Ryerson Holding Corp

NYSE:RYI

Earnings Call Transcript 2023-Q1

[Operator]

Good day and welcome to the Ryerson Holding Corporation's First Quarter 2023 Conference Call. Today's conference is being recorded. There will be a question-and-answer session later. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Jorge Beristain. Please go ahead, sir.

[Jorge Beristain, VP, Finance]

Good morning. Thank you for joining Ryerson Holding Corporation's first quarter 2023 earnings call. On our call, we have Eddie Lehner, Ryerson's President and Chief Executive Officer; Mike Burbach, our Chief Operating Officer; Jim Claussen, our Chief Financial Officer; and Molly Kannan, our Chief Accounting Officer and Corporate Controller. John Orth, our Executive Vice President of Operations; and Mike Hamilton, our Vice President of Corporate Supply Chain, will be joining us for Q&A.

Certain comments on this call contain forward-looking statements within the meaning of the federal securities laws. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those implied by the forward-looking statements. These risks include but are not limited to those set forth under Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, our quarterly report on Form 10-Q for the quarter ended March 31, 2023 and in our other filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made and are not guarantees of future performance.

In addition, our remarks today refer to several non-GAAP financial measures that are intended to supplement, but not substitute for the most directly comparable GAAP measures. A reconciliation of non-GAAP measures to the most directly comparable GAAP financial measures is provided in our earnings release filed on Form 8-K yesterday, also available on the Investor Relations section of our website.

I'll now turn the call over to Eddie.

[Eddie Lehner, President and Chief Executive Officer]

Thank you, Jorge, and thank you all for joining us this morning. I want to start by expressing my heartfelt thanks and appreciation to our 4,200 plus strong Ryerson team, which now includes BLP Holdings and its divisions for their dedicated efforts and commitment to a safe work environment that enables our mission of delivering great customer experiences throughout our network of intelligently connected industrial metals service centers.

The first quarter was a period of solid seasonal demand characterized by robust inventory restocking better than expected price drivers and sustaining customer order backlogs. While noting ongoing supply chain distortions, credit market distress, rising interest rates and still tight labor markets secular manufacturing strength got the better of countercyclical indicators during the first quarter of 2023 as an ever present reminder around the promise and potential of our industry and business. While these cyclical factors may be framed and clocked in quarters, our business is investing for the years ahead as we look forward to the growth opportunities and gendered by long-term emerging trends that we expect will lead to a growing and sustainable industrial economy in North America.

Overall, our first quarter started the year with encouraging results whereby we generated positive operating cash flow solidly exceeded our expectations on earnings per share, increased our quarterly dividend and maintained our net leverage ratio at the low end of our target range. We continued modernizing and growing our business through construction progress at our 900,000 square foot state-of-the-art service center campus in University Park, Illinois, which will be operational later this year, as well as adding to our Ryerson family of companies with the acquisition of value-added processor, BLP Holdings, which will enable us to do more for our customers across various end markets while expanding our footprint in the southwest United States. Additionally, during the quarter, we participated significantly in our largest shareholders secondary share offering through the repurchase of 1.5 million shares of Ryerson stock for $53 million further increasing free float while simultaneously accreting more ownership to non-selling shareholders as we demonstrate further our commitment to shareholder returns and will continue to do so in a balanced and prudent manner.

The progress of our past work sets the stage for our future. The years ahead will be shaped by emerging trends and onshoring shifting trade paradigms favoring the American manufacturing, fiscal investments and infrastructure and climate transitioning, which we expect will lead to an imperative recyclable metals intensive overhaul of our society and economy. Industrial metals are the reusable and sustainable enablers essential to shaping the world around us and paving the way for the required advances in the human experience, living conditions and societal wellbeing. In this new paradigm, Ryerson's investments in value-added manufacturing, customer-centric connected distribution networks, as well as modernized plants, equipment and systems, position us squarely at the nexus of these global mega trends and propel us toward a brighter future for all of our stakeholders.

With that, I'll now turn the call over to our Chief Operating Officer, Mike Burbach, to further discuss the pricing and demand environment.

[Mike Burbach, Chief Operating Officer]

Thank you, Eddie, and good morning everyone. I want to start by thanking our team for continuing to prioritize a safe and productive working environment, as well as creating a culture of partnership with our customers and suppliers where our extensive offering and capabilities can provide value while improving their overall experience. In the first quarter, we saw a continuation of the shifting price trends for the commodity prices underlying our product mix that were led by supply driven factors. Since late in the fourth quarter, domestic steel mills raised prices increasing HRC spot prices from approximately $650 per ton in December to just north of $1,200 per ton as of April. Additionally, HRC lead times extended from recent lows late last year to six weeks by the end of March. Supply side dynamics, low imports and strong seasonal restocking have helped support a surge in domestic spot pricing. Conversely, compared to the end of 2022, prices for our bright metals franchise experienced some reversion mid quarter with declines in LME Nickel and Aluminum. On balance, our average sales price for the first quarter was $2,709 per ton, or just over a 2% sequential decrease in line with our guidance range.

Turning to the demand environment over the first quarter, sales volumes improved as customers accelerated the restocking as mill prices rose, while we continued to see healthy customer order backlogs. The first quarter sales volume grew by 11.6% coming at the high end of our guidance expectations of up 10% to 12%. With sequential shipment increases across almost all end markets, notably with commercial ground transportation up 20%, food processing and agriculture equipment up 19% and industrial machinery up 17%. As for our industry in the first quarter, North American industry shipments as measured by the Metal Service Center Institute, or MSCI, grew by 15.7% quarter-over-quarter compared to Ryerson's North America volume increase of 14.5%.

Ryerson's performance delta was largely end market exposure related. There was a strong uptick in auto industry and non-residential flat carbon shipments, areas where Ryerson does not have a high end market presence. To briefly discuss that macroeconomic factors, high interest rates, high inflation, cost of input materials, as well as the availability and cost of credit weigh on industrial manufacturing companies, and was reflected in some key indicators. U.S. industrial production reported a lowered trend of positive year-over-year growth continuing to exhibit deceleration since the latter half of the past year.

The U.S. Purchasing Managers Index, or PMI, after indicating slowing growth starting the second quarter of last year, continues to report below the growth threshold of 50 as of March. The trend of this report indicates that overall companies are slowing outputs to better match demand. Finally, as a continuation of that theme, I would like to say that while demand can fluctuate quarter-over-quarter and cyclical factors can weigh on the cost of doing business, we run our business serving the growing needs of our customers, as well as planning for the long run trends that will shape industrial manufacturing in the future.

The investments we have made in our technological capabilities and distribution network, including our new state-of-the-art service center in Centralia, Washington, as well as the upcoming 900,000 square foot modernized facility in University Park, Illinois, are geared for the current and future needs of our customers. As our customers have experienced over the past few years change in supply chains can have a large impact on our business. While upcoming changes in decarbonization are fluid and the evolution of product needs present a changing landscape, Ryerson can serve as an important one-stop shop business partner that can help navigate change through solutions based on our interconnected network and advanced service capabilities. As we look forward to the rest of 2023 and beyond, we are excited about the work we can do with our customers and the future we can build together.

And with that, I will turn the call over to Jim for our second quarter outlook, as well as first quarter review of cash flow, net debt and shareholder returns.

[Jim Claussen, Chief Financial Officer]

Thanks, Mike, and good morning everyone. Looking to the second quarter of 2023, we expect volumes to be effectively flat compared to the first quarter of 2023. As such, we see second quarter revenues to be in the range of $1.4 billion to $1.44 billion with average selling prices up slightly from 0% to 1%. Based on these expectations, we forecast adjusted EBITDA for the second quarter of 2023, excluding LIFO, in the range of $93 million to $97 million and earnings in the range of $1.28 to $1.36 per diluted share. We also expect LIFO expense of approximately $5 million.

In the first quarter, we generated $80 million of operating cash flow from our operations, which included $54 million released from our balance sheet. We ended the period with $395 million in total debt and $351 million of net debt. Ryerson's leverage ratio increased slightly quarter-over-quarter to 0.8x, but remains low historically and at the low end of our leverage target range while the company's available global liquidity remains near historic highs at $856 million.

Capital expenditures were $28 million in the first quarter, largely in line with our annual budget of approximately $95 million. This amount comprises both maintenance and growth projects, including service center modernizations such as our upcoming state-of-the-art facility in University Park, Illinois, which replaces the previously sold Central Steel and Wire facility in Chicago. We look forward to opening the facility in the second half of 2023. Additionally, we acquired BLP Holdings during the first quarter, a specialty service center, which is comprised of three divisions that provide value-added capabilities to customers in the oil and gas, aerospace and telecommunications markets, as well as creating broader industrial applications. We're very excited about welcoming the BLP team to our family of companies and the future we will create together.

Turning to shareholder returns, Ryerson returned approximately $59 million in the form of share repurchases and dividends. The largest contributor to that figure was an opportunistic 53 million repurchase of 1.5 million shares from our largest shareholder, Platinum Equity, in their secondary offering. Their sell-down and our repurchase has contributed to our free float reaching 67%. During the quarter we also returned $6 million to shareholders in the form of a quarterly dividend of $0.17 per share. We announced a second quarter cash dividend of $0.18 per share, an increase of 6% marking our seventh consecutive quarterly dividend raise. Finally, on May 1st, the board of directors approved increasing the share repurchase authorization by approximately $80 million to $100 million and extending the term from August 2024 to April of 2025.

With that, I'll turn the call over to Molly to provide further detail on our first quarter financial results.

[Molly Kannan]

Thank you, Jim, and good morning everyone. In the first quarter of 2023, Ryerson reported net sales of $1.4 billion, which met our guidance and was 9% higher sequentially driven by a combination of 12% higher volumes offset by 2% lower average selling prices. In the same period, gross margin of 18.8% was an expansion of 610 basis points versus the previous quarter. We also recorded LIFO expense of $4 million. Excluding LIFO expense, gross margin was 19.1% as cost of goods sold reflected consumption of lower cost of materials through our metal sales mix.

On the expense side, warehousing delivery, selling, general and administrative expenses increased 2% sequentially to $194 million, primarily driven by variable expenses related to higher sales volumes as well as expenses at our recent acquisitions, BLP and Excelsior. For the first quarter of 2023, net income attributable to Ryerson was $47 million, or $1.27 per diluted share, compared to a loss of $24 million and a loss per share of $0.65 in the prior quarter. Finally, Ryerson achieved adjusted EBITDA excluding LIFO of $90 million in the first quarter of 2023, which compares to $29 million in the prior quarter. Free cash flow generation was $53 million this quarter and compares to $148 million in the prior quarter period, which was driven by significant working capital release in the prior quarter.

And with this, I'll turn the call back to Eddie.

[Eddie Lehner, President and Chief Executive Officer]

Thank you, Molly. As we reflect on a strong first quarter and look forward to the next stage of Ryerson's advancement, our ongoing development of an investment in an intelligent network of value-added metals service centers, delivering industrial metal solutions with joy, speed, value-add, scale and consistency is the mission we're on with indefatigable passion and purpose. Better quality of life and wellbeing require greater investment and recyclable industrial metals. That is why metal matters, as you'll experience when visiting us at Ryerson.com, and why the Build Now movement at MSCI.org are so vital and imperative. Let's all passionately advocate for manufacturing and all the good it creates and let's keep progressing together.

With that, we look forward to your questions. Operator?

[Operator]

[Operator Instructions] We'll take our first question from Samuel McKinney with KeyBanc.

[Samuel McKinney, KeyBanc]

Hi, good morning.

[Eddie Lehner, President and Chief Executive Officer]

Hi, Sam. Good morning. How are you doing?

[Samuel McKinney, KeyBanc]

Good. Good. I'd like to start off asking about the demand evolution into the second quarter. Specifically if you could talk us through April versus sort of the average you saw in the first quarter, and then specifically any differences among your key end markets.

[Eddie Lehner, President and Chief Executive Officer]

Sure. I'm going to go ahead and turn the question over to Mike Burbach in a second, but just for context we felt demand was good in the first quarter. B2B was stronger than B2C, which you would expect just given the cyclical dynamics in place through the quarter. Given that early April we had a holiday. We're still looking for those demand trends to emerge and solidify through the quarter, but so far there's still, I mean, everywhere I look, there is demand. The question is, is whether that demand is going to get led or not, but everywhere we look, there's demand. We're just looking to see that demand come through and see those backlogs turn over that we think are still pretty robust. So I'm going to go ahead and turn over to Mike Burbach and he can give you some more color.

[Mike Burbach, Chief Operating Officer]

Thanks, Eddie, and hi, Sam. Yes, I think, Eddie hit the key points here. As we look at Q2, what we hear from our customers is generally positive, backlogs remains fairly robust. There's a couple of themes that seem to happen more often than not – than we're talking to customers is – the biggest concern people have is still labor shortages from a lot of our OEM and manufacturing companies customers. So – but generally speaking the sentiment is positive, no serious differences in the end markets, Q2 versus Q1 that we see, just more the same and should be a fairly steady and good quarter.

[Jim Claussen, Chief Financial Officer]

Yes, Sam, I would – the only thing I would have pinned onto that is the CapEx economy is strong and that B2B CapEx economy seems to be strong and right now we see that continuing.

[Samuel McKinney, KeyBanc]

Okay, thank you. And then balance sheet inventories were down more than 10% quarter-over-quarter in the first quarter. Was that more a function of pricing or volumes in your opinion? And how is that dynamic playing thus far into the second quarter?

[Eddie Lehner, President and Chief Executive Officer]

Sure. With respect to inventory, we saw lead times come in from Q4 into early Q1 before those lead times started to inch out again, but the extension of lead times was not dramatic. And so it just gave us an opportunity to bring our cycle and to bring our purchasing cycle in and take out some excesses that accumulated throughout COVID. But I'm going to go ahead and I'm going to flip this to Mike Hamilton. He can give you some more color on that.

[Mike Hamilton, Vice President of Corporate Supply Chain]

Hi. Thank you, Eddie. Sam, I think Eddie covered off most of the points, and the reality is imports have remained subdued. Lead times are manageable and in line with what we would expect. And so with shipments in line with what we expected for Q1, we were able to take the inventory down and get some better working capital management through the cycle.

[Samuel McKinney, KeyBanc]

Okay, thank you. And then lastly for me, just if you could provide an update on your internal growth initiatives and the progress at the new facilities at Centralia and University Park. Thank you.

[Eddie Lehner, President and Chief Executive Officer]

Sure. I'm going to go ahead and tip this over to John Orth in just a moment, but for context we're really pleased that we've been able to continue to execute our growth plans through what was a mini counter cycle in the second half of last year, and to continue to be able to invest in growth with really good shareholder returns alongside of those initiatives. So in terms of building these systems and in terms of bringing up and starting up Centralia and starting up University Park at the end of Q2 and end of Q3, Sam, this is all part of how we have to modernize our business across the hundred plus locations that we have now.

In order to provide the customer experiences we want to provide, we really have to be able to provide a very low friction or frictionless experience, sharing inventory, sharing equipment, being able to buy inside and out and moving our materials inside and out of our network, even to a third-party outside processors. So we need to make those investments to bring that vision about and to get to that next level operating model that we think is going to drive EBITDA growth that allow us to meet and surpass our next stage financial targets that we discussed during our Investor Day last November in New York. But specifically to Centralia and University Park, I'm going to ask John Orth to give you a little bit more color on that.

[John Orth, Executive Vice President of Operations]

Thank you, Eddie, and good morning, Sam. As Eddie mentioned, we have really focused on the investment and growth specifically around value-add investments, safety, productivity, and throughput. At Centralia, our team has successfully and safely brought that facility into operating status, and we are ramping up production and completing some of our automation projects around plate processing investments. And at University Park, construction is proceeding very well. We have actually taken possession of the facility now, and we will be begin moving into the facility in Q2 and begin operations in H2. And just to touch on a key point here also we're utilizing proprietary systems and tools that we've developed around the Ryerson production system so that we can optimize that end-to-end fulfillment process for our customers with a focus on service and value add.

[Samuel McKinney, KeyBanc]

Okay, thanks you. That's it for me.

[Eddie Lehner, President and Chief Executive Officer]

Thanks, Sam.

[Operator]

Thank you. We'll now take our next question from Katja Jancic with BMO Capital Markets.

[Katja Jancic, BMO Capital Markets]

Hi. Thank you for taking my question. First, you are guiding for pricing in the second quarter to be flat to up 1%. Now, I would expect that would be better given the significant increase in the carbon, many carbon steel pricing. So could you provide some of the color of what – why the pricing only flat to up 1%?

[Eddie Lehner, President and Chief Executive Officer]

Hi, Katja. Good morning and I hope you're doing well. With the pricing, we're really seeing just some early quarter offsets where you had some reversion in aluminum and nickel pricing or price drivers that although they've turned up recently and they're more range bound that just needs to work its way through our P&L from a spot and contract perspective. And you're right, carbon resets, particularly in our program business. We should start to see those come through as accretive to average selling price through the quarter. But taking a little bit more of a conservative stance just in terms of price, just given the timing and the flows of when does aluminum and stainless come back up and I would say level out from being down, I'd say in the second half of Q1 while carbon continues to incrementally increase.

[Katja Jancic, BMO Capital Markets]

And it seems that margins in the first quarter were better than expected. Is that driven by mix? Or can you talk about that?

[Eddie Lehner, President and Chief Executive Officer]

Yes. So, coming out of Q4 and the tailing effects of Q4 and what we reported in Q4, we were certainly seeing margins expand even towards the end of the year and going into Q1. But I would really direct your focus to our value add mix, and we did more value add in Q1. And as we've said, the more transactional business and the more value add business we do that will drive that margin profile higher. So we certainly saw a lift from Excelsior. We saw a lift from Howard Aluminum. We also saw a lift from our Ryerson advanced processing business and those fabrication margins that have been a strategic target for us for some time now.

[Katja Jancic, BMO Capital Markets]

Can you remind us how much value added processing currency is of revenues?

[Eddie Lehner, President and Chief Executive Officer]

Yes. So we were – during Investor Day last year, we had, excuse me, communicated that it was presently at 14%. Our target is 20, and we came in, excuse me – we came in at about 17.5 in Q1. So we made some really nice progress.

[Katja Jancic, BMO Capital Markets]

And how should we – and is that sustainable or is that just the first quarter and maybe it's going to trend them over? How should we think about that?

[Eddie Lehner, President and Chief Executive Officer]

I think the regression line is certainly up and to the right. Just based on cyclicality, I mean, we could have quarters where we dip down a few basis points here and there, but I think the trend is decidedly up when you look at it on a regression line basis.

[Katja Jancic, BMO Capital Markets]

Okay, thank you very much.

[Eddie Lehner, President and Chief Executive Officer]

Thanks, Katja.

[Operator]

[Operator Instructions] We'll move to our next question, which is from Alan Weber with Robotti Advisors.

[Alan Weber, Robotti Advisors]

Oh, good morning. How are you?

[Eddie Lehner, President and Chief Executive Officer]

Hi, Alan. How are you doing?

[Alan Weber, Robotti Advisors]

Good. So can you talk about first the acquisitions that you've made since really most – most of them since the third quarter of last year? How fully integrated are they? And kind of if you – how do you think about the potential when you look out a year or two in terms of EBITDA like that?

[Eddie Lehner, President and Chief Executive Officer]

Thanks, Alan. Without getting any specific EBITDA targets for those acquisitions, I would say this. When we buy businesses like Howard and like Excelsior, like BLP, we first take the Hippocratic Oath that is to do no harm. Those are strong businesses with really good franchises and value-add. So we really look to work with them in terms of that post-close synergy case where we want to get those capabilities that they have and the things that they do really well. We want to get those mapped into our overall network, so we can sell that to a broader audience. And then we start to look at system synergies without disrupting the flow of what they do really well. So you can imagine we start to look for some back office synergies, some purchasing synergies things where we really could lend a helping hand lower cost of overall capital.

But with those businesses that really do have goodwill and they've proven that they have sustaining goodwill, we really want to increase that commercial envelope by training our people on those products, on the things that they do well. And then getting those things expanded throughout our network with that value-add within that, I'd say in Howard's case aluminum, Excelsior being more broad based, BLP be more broad based, but maybe more carbon centric. We want to drive more opportunities into those plants and also take their best practices and apply them to other plants in our network.

[Alan Weber, Robotti Advisors]

So I realize each acquisition is different, but when you think about kind of long – like how do you think about, when do you think about it being, getting all those benefits? Does it take a year, two years? How do you think about it?

[Eddie Lehner, President and Chief Executive Officer]

In the case of Excelsior and Howard and BLP, the benefits accrued on day one. I think going back to 2018, when we acquired Central Steel and Wire, those benefits, they continue to play out, but they take longer to realize. When we do investments in new service centers, those benefits may be stretched out over a slightly longer horizon as that facility gets commissioned and really starts to season out. But it's the potential that is really so enticing and that really gives us so much optimism because once those facilities are fully equipped, once those – once you go through that shakeout process, you really see a significant leap forward in service. You see a leap forward in the types of customer solutions you can provide. So in that continuum, it could be day one, depending on the acquisition and some of them that I've named, others as well from our past.

And at the same time, some of those investment cycles are a little bit longer. So what we're going through an enterprise resource planning system upgrade throughout our network to facilities that were on legacy systems that really needed to be replaced. And really for us to make that next leap forward, we need to be on a uniform EMT platform. So a lot of the digital tools that we're developing, they can scale throughout our enterprise. So that's going to continue to unfold and fulfill its promise over the next several years and even beyond.

[Alan Weber, Robotti Advisors]

Okay, thanks. And then my other question was, when you look at CapEx of $95 million and was a little over $100 million last year, how do you think about the amount that really is maintenance versus growth?

[Eddie Lehner, President and Chief Executive Officer]

That's a good question. I would say just given the increase in our overall footprint, maintenance CapEx, I would tell you, is probably at a run rate of $30 million to $35 million. If we go into a protracted downturn, I mean, we can go ahead and we can – we can knuckle that down to 25. But right now given the expansion in our footprint over the last several years $30 million to $35 million on maintenance CapEx and no shortage of good growth opportunities. But as I've discussed with the stakeholder community before, there is a very – there is a point of intersection between even the amount of capital that may be available to you to invest and what you can successfully deploy because your organization can assimilate that capital investment and put into the best use to where you stay on schedule on time and you generate the returns along the time horizon that you expect.

So, 95, good number for us, we have no shortage of good projects to do. Frankly, right now we're seeing some lead times extend with equipment suppliers, which is the other half of that demand answer I gave earlier, which is we would have expected in a counter cycle in a downturn, we would have expected that equipment lead times would have – would have already come in. And that maybe there would be cancellations or the ability to substitute pieces of equipment because of order cancellations or pauses in other people's spending. But we haven't seen that yet. So really from a perspective of ongoing supply chain tangles and extended lead times to procure CapEx, surprisingly those lead times are still somewhat extended, which is maybe causing a little bit more of an extension of when we would like to get that equipment in, get it installed and running revenue across it.

[Alan Weber, Robotti Advisors]

And I guess my last question is, obviously given your financial improvements over the last few years, can you talk about acquisitions, how you're thinking about acquisitions today and like that?

[Eddie Lehner, President and Chief Executive Officer]

Yes, absolutely. So we have a good pipeline now and I really – I can't stress enough not just what's in the pipeline, which I can't discuss, but given what we have completed and executed upon really, really pleased with the acquisitions we've made. And I would say that we look at everything from smaller to larger. It's really just a question of does it really fit our strategy. I go back to a conversation I had years ago with another CEO just talking about how important it is to stay disciplined when it comes to M&A. It's really easy to make mistakes in M&A and you really have to keep the discipline to make sure that the companies you acquire are really going to deliver the goods. And so, we have to keep that discipline, but no shortage of opportunities.

[Alan Weber, Robotti Advisors]

Okay, great. Thank you very much.

[Eddie Lehner, President and Chief Executive Officer]

Thanks, Alan.

[Operator]

[Operator Instructions] And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing comments.

[Eddie Lehner, President and Chief Executive Officer]

Thank you for joining us for this morning's Q1 2023 earnings call. Stay well, and we'll look forward to seeing and being with all of you again next quarter. Take care.

[Operator]

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.