Ram is I would say it's more synergies from our whole network of coupling on to Ram and also the fact that we move to a direct to value added service to the end retailers really what’s further driven the all synergies that we’ve been able to drive in. But our ability to shift production to plant that we’re closer to the clients, optimize production at every location, that’s where we’re seeing all the synergies. It was brought about by the Ram acquisition but the reality is that it could not have been done with our facilities that were already in operation.

Chris Martino

Right, do you see any more optimization coming out of that or is it kind of saturated?

Brian McManus

Look as a company we’re always striving to further optimize. It’s one of the things I am always very proud of with our team is they are never satisfied standing still. So I think there are certainly other areas that we’re looking to improve upon. The low hanging fruit has been picked, but we’re starting to climb the tree to get the fruit further up the tree.

Chris Martino

Okay, great. That’s great I will pass the line.

Operator

[Operator Instructions] Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Your line is now open.

Benoit Poirier

Yeah, just some follow up question Brian, if we come back to the expansion of your facility in Wisconsin that will start to kick in Q1, just wondering how it will impact margin at the beginning. Should we expect kind of slightly negative contribution given the ramp up or right at the start should we expect a positive contribution on the margin?

Brian McManus

From a dollar margin you can full expect the positive contribution, from a percentage margin just until it’s fully ramped up, it will be operating below what our normal facilities would operate at. So I wasn’t sure whether you meant percentage or you meant dollar, but we do not expect that it will be a negative contribution out of the gate, we fully expect that we’ll start to see positive margin contribution almost immediately.

Benoit Poirier

Okay, perfect. And I assume on the percentage basis this will be not be highly material anyway?

Brian McManus

No, no exactly.

Benoit Poirier

Okay.

Brian McManus

Even on a dollar one to be fair.

Benoit Poirier

Okay, perfect. And what would be kind of the ramp up area, Brian?

Brian McManus

We suspect that it will take almost all of 2017 to get it fully ramped up.

Benoit Poirier

Okay, excellent. And on the utility pole side, I was wondering if you could provide some color about what you foresee in 2017. Whether it’s some softening demand you see in 2016, could translate also in 2017 or the outlook is still very robust out there?

Brian McManus

I am still holding to the fact that it’s such a common theme that we hear from all our utility customers and in all regions that it’s the need to upgrade their networks, the need to increase maintenance. For years I have been saying that we see it coming and we did see it for a while and then of course we had the commodity crash that brought down a lot of special projects. But I also said it was going to be lumpy and I think this is one of those lumpy periods. So, it’s really hard to say at this point in time, but I would suspect 2017 will probably continue to see may be a bit if softness at the beginning. But I would expect it is going to pick up.

Benoit Poirier

Okay, and for the special project have you seen kind of renewed interest given the little spike in some commodities or?

Brian McManus

Surprisingly, yes we have actually. It’s some of the ones that were put on the backburner are starting to come back to life now, whether we’ll see that pull through this year or early next year, it's hard to say at this time. But I wouldn’t be surprised if it didn’t take much of an uptick to see some of the projects starts to reignite.

Benoit Poirier

So that could surprise positively next year, right?

Brian McManus

Correct, yes.

Benoit Poirier

Perfect, and just in terms of M&A, you mentioned a kind of opportunity in the shorter term, medium to longer term, still a lot of opportunity in all of our market. So just wondering whether you -- if the size would require some equity financing or given the size you’re looking at, is it mostly tuck-in and given it will be toward the back half of the year or 2017 your free cash flow will be able to finance that.

Brian McManus

I would say at this point our free cash flow is very strong and in fact Q3 will be even stronger than what we’ve seen happen in Q2. So, I am confident that what we foresee borrowing and now it's some big surprise comes and we need to, in terms of an opportunity and we need to tap the market, I really don’t think we will need to in the short term for sure, I think we’re in a very solid financial position.

Operator

Your next question comes from the line of Brian Pow with Acumen. Your line is now open.

Brian Pow

Just wanted to talk to you about -- you’ve given sort of guidance or outlook on 2017 for couple of buckets. But just maybe if you could give us a sense on how you’re looking at the residential lumber? Is it something that can make up for some of the weakness you’re seeing in other areas?

Brian McManus

Tough to say now. I would say, I suspect residential will certainly at the very least perform at what we’re seeing it do in 2016, and a lot of it will be how the overall economy is performing. So, we have obviously in the west it's under some pressure, but in the east it's good. So, I think there is further opportunity and also even as we try to capture some additional markets out there. So, yes, I don’t think anything really material at this point in time Brian. But it certainly has become a product category for us that is a solid addition to our Company.

Brian Pow

And then just again on inventory levels, as you go into the fall and prepare for next season, how do you look at your inventory levels as they are today -- against where they are today?

Brian McManus

Well, I would say overall as a Company our inventory levels are sitting pretty good. We’ll have some changes within product categories as our residential runs down a bit towards the end of the year we’ll start to see rebuild it again in Q4. But then on the tie side as an example we’re not playing the catch up game we had to play last year. So, we’re in a better position there. Utility pole, same thing we’re in a good position. I don’t see a lot of change happening from a working capital perspective.

Brian Pow

And then finally just we all keep on hearing the government that they want to put money into infrastructure spending. Are you guys seeing any benefit of that at all yet, or what are you sensing on the special projects from government spending?

Brian McManus

Nothing, really haven’t seen anything. I am hoping it’s coming, but we’ll see.

Brian Pow

Great. Thanks so much.

Operator

Your next question comes from the line of Michael Tupholme with TD Securities. Your line is now open.

Michael Tupholme

Thanks just a couple of quick follow ups. Brian with respect to the comments you just made around 2017 are there possibilities there within residential lumbers, just to understand is what you’re saying that some of these new markets could create a little bit of growth opportunity there but earlier in the call you had talked about possibility of some shorter term opportunities in consumer lumber in Canada, is that what you were referring to when you talk about new markets or if those opportunities come true could that create moral [ph] lift related to what you were just signaling?

Brian McManus

No, no I am talking about the same thing Michael it’s really just more using our existing facilities and just in expansion outside of our traditional client base if you want to call it, just into more the non-box store clients that we feel we have good value to offer. Again, we’re not talking any large material increase, but I think it creates some uplift in 2017.

Michael Tupholme

Okay. Thanks. And then just I heard your comments around inventory, so with respect to the back half of the year though as we thinking about thinking about working capital and how that looks I guess for the back half or even for the full year, any comments there would be helpful as well.

Brian McManus

I think for the back half we will see relatively little change in working capital, in terms of the change as we move between now and end of the year. Again, just we’ll -- the lumber side we’ll have to start to get built up again in Q4, but we still have to maintain a good level of inventory to service our clients. And then as I said on the ties and poles for most regions we’re in a comfortable position.

Michael Tupholme

Okay. That is helpful. Thank you.

Brian McManus

It will be just replacing what we’re selling type thing.

Michael Tupholme

Right. Okay, thank you.

Operator

And there are no further questions on the phones at this time I will now turn the call back over to the presenters.

Brian McManus

Good, well, thank you everyone for joining me on this call. And look forward to speaking with you again at our next quarterly call. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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