Ryerson - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the Ryerson Holding Corporation second quarter 2023 conference call. Today's conference is being recorded. There will be a question-and-answer session later. If you would like to ask a question, please press star one on your telephone keypad at any time. Again, that is star one to ask a question. At this time, I would like to turn the conference over to Pratham Dear. Please go ahead, sir.

Pratham Dear (Manager of Investor Relations)

Good morning. Thank you for joining Ryerson Holding Corporation second 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 Cannon, 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 31st, 2022, our quarterly report on Form 10-Q for the quarter ended June 30th, 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 CEO)

Thank you, Pratham, and thank you all for joining us this morning. I want to start by expressing my heartfelt thanks and appreciation to our 4,300+ strong Ryerson team for their dedicated efforts and commitment to a safe and productive work environment that enables our mission of delivering great customer experiences throughout our network of intelligently connected industrial metals service centers. The second quarter of 2023 was a period of countercyclical headwinds in our Bright Metals franchise, characterized by falling prices and slowing customer demand, particularly in our Stainless Products segment and late cycle end markets. While our business performed well, we are experiencing some short-term growing pains from greenfield service center startups in Centralia, Washington, and University Park, Illinois, as well as a facility expansion and modernization in Shelbyville, Kentucky, and ongoing ERP system conversions.

Despite some temporary discomfort, these investments are essential to Ryerson's next relay leg of its operating model transformation as we gather momentum toward our next stage financial targets and create the best industrial metals customer experience across a wide expanse of metal selection, value-added distribution, fabrication, and service, all at differentiated speed, scale, and consistency. Coming back to countercyclical industry catalysts that popped during the second quarter and into the third quarter, we noted shifting consumer spending from goods to experiences, the impact of higher interest rates, credit tightening, contractionary PMI and industrial production indicators, late cycle end markets, and a long-expected economic recovery in China that has thus far failed to materialize. All that said, we've seen countercycles many times before and managed through them well. Current manufacturing indicators aside, our enthusiasm and optimism around longer-term secular drivers for manufacturing growth in North America is undiminished.

Taking a more holistic view of the second quarter, we generated positive operating cash flow, increased our dividend to the eighth consecutive quarter, and maintained our net leverage ratio within our target range, while carrying our organic and acquisition growth investments over the aforementioned countercyclical waters. 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 (COO)

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 second quarter, we saw a continuation of shifting price trends in the commodities that underlie our product mix. Increases in domestic steel prices that started in the fourth quarter of last year and continued into the first quarter of this year, reversed by approximately $300 per ton over the second quarter. Similarly, supply exceeded demand, which impacted prices for our Bright Metals franchise, as we saw continued declines in LME nickel and LME aluminum during the second quarter.

Due to our sales mix, the continued declines in pricing on LME nickel and aluminum contributed to margin compression over the quarter. Despite the pricing turbulence, on balance, our average sell price was in line with our guidance range for the second quarter at $2,709 per ton, or flat sequentially. Turning to the demand environment, second quarter sales volumes were lower sequentially as we saw easing conditions in our end markets as customers slowed down industrial metals purchases during a period of falling prices, tighter credit conditions, and an uncertain economic outlook for the second half of 2023. Sequentially, volumes were lower by 4.4%, led by shipment decreases in industrial machinery and equipment, HVAC, and food processing and agriculture, and partially offset by strong increases in construction equipment and oil and gas.

Although countercyclical conditions, as noted, pervaded the second quarter and have continued early into the third quarter, industry inventories are better balanced to demand than a year ago, thus somewhat tempering near-term price pressures. Finally, I would like to say that while we saw ebbs in demand conditions, Ryerson continues to partner with our customers for their long-term needs. To that end, we continue to invest in the equipment, technology, processes, and our people. Strategic investments within our business, as well as additions to our family of companies, have increased our value-added sales to 18%, which is expected to translate into higher and more durable margins throughout the cycle. We continue to work towards our target of at least 20% value-added sales.

We see the increase in value-added sales as a promising area of growth that will benefit from secular trends of nearshoring, decarbonization, creating an emergent need for smart manufacturing in North America, whereby our customers can benefit from our scale and value-added capabilities that will be complemented by our digitalized network of connected service centers. Similarly, we are also excited about the upcoming startup of operations at our new facility in University Park, Illinois, which will serve as our lawn product hub in the Midwest, with state-of-the-art equipment, service capabilities, and more efficient operations. Finally, our investments in improved facilities, IT infrastructure, and enhanced value-added capabilities continue to support our drive to enhance our customers' experiences. With that, I will turn the call over to Jim for second quarter financial highlights as well as our third quarter outlook.

Jim Claussen (CFO)

Thanks, Mike. Good morning, everyone. Before discussing the third quarter, I would like to highlight the drivers for our second quarter performance compared to our guidance expectations. The primary driver in our second quarter volume shortfall was softness in later cycle end markets, which affected all three of our primary material franchises. Along with this broad-based, demand-driven falloff, excluding strength in automotive, aerospace, and non-residential construction, stainless steel average selling prices and margins were further impacted by sharper, stainless-specific commodity price declines and still elevated channel inventories. While we expect strong long-term demand underpinnings in our Bright Metal franchise, given decarbonization-led efforts, the supply-demand imbalance in the quarter significantly pressured market pricing and margins. Looking to the third quarter of 2023, we expect volumes to be down sequentially compared to the second quarter, in line with normal seasonality.

As such, we expect third quarter revenues to be in the range of $1.25 billion-$1.3 billion, with average selling prices down 1%-2%. Based on these expectations, we forecast Adjusted EBITDA for the third quarter of 2023, excluding LIFO, in the range of $43 million-$47 million, and earnings in the range of $0.31-$0.43 per diluted share. We expect LIFO income of approximately $2 million. In the second quarter, we generated $115 million of cash flow from our operations, which included $38 million released from lower working capital requirements. We ended the period with $396 million of total debt and $366 million of net debt.

Ryerson's leverage ratio increased quarter-over-quarter to 1.4x, but remains within our leverage target range, while the company's available global liquidity remains robust at $790 million. Due to our improved capital structure and multiyear progress deleveraging the company, Ryerson generated $196 million of cash flows from operations in the first half of 2023, compared to $168 million in the first half of 2022. With a healthy balance sheet and several highly accretive strategic projects, we remain focused on investing back into our business through the cycle. Capital expenditures were $46 million in the second quarter, which included $24 million for the purchase of building and land related to the BLP Holdings acquisition.

Given this real estate purchase, our updated expectations for full year 2023 capital expenditures are now approximately $125 million. This amount comprises both maintenance and growth projects, including service center modernizations. We are very excited about the modernization efforts taking place across our network, which will continue to drive better customer experiences, enhance long-term potential of our equipment, and improve asset utilization. Turning to shareholder returns, Ryerson returned approximately $57 million in the form of share repurchases and dividends. The largest contributor to that figure was an opportunistic $50 million repurchase of 1.4 million shares from our largest shareholder, Platinum Equity, in conjunction with their secondary offering. Their sale and our repurchase has contributed to our free float reaching 77%.

After having increased our share repurchase authorization to $100 million last quarter and extending the term to April 2025, we currently have approximately $50 million remaining on our authorization and will continue to prudently evaluate our shareholder return opportunities, as well as our overall capital allocation strategy to maximize long-term shareholder value. During the quarter, we also returned $6 million to shareholders in the form of a quarterly dividend of $0.18 per share. Additionally, we announced a third quarter cash dividend of $0.1825 per share, an increase of 1.4%, marking our eigth consecutive quarterly dividend raise. With that, I'll turn the call over to Molly to provide further detail on our second quarter financial results.

Molly Kannan (Chief Accounting Officer and Corporate Controller)

Thank you, Jim, and good morning, everyone. In the second quarter of 2023, Ryerson reported net sales of $1.3 billion, which was 5% lower sequentially, driven primarily by 4% lower volumes. In the same period, gross margin of 19.4% was an expansion of 60 basis points versus the previous quarter. Excluding LIFO, gross margin fell 40 basis points from the first quarter to 18.7%, as our average selling prices for our stainless steel sales mix decreased faster than cost of goods sold.

On the expense side, warehousing, delivery, selling, general and administrative expenses increased 4% sequentially to $203 million, driven partially by higher expense related to our acquisitions, higher depreciation from additional assets placed into service, reorganization expense related to systems implementation, and startup costs associated with the University Park Service Center, which were partially offset by lower fixed operating expenses. For the second quarter of 2023, net income attributable to Ryerson was $37.6 million, or $1.06 per diluted share, compared to net income of $47.3 million and diluted earnings per share of $1.27 in the prior quarter. In the first half of 2023, net income attributable to Ryerson was $84.9 million, and diluted earnings per share was $2.33.

Finally, Ryerson achieved Adjusted EBITDA, including LIFO, of $70 million in the second quarter of 2023, which compares to $90 million in the prior quarter. Free cash flow generation was $69 million this quarter and compares to $53 million in the prior quarter period, driven by operating earnings as well as working capital relief. In the first half of 2023, Ryerson has generated $160 million in Adjusted EBITDA, including LIFO, and $122 million in free cash flow. With this, I'll turn the call back to Eddie.

Eddie Lehner (President and CEO)

Thank you, Molly. While we encountered countercyclical headwinds during the quarter sooner than anticipated, our belief in the greater and sustained need for longer-life manufactured assets to improve quality of life and better the human experience remains resolute. Metals are the perennial materials enabling both the remedial and transformative manufacturing and building required to meet the formidable challenges of these times and beyond. The investments Ryerson is making through the cycle in our network of intelligently connected industrial metal service centers that deliver customer solutions with joy, speed, scale, value-added consistency, positions Ryerson and its stakeholders well for an enduring and valuable future as these commutable trends play out in the years ahead. With that, we look forward to your questions. Operator?

Operator (participant)

Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Our first question is going to come from Katja Jancic from BMO Capital Markets.

Katja Jancic (Analyst)

Hi. Thank you for taking my questions. First, maybe if we can start with margin outlook. Can you talk a little bit about how you're thinking about margins over the next few quarters? What are some of the puts and takes there?

Eddie Lehner (President and CEO)

Hi, Katja. Good morning. Three cases when it comes to margins. I think there's evidence right now that the upside case would be stabilization, and, and there are actually signs. You look at the Bloomberg Industrial Metals Subindex. When we were having our conference call a quarter ago, that was at 170. It got as low as 120. It's actually rebounded to 150. I think there's a good case to be made for stabilization, maybe on the upside. Base case, I'd say mild counter effects, where you're still gonna see indexes drift lower through the quarter. You'll see some margin compression as a result of those falling prices. Base case, it's gonna be mild, and that's, you know, that's more or less reflected in our guidance.

Then there's a downside case where you have a more aggressive counter cycle, and, there's more pressure on prices. There's falling demand, and so you've got a lot of competitors that are trying to take orders and POs off the street by bidding more competitively for those orders. Three cases, and that's how we would see it over the back half of the year.

Katja Jancic (Analyst)

I think I heard that the CapEx increase is driven by land purchase. Is that correct?

Eddie Lehner (President and CEO)

Yeah, it was a good opportunity to purchase. We did the BLP acquisition, towards the end of the first quarter of 2023, and we had an option, to, purchase that land. We're, we're certainly bullish long term on industrial real estate, so we saw it as a good opportunity, so we went ahead and exercised that option.

Katja Jancic (Analyst)

What is the plan with that land specifically?

Eddie Lehner (President and CEO)

I'm sorry?

Katja Jancic (Analyst)

What, what is the plan? Are you planning to maybe build on that land, or how are you thinking about it?

Eddie Lehner (President and CEO)

There's three facilities that are on that industrial property site, and we just, we just like the property, like the real estate, like the configuration, and gives us more control if we decide to expand those assets going into the future. Also, we think it's just gonna create value longer term when we look at it as part of our industrial real estate portfolio.

Katja Jancic (Analyst)

Maybe just one last one. Can you remind us what the maintenance CapEx is right now?

Eddie Lehner (President and CEO)

Yeah. Maintenance CapEx is running at about $30 million per year as we picked up some additional square footage through our acquisitions. So we can, we can get down to, I'd say, about $30 million in maintenance CapEx. Looking ahead, just given some tactical adjustments that we'll make going forward based on economic conditions, you know, right now, I would say early look at 2024 would be, we would reinvest in CapEx at the rate of GAAP depreciation, plus the carryover from 2023. We think it's really important given that we have the ability and we have the liquidity. It's really important to carry these growth initiatives sort of across these countercyclical waters and see them through to the benefits that we believe they're gonna provide.

Katja Jancic (Analyst)

Okay. Thank you very much.

Operator (participant)

Once again, if you'd like to ask a question, please press star one. We'll take our next question from Samuel McKinney, KeyBanc Capital Markets. Please go ahead.

Samuel McKinney (Equity Research Senior Associate)

Hi, good morning, Eddie and team. How are you?

Eddie Lehner (President and CEO)

Hi, Sam.

Samuel McKinney (Equity Research Senior Associate)

Good. I wanted, I wanted to start off on operating expenses. You know, volumes were down 4% in the quarter versus the first quarter, but your warehouse delivery and SG&A expense increased by 4%. Can you talk through the specifics of what happened to drive that OpEx number higher, despite the decrease in total volumes?

Eddie Lehner (President and CEO)

Yeah, sure. Part of that, sequentially, Samuel, is reorganization. Then really, that's about, and I'll have Jim add some add some commentary to this, but we've got about $3.2 million in reorg that goes to that. It's spreads quarter-over-quarter, and then we have about $4 million that's related to acquisition activity sequentially. That's the majority of it. It's growth-based. As we move through the back half of the year, we'll be able to flex down on costs. You know, as I, as I mentioned, in the earnings release, we're very good at it. We know how to run a countercyclical playbook, and we'll be able to further advise these investments as we move through the back half of the year.

Jim, you want to add any, any color to that?

Jim Claussen (CFO)

Morning, Sam. No, Eddie, I think you covered it. You know, really, it's... it was a function of, of some acquisitions we added and then, and then the initiatives with some reorganization costs. Sam, we would expect those costs to be, the reorganization costs, to be maybe $4 million-$6 million in Q3.

Samuel McKinney (Equity Research Senior Associate)

Okay. Okay. Thank you. Then your outlook for the third quarter on pricing and mix is holding in pretty well, only down 1%-2%. Is that a function of higher value stainless aluminum being a higher sequential percentage of the mix in the third quarter? Are you expecting pricing to hold in better in certain areas of carbon?

Eddie Lehner (President and CEO)

Yeah, we'll let, let's go ahead, and we'll kind of unpack it like this. There are some signs that we're seeing stabilization, coming off of a Q2, that maybe countercyclical conditions arrived a quarter, before we anticipated at the time that we offered guidance last quarter. There are some increasing signs of stabilization. Obviously, when you look at end markets, automotive has performed better, aerospace has performed better, non-resi has performed better. As we, as we show in our investor deck, broad-based industrial has been in a malaise, which has tracked the indicators around PMI and industrial production. We did see some strength in construction and heavy equipment, and energy as well. The consumer right now is, is showing fatigue. You've seen a shift in spending.

Durable goods, and goods, manufactured goods related to the consumer, you continue the impact of higher interest rates and a change in preference. Excuse me, a change in preference, as to how those dollars are spent. I'd say upside cases, we see stabilization around price and demand, and then you start to see a reset in replacement cost, which starts to expand your margins as you go through the quarter. Base cases, again, mild countercyclical conditions that are more or less represented, you know, not more or less, because they're represented in our, in our guidance for the quarter. I think stainless, again, being more levered to the consumer, stainless, that countercyclicality is still playing out. There's been a more of a stabilization around aluminum and aluminum demand and, more of a stabilization for now around carbon demand.

That's how we would see it on the commodity side. I'll ask Mike Burbach to pitch in with any additional comments he may have.

Mike Burbach (COO)

Yeah, thanks, Eddie, and good morning, Sam. No, I think, I think you, you hit the high points already there, Eddie. So, the stabilization is something that we're watching. There was a lot of change that took place through Q2, with futures prices of nickel and aluminum, coming down off of places where they were late in Q1, which triggered maybe some demand deferral in Q2, especially in Stainless Steel, where industry shipments were off nearly 8% sequentially from Q1. So but, that, that appears to be stabilizing to some extent, but, you know, we'll play it as she comes. So thanks.

Samuel McKinney (Equity Research Senior Associate)

Okay, thanks. Lastly for me, I know that, stringing together a lot of value add M&A can have a big impact on your margins. Eddie, you mentioned recently that the market for any really sizable M&A has been difficult to complete given the extended valuations. How has that market been developing recently?

Eddie Lehner (President and CEO)

Sam, I would characterize it this way: I think still for bigger deals, and I, I'll go back and just give everyone, everyone a historical perspective. I mean, you had the Metal USA-Reliance transaction in 2013. You had the deal that we did in 2018 for Central Steel and Wire. I think you'd be hard pressed to really name any additional deals in the space that have been, you know, bigger than those deals. So there's still a gap, I think, between what, what buyers want to pay and, and what sellers want to sell for. That's in the bigger, what I'll call, transformational acquisition space.

The bolt-on pipeline is still healthy, and, and we're excited about, what we have in our bolt-on pipeline and the opportunities that, that are there that we're currently working through now. We'll see which ones, you know, come to fruition. Activity within our, within our, our bolt-on pipeline is, is good, it's robust, and it's attractive, given our strategy and what we're looking to accomplish over the next, over the next five years and beyond.

Samuel McKinney (Equity Research Senior Associate)

Okay. Thank you. That's it for me.

Eddie Lehner (President and CEO)

Thanks, Sam.

Operator (participant)

Once again, if you'd like to ask a question, please press star one. Our next question is going to come from Alan Weber from Robotti Advisors. Please go ahead.

Alan Weber (Research Associate)

Oh, good morning. How are you?

Eddie Lehner (President and CEO)

Hi, Alan, How you doing?

Alan Weber (Research Associate)

Good. Just a quick question. You know, in some of the presentations, you used to give a talk about, you know, projected EBITDA through the cycle like that. Can you talk about your thoughts there, given, you know, you have ramped up the acquisition, you ramped up the CapEx, and, you know, things have changed? How do you think about that today?

Eddie Lehner (President and CEO)

Yeah, absolutely. Alan, a couple things. We, we put out our next stage financial targets, when, when we were at our Investor Day in New York last November. We, we look at mid-cycle EBITDA within that next stage, being between $350 million and $400 million. We look at those margins, at, at mid-cycle being at about 22% with, with that neutrality of not really having holding gains or holding losses in inventory. Then we talked about value add being, up to 20% of our, of our mix. We've certainly seen good progress on the value add front. Certainly given some of the acquisitions we made and, and some of the organic, improvements and accomplishments that we've had within the Ryerson, Ryerson Advanced Processing segment of our business.

I would, I would also say this, the things that we're doing at University Park, in Illinois, the things that we're doing in Centralia, in Washington, which is on the Oregon-Washington border, we're doing in Shelbyville, Kentucky. These. You know, the ERP conversions that we're doing, the systems investments that we're making, these are all very important things. They're harder, but they're really important things to getting to that next stage operating model. You know, we're, we're in the kitchen right now. We're cooking that. In the meantime, we're, we're running our existing business. We're doing that well.

However, you've got to carry these things from early, middle, to the finish line, and we'll get there, and they will produce the returns that we expect, and that'll get us to those next level, those next level operating and financial targets. It all fits together really well. There's just the work in between and we'll do that work, and we'll get it done.

Alan Weber (Research Associate)

When you kind of when you talk about the targets, because, again, from November, you've made a few acquisitions. You've, you know, ramped up CapEx. Should those targets be a little higher?

Eddie Lehner (President and CEO)

Should those targets be a little bit higher? Yeah. I mean, look, I, we it's to really where we've seen the industry be historically, where we think it's, it's gonna go. Certainly as we look at conditions right now, they are decidedly countercyclical. I mean, if you look at PMIs, if you. They're, they're countercyclical, so that, that creates a certain to, you know, what happens as we go from countercyclical back to cyclical. When we look at those next stage financial targets, you know, especially at midcycle, because we, we've seen a peak, right? I mean, we saw a peak in 2021. We know what that peak was. It was $861 million. We, we know when conditions are at what we'll call a cyclical peak. We sort of know what that looks like and what it can look like.

We also know what it looks like at the trough, depending on whether it's a pandemic or whether it's a severe manufacturing recession. We know what that looks like as well. We set those peaks very... Well, we set those targets very thoughtfully, when we did those next stage financial targets. We believe that when we do hit those financial targets, it's gonna be very, it's gonna be very good for, for stakeholders and for shareholders.

Alan Weber (Research Associate)

Just the last question from me. When you, if you exclude auto and aerospace, which you're not as big in, how do you think about your market share for, say, for the first half of the year?

Eddie Lehner (President and CEO)

Yeah. I, I would, I would say this: We, market share is fluid, and so right now in the industry, market share is being overweighted with stronger end markets. So if you've got more exposure to automotive, if you've got more exposure to aerospace, you've got more exposure to non-resi, market share is going to be tilted in your favor. When you look at market share statistics, going back to 2021, which was, you know, I'd say much more compatible with Ryerson's end market exposure overall. Obviously, we were the beneficiaries of that opportunity where we were able to capitalize on our higher market share in those verticals, and that helped really be a, a significant driver of, of profitability at that time. So you, you get these puts and takes in the cycle.

Right now, as I look at our investments, as I look at our plans moving forward, we're planning for that next upturn and that next upcycle and really have a lot of optimism and enthusiasm around what we're gonna see when we come up into that next upturn, and how we're going to have exposures to end markets, including penetrations into other verticals, and progress in other verticals, where, where maybe we've been lighter historically.

Alan Weber (Research Associate)

Okay, great. Thanks a lot.

Eddie Lehner (President and CEO)

Thank you.

Operator (participant)

It appears there are no further questions at this time. I'll turn the conference back over to you, guys, for additional comments or closing remarks.

Eddie Lehner (President and CEO)

We thank you for your continued support and interest in Ryerson. Please stay safe and be well. We look forward to being with all of you in November for our third quarter 2023 earnings release and conference call.

Operator (participant)

This concludes today's call. Thank you for your participation. You may now disconnect.