Q3 2019 Earnings Call
At this time I would like to welcome everyone to Ryersons third quarter 2019 earnings webcast and conference call.
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After the speaker's remarks, there will be a question and answer session.
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The press Star then the number one on your telephone keypad.
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MS. Justine Carlson you may begin your conference.
Good morning, Thank you for joining Ryerson holding corporation's third quarter 2019 earnings call.
Here this morning, with Eddie Lehner, Ryersons, President and Chief Executive Officer, and our Chief Financial Officer Erich Schnaufer.
Kevin Richardson, Mike Burbach, and Jim classes, our North American regional President will be joining us for acuity.
Before we get started let me remind you that certain comments, we make on this call contain forward looking statements within the meaning of the federal Securities laws.
These forward looking statements involve a number of risks uncertainties that could cause actual results to differ materially from those implied by the forward looking statements.
Such risks and uncertainties include but are not limited to.
Those set forth under risk factors and our annual report on Form 10-K for the year ended December 31st 2018.
You are cautioned not to place undue reliance on these forward looking statements, which speak only as of the day, they're 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 the non-GAAP financial measures discussed on today's call. The most directly comparable GAAP measures is provided on our third quarter 2019 earnings release filed on form 8-K, which is available on the Investor Relations section of our website.
I'll now turn the call over Daddy.
Thank you just seen and thank you all for joining us this morning.
Want to thank our customers the opportunity to earn your business, which we never take for granted.
Also want to thank my Ryerson and central steel in wire.
Foresee isn't w. teammates.
Across our network for their efforts and continuing to make Ryerson a better organization as we move through this counter cyclical deflationary cycle.
A few words, we're in the fifth consecutive quarter of declining see are you hot rolled coil sheet or see are you HRC prices.
We have now surpassed delta.
$400 per tonne peak to current trough see are you HRC prices.
During the past 15 months.
Do you HRC prices have declined 34% year over year or $294 per ton in fact acute price deflation.
Across all categories of carbon steel has been prevalent over the past five quarters exacerbated by ineffective attempts at mill price increases in the second and third quarters that increased an extended the magnitude and duration of margin pressure domestic.
The prices of now approached levels, whereby domestic to international spreads Favre domestic sourcing and scrap price declines appear to be abating with mill lead times stabilizing if we look objectively a year over year industry data, we find industry shipments contracted.
Approximately 7% against relatively high inventory stocking levels.
Consequently, the outfall such factors is not surprising and resembles industry conditions experienced during 2015 in 2016, but have lesser magnitude so far.
We highlight these points for several reasons.
Despite the resulting gross margin compression the impact is transient.
And beneath the surface, we're building more operating leverage in our business as we expect to inflect back to improving industry fundamentals and Ryersons financial and operating condition is much stronger than it was four years ago.
Ryerson realized same store industry market share growth.
Same store expense leverage.
Net working capital management within our expectations.
Solid counter cyclical cash flows reduced leverage and increased net book value of equity in the quarter.
Some cores, we grind it out while our strategic investments in Capex acquisitions, and our digitalization initiatives begin generating an expected returns even.
Even when the clock runs out on a quarter, we continue advancing on a longer game at Ryerson as our operating model continues its demonstrated progress toward improved financial performance over the cycle.
Since the last industry counter cycle in 2015.
Ryerson has increased its net book value of equity by approximately 282 million or approximately $7.43 per share.
[noise] with respect to see us MW, we always understood. This acquisition was going to be a heavy lift and shift turnaround, but also very worthwhile.
She has some w. as a strong industry brand with customer goodwill, but in operating model requiring modernization.
ATSI isn't W. With a product mix that is 85% carbon steel industry conditions over the past five quarters marked by acute carbon steel deflation created significant transient margin compression.
As we expect the average cost an inventory to move below replacement cost during the next several quarters. We also expect season W. performance to recover meaningfully within a vastly improved long term operating model.
Turning to the current economic environment.
You are you carbon hot rolled prices have declined to 2016 levels down by more than 30% in October compare to the beginning of the year.
Now, let me aluminum prices have fallen to two year lows and have come under further pressure due to weak demand and falling alumina prices.
Stainless prices have received support from surging nickel prices, which rose more than 40% in the third quarter before giving back some gains over the past several weeks.
From a demand perspective, the industrial environment softened and third quarter with September U.S. industrial production decreasing compare to the same month last year for the first time since November of 2016.
We can conditions were also observed in the September Peter My reading of 47.8, which indicates manufacturing contraction.
North American service center tons shipped continue to contract in the third quarter of 2019 compared to the prior year.
Evidenced by a 6.6% declining shipments as measured by the end Sci.
At the same time Ryersons North American same store tons shipped excluding central stealing wire were up 25% exhibiting better than industry performance in market share gains amidst the app or mentioned industry challenges.
Turning more specifically to Ryersons end markets H.B.C. commercial ground transportation.
And metal fabrication and machine shops were the strongest performing sectors with volume growth in the first nine months of 2019 on a same store year over year basis supported by nonresidential construction activity and class a truck sales.
Ryerson experienced lower shipments on a same store basis in several end markets, most notably the oil and gas and food and agricultural equipment sectors as us crude oil rig counts have steadily declined since the started the year and the agricultural industry has been negative.
Really impacted.
By global trade friction.
Central stealing wire continues to progress toward post acquisition goals exceeding customer account retention expectations, achieving approximately 32 million.
In annualized expense Takeouts, and realizing 12 million in cumulative proceeds from real estate sales for operations that were consolidated into existing facilities.
She has some w. was acquired with significant working capital of nearly 140 days of supply of inventory.
And management continues to target levels more in line with Ryersons same store service center metrics.
However days of supply increase slightly at the end of the third quarter to 92 days compared to 91 days for the prior quarter due in part to shipment declines reflective of industry demand weakness.
At the same time, the continuing industrial metal deflationary cycle, most notably in fear you Hot roll coil price deflation caused continued margin compression and inventory holding losses.
As a result, CNW generated an adjusted EBITDA, excluding LIFO loss of 4.5 million in the third quarter compared to our expectation of adjusted EBITDA, Excluding LIFO income of $3 million for the period and compared to a loss of 2 million.
In the second quarter of 2019.
As high cost carbon inventory cycle out margins reset and cost takeouts renovate the expense structure of CS and W. Ryerson continues to view the company as having strong commercial goodwill that is in the early innings of its turnaround potential.
Management also continues to work toward its long term mid cycle target for CS MW of 600 million in revenue and 50 million and adjusted EBITDA, excluding LIFO on an annual basis.
For the fourth quarter of 2019.
Ryerson anticipates revenues of 960 million.
The 1 billion.
With tons shipped down 6% to 9% compared to the third quarter of 2019.
Due to normal seasonality patterns compounded by slowed U.S. industrial growth.
Projected declines in global economic growth and business investment uncertainty.
Carbon prices are expected to bottom in the fourth quarter and aluminum prices are expected to be neutral to modestly lower while stainless prices. Despite a recent pullback in nickel prices are expected to remain supported by low warehouse and stock inventories as reported by the London metal exchange secular demand.
Patients in the electric vehicle battery market and export restraints on Indonesian nickel or.
Collectively Ryerson expects average selling prices in the fourth quarter to be down 3% to 5%.
LIFO income in the fourth quarter is expected to be the range of 6 million to $10 million as inventory costs align more closely to replacement costs.
Given these expectations Ryerson anticipates margins to expand in the fourth quarter of 2019 as inventory costs more aligned to current market prices.
And therefore expects earnings per diluted share to be in a range of eight cents to 18 cents per share and adjusted EBITDA, excluding LIFO in the range of 36 million to $40 million.
Ryerson expects to continue to de leverage in the fourth quarter with a continuation of counter cyclical cash flows utilized to further reduce long term debt with that I'll turn the call over to Eric who will discuss the highlights.
Our third quarter 2019 performance.
Thanks, Eddie and good morning.
In the third quarter of 2019, Ryerson achieved revenues of $1.1 billion, a decrease of 11.6% compared to $1.25 billion in the third quarter of 2018.
With average selling prices down, 8.1% and tons shipped down 3.9% growth.
Gross margin was 18.5% for the third quarter of 2019 compared to 17.6% in the second quarter of 2019, and 16.7% for the same quarter last year.
Included in cost of material sold during the third quarter of 2019 was LIFO income of $29.6 million compared to LIFO income of $12.9 million in the second quarter of 2019.
And LIFO expense of $32.1 million in the third quarter of 2018.
Gross margin, excluding LIFO was 15.8% in the third quarter of 2019 compared to 16.5% in the second quarter of 2019.
And 19.2% in the third quarter of 2018.
Margin compression during the third quarter was impacted by mark to market hedging losses of $4.9 million and inventory costs falling at a slower rate than average selling prices most notably at season W. Which continues to work down it's large inventory positions.
In carbon sheet products.
Warehousing delivery selling general and administrative expense decreased by $8.4 million or 4.8% in the third quarter of 2019 compared to the year ago period.
However, warehousing delivery selling general and administrative expenses as a percentage of sales increased to 15% in the third quarter of 2019 compared to 13.9% in the third quarter of 2018 as revenue declines outpaced.
Okay.
Net income attributable to Ryerson holding corporation was $10.1 million or 27 cents per diluted share in the third quarter of 29 team compared to $77.5 million or $2.06 per diluted share in the prior year peer.
Good.
Adjusted net income attributable to Ryerson holding corporation.
Excluding gain on bargain purchase related to the season W. acquisition.
Gain on insurance settlement restructuring and other charges and income taxes was $9.2 million for the third quarter of 2019, or 24 cents per diluted share compared to $6.3 million or 17 cents per diluted share in the prior.
The year period.
Ryerson achieved adjusted EBITDA, excluding LIFO of $29.5 million in the third quarter of 2019, a decrease of $21.2 million compared to the second quarter of 2019, and 59.2 million lower than the third quarter of 2018.
Turning to year to date results Ryerson generated revenues.
Of $3.54 billion, an increase of 9% compared to $3.25 billion for the same period last year with tons shipped 8.8% higher and average selling prices relatively flat.
On a same store basis, Ryerson generated revenues of $3.08 billion slightly up from prior year to date revenues of $3.07 billion with average selling prices, 2% higher partially offset by a decrease in tons shipped.
Of 1.6%.
Warehousing delivery, selling general and administrative expenses increased by $50.5 million or 11.4%.
An increase as a percentage of sales from 13.6% to 14% in the first nine months of 2019 compared to the same period last year.
Notably on a same store basis, warehousing delivery, selling general and administrative expenses decreased by $6.7 million or 1.6% and decreased as a percentage of sales from 13.3% to 13.1% in the.
Same period.
Net income attributable to Ryerson holding corporation was $56 million or one dollar and 48 cents per diluted share in the first nine months of 29 team compared to $105.4 million or to do.
Colors, and 80 cents per diluted share for the same period in 2018.
Adjusted net income attributable to Ryerson holding corporation, excluding gain on bargain purchase restructuring and other charges loss on retirement of debt and income taxes was $56.3 million for the year to date period of 2019 or one dollar and 49.
Cents per diluted share compared to $34.2 million or 91 cents per diluted share in the prior year to date period.
Adjusted EBITDA, excluding LIFO was $143.2 million in the first nine months of 29 team compared to $257.5 million in the first nine months of 2018.
At the end of the third quarter of 2019, Ryerson had 76.4 days of supply in inventory or 74.2 days on a same store basis.
Up from 73.6 days at the end of the third quarter of 2018.
Our same store inventory levels were within our target range of 70 to 75 days, while see us and W. continues to work towards achieving acquisition post closing inventory targets.
We maintained ample liquidity throughout the quarter.
As of September 32019 borrowings were $441 million on our primary revolving credit facility with additional availability of $395 million.
Including cash marketable securities and availability from foreign sources, Ryersons total liquidity increased to $455 million as of September Thirtyth 2019, compared to $441 million as of December 30, Onest 2018.
We generated cash from operating activities of $82.5 million for the third quarter of 2019.
Compared to cash used in operating activities of $44.5 million in the year ago period, primarily driven by lower working capital requirements.
We are pleased that Fitch ratings assigned a first time b plus rating to Ryerson with a stable outlook in recognition of our improved operating performance and disciplined balance sheet management.
Ryerson continued to strengthen its balance sheet by utilizing the majority of our cash provided by operating activities to reduce debt outstanding by $77.1 million, while also investing $9.1 million in capital expenditures in the third quarter.
Compared to December 30, Onest 2018.
Total debt decreased by $114.7 million and book value of equity has increased from $75.9 million to $141.1 million.
Ryerson expects to continue generating significant cash from operating activities in the fourth quarter of 2019.
Given lower inventory replacement costs, coupled with our normal seasonally lower working capital requirements.
Now I'll turn the call back over to Eddie to conclude thanks, Eric.
While pricing and demand conditions, certainly proved challenging in the third quarter, particularly after July and August mill announced price increases failed to materialize Ryerson is again proven adept at advancing our strategic initiatives, while gaining market share and generating counter so.
Nickel free cash flow despite the current recessed market conditions.
We expect to further reduce leverage and expenses as we move through year end, while improving operating leverage as we transition back to improving price and demand industry fundamentals.
Longer term and more structurally.
Despite transient deflationary factors, our long term value thesis continues its emergence around providing consistently exceptional value added customer experiences across a network of intelligently connected service centers at a local regional national and international scale.
With that let's open the call to your questions operator.
Thank you, ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to can Paul the couponing roster.
Your first question comes from the line of Martin Angler with Jefferies. Your line is open.
Hi, good morning, everyone.
Hey, good morning.
Within the release, you talked about working through the higher costs inventory and then commented on adjusting inventories to current and anticipated demand.
Looking ahead through fourth quarter and one Q2 0 are you planning further reductions within the inventories are rather do you expect some restock now for your thinking carbon steel prices a bottom.
I don't think we have to restock just yet.
I mean, I think we're getting to a point of of neutrality.
Martin here some news you can use though.
We went back and we looked.
We've looked carefully at what we call duration of cyclical periods and counter cyclical periods and.
We're in the fifth quarter now the counter cyclical period, the average duration of those counter cyclical period tend to be about eight quarters.
Got a couple more quarters ago, probably of that counter cyclicality, all other things being equal based on the information we have available to us now.
Our our CSS group did some really good analysis and 88% of the time over the last 10 years. The HRC price has been above $475 see are you print today was for 44. So I think the probabilities are on our side I think the probabilities are on the industry side that.
We're going to come out of this bottom and.
We're going to see better pricing fundamentals going forward you know if you look at the Bloomberg commodity sub index prices lead the industry down demand follows in that at some point similar to 2015 and 16.
Cases inflect backup in demand should come back up with it with about a one to two quarter lag that's what that's what the history would show.
So based on your commentary it would seem that were maybe in for some continued headwinds maybe through first half of 20, if we have a couple more quarters ago here with some anticipation that maybe some pricing recovery.
At that point.
Yeah, I think you've got full pricing recovery, yet and I think thats just the tailing out effective average cost getting to replacement cost and then seen average costs move below replacement cost, which is which is how that works I mean, if you think about it we had to head fakes. This year that actually came at ironic times, but I mean at the time, we had our our Q1 call.
Was April may and you could see a flattening of the CR you numbers and it looked like they might inflect up.
Back in July August if you remember and I know you do.
The mills announced price increases that turned out not to materialize. So during those two periods in particular prices leveled out and actually went higher but they didn't stick. So I think you know.
It really matters what matters is when do you received the inventory right. So you're receiving stuff now that you bought four weeks ago six weeks ago eight weeks, good depending on whether its HRC cold rolled or coded.
And so now you're getting that inventory in from one to two to three months ago, but looking forward clearly.
That replacement cost is going to be trending more aggressively down towards average and then moving below that.
Got it.
Looking at.
More notable double digit declines versus the prior year across both aluminum and stainless volumes can you touch on what you're seeing in those products and markets and maybe expectations over the near term into early 2020.
Yes, sure I mean, I think I think it's just general softness has been noted and machinery and equipment somebody other assembly other end markets.
But I'll, let a I'll, let Mike and Kevin Good is more a more color on that.
Hi, Martin This is Mike Burbach say, hi, Mike I think I think Eddie is right. There is just more general softness than than any one thing that you can put your finger on but.
What we did see from an end market perspective is continued strength centered relative basis.
Commercial ground transportation much of which attributed to class a trucks HPC continued to be strong for us. This year and then when you look at the metal fabrication dementia machine shop sector.
I look at that sector is an area that is highly transactional in nature and really reflective of ryersons ability to improve its business model gain share as we continue to invest in speed and responsiveness and having the right inventory in right places. So we continue to.
See those areas deliver better than average results and then we saw some declines as noted in the release.
In food and agriculture oil and gas and I think some of that is going well well documented previously so.
Other than that I think it's more of a.
Typical type situation in some of which.
I think is you look at our overall performance for the year, we are trending.
In a much better spot and what the Emmis HPI is reporting to have happened so.
But we're going to continue doing what we have to do we just take care of the customer.
And.
Give the best service or is out there and I think all else will take care of itself.
And that Martin. Please go ahead.
The Kevin Richard is just one more commentary in terms of an end markets. It's impacting aluminum is we are starting to see the effects of the well publicized drop in the class eight truck market and the current outlook for 2020 right now is to get back to about 2016 build levels, which is down 30% and it's if you look at other than that.
Absolute basis, it's actually a pretty good build rate, but it's coming off of a peak. So that's that's about a 30% drop in terms of what's anticipated next year relative to this year.
Okay. So just to make sure that I'm reading it right based on some of your end market commentary and then your analysis of kind of eight quarters, maybe of a downturn average duration. When we think about the industry as a whole and look like.
Data volumes as a proxy.
Would you continue to expect year on year contraction for the industry moving through first half of 20 based on what your customers are seeing and.
What's your kind of thinking internally.
Yes, Martin this is Eddie I mean, I think we have to deal and probabilities and I think.
We get if we see prices stabilize and it looks like prices are stabilizing.
Hopefully what we see as by the Middle of Q1, we start to see prices going up.
Average cost inventory coming down as I noted with demand.
Surfacing about that time, so I think we come to that kind of blackout period, which.
Coincides with Chinese new year, which is sort of how it's how it's been the last several years and once we get to about mid February I think the probabilities are our weighted more towards seeing recoveries in price and recoveries in demand as we get to love about mid Q1.
We believe we build from there.
Okay. Thanks, that's helpful understanding the cadence there and then when you look at your downstream end users any insights into their inventory positions and plans over the next couple of quarters. Both as you think about their metals inventories of Theyre holding as well as finished goods that are containing middle metals farther down.
Stream.
Yeah.
I'm going to I'm going ask Mike and can comment on that just a minute, but I would say in general moving through the fourth quarter at least I think people are still adjusting your inventories lower.
Hey, Martin This is Mike again, I agree with that I think the with the price uncertainty that we've seen.
There seems to be a correlation with how people approach your inventories when they think tomorrow's prices going to be lower so I think just given the time of year some of the uncertainty in the marketplace.
There is there is a trend right now to to lean out inventories.
But it really is a customer by customer situation.
I have heard people, taking them down and I've heard other people.
And can differently, so, but generally if there was an overall trend I would say given the time of year, you would see little little bit of a retraction on inventory levels.
Hey, Mark and Kevin one other thing that I would add is I think with the drop in the C are you in.
The reference some of the historical numbers and where it is right now I think there is consensus in the marketplace with our customers thinking that it's got to be closer to the bottoms in terms of more theres going to be more to the upside than there is to the downside. So just in the last week or 10 days, we're starting to see some some contract customers getting ready to make a move.
And commit going into next year.
Yes, I think more and I'll tell you going back to 2015 again, so instructive about the ended 2015 was when you saw HRC get to 400 in that range. It really started to cause supply chain destruction, I mean real supply chain destruction, and so even with a CR you print today, even though we're still two weeks away from the official see are you number.
For the December reset seer you print today. It for 44 tells you that again when you look at the probabilities because it always looks really I mean, it looks bad at the moment, but when you look at the probabilities with the 10 year average HRC price being about $623.
And it having been above 470, 580% of the time.
I think you just go back and you look at the probabilities I mean, we don't know if at any moment in time over the next 30 days.
It may trade below even even today see are you print, but again you go to the probabilities and.
It really looks it looks like the conditions are present for for that prices start moving higher.
Okay.
And if they don't get hit with this round of price increases are in early 2020, then you'll have to see some supply side response from the mills here.
Yes.
Okay. Thanks for all that color folks and good luck.
Thanks Martin.
Your next question comes from the line as Chris Terry with Deutsche Bank. Your line is open.
Good morning, Chris.
Good morning.
And Eric just.
If you could few questions from me a lot, but a lot in the first part just just in terms of some of the legacy contracts at central stealing large just wondering if you could talk through the timing on that and just discussed the inventory level clearing thanks.
Sure I'm going to kick that over to Jim Clawson, who is with us today.
I would tell you this evening.
Central's got 85% exposure to carbon and at the point where.
We closed on the purchase of seasoned W. As you know we were at peak industry conditions in the central It had a history of of really going long physically against their contract commitments. So so we that's really exacerbated this unwinding process submits. This amidst this margin mudslide.
So I think theres a lot to work through in that I'm going to kick it over to Jim and he'll he'll walk you through some of the finer points.
Yes, good morning, Chris.
As Andy said, it we really started with a.
That's extremely long position.
Last at the end of last year and as we've gone through this deflationary cycle. We've worked out on the inventory levels to where we can start to balance out the the supplies the supply and demand side of our business.
The team has done a really nice job.
Working those levels down however, we've done it as prices have deflated throughout the.
The year quarter over quarter, so as we see replacement costs get get.
Above our average cost inventory as the inflection happens we'll be in a really strong position going forward.
Okay.
Okay. Thanks, Thanks for the cold on the and then just just in terms of thinking about where we are in the soco and Youre thinking we're still targeting 20% gross margins just wondering how you're thinking about that how long that monetize can just just to utilize thoughts on the on on your ability to expand the margins back out. Thanks.
Yes, absolutely. So let me let me give you a perspective, okay. So I as I was doing my prep for the call I go back and I look at Ryerson in terms of.
Four games and one game was play between 2007 in 2010. Another game was play between 2011 in 2014, we just got finished with the last game, which is 2015 through 2018, which takes you through.
The beginning of a counter cyclical period, all the way up to maybe another cyclical peak at least in in our industry. When you look at the numbers and so we're starting to sports game right of 2019 to 2022 and when we look at what's going on with our value add any investments that we're making all things being equal because right now when you see HRC go from 900 plus.
Down to 444.
You got to deal with that and the good news as we've been through it enough times now that we know how to run this counter cyclical playbook, but in the next four years.
I, certainly expect us to stabilize around that 20% target and the next four years and we said that.
Okay. Okay. Thanks, and just last one from Asia, specifically on the cross talk announced last week in carbon.
Just talk about the reaction to that in the in the markets since and how that how that's how that's going downstream. Thanks.
It's really early to say.
As long as as long as a C or you keeps going down it's going to that's going to somehow counteract that so I think we really have to see where the reset number comes out in two weeks, but I, but I think it's reflective of this and that is if scrap prices are going to be up 10 to 20 and lead times or at least going to stabilize then at least you have the conditions with imports being where they are you have the conditions for.
Those price increases at least part of them to start to stick now the fourth quarter is always an uncertain time for taking inventory positions just because seasonally demand is softer and you have less shipping days in that period and as Mike referenced is very true that as prices are falling people don't tend to take that replacement cost into their inventory if they think tomorrow.
Price is going to be lower all that said.
This will take a little bit of time to matriculate, even if price even if the price increases stick.
The material that you're buying now you're not going to get for one to two to three months. So I think that puts us into the first quarter 2020, but I do think that given where prices are now the recent price.
Increase the recent price.
Increases had a better chance of sticking than the ones that were announced in in Q2 in Q3.
Okay. Thanks goes that's it for me.
Your next question comes on the line of Joel Tiss with BMO. Your line is open.
Hey, guys Hasnt gone.
Hey, Joel Good morning, Joe how are you doing.
All right. So CS W. I don't know if you said, how many what's their average days of inventory versus Ryerson and kind of like how long is is it going to take to too.
To meshed that the two together to get them to be more like you guys. Yes in the script in the script, we referenced 92 days they have been as high as a 140 days I mean, when we acquired and they were actually above 140 days. So we've taken about 50 days out.
That that realignment continues as it as it resets to really what we think is intrinsic demand as you go through the different seasons of of an MSC type year. So we're going to see convergence between their inventory turnover metrics and ryersons existing.
Inventory metrics with maybe just a little difference in that central's more waited too long and too so.
We might carry two to three to four to five more days, just given the mix of sheet versus versus long into but you're going to see a convergence for central it's going to get below 90, and it's going to start trending towards 80 as we get through.
As we get through 2020 Jen.
Yeah, I mean, Eddie.
You answered a pretty completely there I would say.
We're really into that next phase of of inventory using analytics.
Really making sure we have a items placed appropriately for customers.
Working through some of the tailing out of B or C items that were over position takes a little longer obviously to change your position on a b C item and it doesn't M&A. So working our way through that were I would say were to that next phase and Andy Eddie has already said will work in a way to be Eightys and.
See you pretty good convergence here, yeah, I mean, Joel as I kind of referenced any metaphorically I just it really feels like we're starting that fourth gain that four year period, and it's like an MBJ man. It's like we're early in the first quarter and we're really good team. So you know like our chances.
You guys have done a very like very consistent methodical improvement through all the through all the variations at the end markets keeps thrown at you.
And are there any other is their work still to do on sort of like your customer like Ccs and W.'s customer base. Some of them I'm sure are better than others in terms of profitability or volumes or as a lot of that you can spread it across across all the different products you have include.
Leading ryerson and you don't really need to do a whole lot of.
I'd like product line simplification and and customer.
Customer calling.
Yeah, you know one of the really great attributes of Central is and I think we mentioned this before it was such a unique acquisition in this way is that central has customer goodwill I mean, they really have good brand value in a good brand in the marketplace, but the the the operation itself needs modernization and.
So I think the commercial portfolio was really well situated and actually we've seen a really nice synergy and Thats continued even through this downdraft, we've seen a really good synergy between Ryerson and central in terms of.
Ryerson being able to tap the central inventory to enhance its product offering across the Ryerson network of customers that predated the central acquisition I think would central Joel the real key is is to modernize the operation in the systems in that business to get their costs.
Very close.
To Ryerson current cost benchmarks and working capital benchmarks and Theres a lot of operating leverage in that business, but it really needs to go through a systems and and process reengineer modernization.
Okay that makes sense.
And I didn't hear if you guys gave a free cash flow estimate for 2019.
Even if it's kind of a ballpark ish.
We we didn't give us a number but we said that we would continue to generate significant cash flow in the fourth quarter again, we hit our seasonally low inventory in a our balances and so that throws off a lot of cash in the fourth quarter.
Okay and then just last one from me can you talk a little bit about the balance like more philosophically.
Between using using your your liquidity for further debt reduction or looking to consolidate the industry a little bit more given given that it's kind of a difficult environment for everybody out there and might be some real opportunities. Thank you.
Yes, there is there's a lot of deals that are coming to market Joel and let me. Let me say this I mean, if you if you look at our industry in general.
There's not a lot of general line service center businesses that are less attractive.
Gary enough goodwill to get us interested I think that they're either distressed and you take on that challenge and you buy below book value or do you find something is really highly differentiated that adds a lot of value.
And you look for those you look for those gems and then you really try to to pay a reasonable multiple for us for those businesses, but I mean, given that we've given that we have central and we're just really a little bit over a year into that and if you go back and look at over if you look over the last three years.
I think our our record for M&A has been really really good I mean central Anello Guy laser flex Fay STS think we need to take a little bit of a pause I mean, we won't turn our back on something that's really great, but I think we need to take a pause use our cash pay down debt de leverage then get our coupon down it really kick off that virtual.
Got you a cycle we've looked at.
As we as we as we really envision this shift in enterprise value from debt to equity.
If you look at where the App, where our average selling prices today at around I think eight was an 18 47.
If you look our average selling price today at 18, 47, and you look at the average JSP really I'd say in the industry over the last 10 years are still another 100 bucks per ton roughly that you would wring out of the balance sheet going from today's price to about the industry average all things being equal. So we've got a lot of cash still stored up in our.
Balance sheet, there's a lot of cash there and I think our operating model continues to get better.
As we move forward plus we're going to see lower cost an inventory as we move through the next several quarters, we're going to get that margin reset and in 2016 going back to a question that Chris Teary, Chris Terry asked you look at our margin performance in 2016.
It was great and I think is if we're going to have to go through these boom and bust margin cycles.
There really is there is sunshine on the other side.
It's really great. Thank you so much thank you.
Thanks Joel.
Your next question comes from the line, Phil Gibbs with Keybanc capital. Your line is open.
Hi, good morning.
Good morning, Phil Cleveland Roxanne.
Got it absolutely.
First question is just on the on this GM strike and how how that's.
Played into the psychology, and maybe some of the various different end markets or whether whether it has a minutes that's.
It's deserving to be discussed because we havent seen something like this since the seventies.
Yeah, no. It's a great question I think I think practically it certainly had an effect and I think thats been well reported on I think there's also been the Volvo Mack truck strike as well so you've got two strikes going on in the fourth quarter that certainly haven't helped metals consumption.
Kevin is a little bit closer to it so I'm going to go I think that over to have.
Hey, Hey, Phil.
And to a lot directly.
We don't do a lot directly in automotive so it really hasn't impacted us in a big way in terms of direct customers. We do have some tier two relationships that it's been somewhat disruptive but not.
It hasn't been a big needle mover for US I think it's more about the psychology of what that does on the supply side in terms of from the mills and what that does the capacity utilization, but in terms of demand impact to us it's been pretty insignificant at this point.
Yes, just an interesting to see.
The mills continue to produce at an 80% rate.
Despite the fact that probably there some.
Sales that aren't taking place at the moment. So so there's there's certainly some some level of supply being being stored.
Perhaps perhaps.
Go ahead.
No I was just gets adding that that's our that's our read as well in terms of the impact on the producer side and I think that capacity utilization is actually down into that into the high Seventys now I don't know.
Bill by mill, but I think on a blended rate, it's actually below 80% now.
Phil if we do some napkin math and you just look at the change in imports, but look at where MSC shipments are coming out on a monthly basis.
We're trending back to that 2016 level of shipments. So if you take that Delta Delta and imports and then look at the change in domestic.
Domestic output.
I think your think your conclusion is more accurate than not.
Okay.
Thanks, Eddie and question as it relates to you on the operating expense side I expected operating expenses to be a bit lower than they were.
Was there some integration expenses that you still have running through from the from the side of central that are that are kind of hanging in there because I I noted.
That you all talked about in your script, there some some leverage to come and or lower I think you said renovation of expenses to come so.
Curious in terms of how we should be thinking about the the expense side.
Going forward.
Yes, I mean, we've been we've been carrying some improvement project costs across the water and Thats and that's going to benefit us I mean, as we see our operating leverage improve as we come up through the next upturn.
Some of the projects were doing are going to be very worthwhile and early returns on those projects are really positive. So.
You don't get the full you don't get the full monetary benefits as your as you're in the midst of those projects, while the industry's deflating.
But certainly we've got we've got some really good work that we can do.
In terms of.
Rationalizing costs across our network and that Central's certainly have a big part of that we've got some work we can do across wires as well.
And last question here I'd.
Had mentioned.
Some systems and processes needed to reengineer central I think maybe on the analytic side to get you up to where you've been trying to get the legacy business what.
What does that go into potentially cost or is costing from a capex standpoint or or those costs being run through the.
The operating expense line, how do we think about that thank you.
Yes, I'm going to kick it over to Jim in a sense, how would you say right now the cost hasn't been hasnt been that large because we're going through the reengineering process of documenting what.
What those processes and systems are going to be but as they start to mirror Ryerson.
And we start to think about how to how to hub see as MW into our existing ERP environment.
Cost of that but I think I think you can't go faster than the organization can assimilate those changes and so I think I think into 2020, we're going to see some changes, but we don't see the cost has really been being that high and we'll take it will take it in measured doses, because we have to move with the workforce and with the other restructuring activities that are that are ongoing Jim.
Yeah, we anything that's been done on the system side would have would have rolled through opex.
In that regard this year, but it has not been significant.
Yes.
In the way, we're doing things so.
Really working on the operating model, putting the processes in place and then and then we'll look to be modernizing the systems as we go forward as Andy said.
Yeah, I mean, Phil we really we really want to keep building the tangible net book value of the company and and we've made really good progress in that regard over the last four years and and I think thats a good thing for us to focus on its just continue to build that tangible net book value of equity across the enterprise.
Thanks, I wanted to take a page of the Warren Buffett playbook.
Yes, the module gone there to go.
Your next question comes from the line of Matthew Fields with Bank of America. Your line is open.
Hey, guys.
The fourth floor for 44 data point from C or you, but understand that works on a lag.
And then steel market update seems to see spot prices trending more towards about 480.
So seems like that $40 per tonne price hikes kind of working.
Are you seeing indications that that would sort of.
Bolster that that train of thought.
Yeah, Matt its early I mean, you don't know till you know I mean, I I again, I think that.
We thought that in April may we thought that in July August I mean, we're going to have to see I mean really.
How how the mills and force that price increase across the spectrum of demand I mean, we have to see I mean early indications are are are positive. If you look at the same SM you sentiment index, though that sentiment index spiked up at the time that the last mill price increases were announced in April may and July and August So really I mean, it's really up to the mills.
It's up to the mills and it's up to the it's up to the customers.
And is that is there is you think the recent announcements on price hikes are informed by November scrapping up 20 or.
Or is that that sort of November being up 20 kind of have further upside to where we are now.
I think it's helpful. I mean, I think if you look at iron ore, even iron ore, even though it spiked a 125, it's still in the eighties and so.
Scrap is certainly a better value than.
I'd say.
Fully yielded iron costs are Virgin iron costs through a through a blast furnace in a b O F.
Scrap is still the more attractive alternatives. So you see scrap up by 10 or 20 Bucks.
Pig iron prices.
Still above 300.
There is some support for for those increases as we move into Q1, just noting that Q4 is softer on the demand side, but if you look at the if you look at the cost push side of it supply side of it.
There should be some support therefore for prices to come off their their current level.
Okay.
Hey, Matt is hey, Matt as Kevin one another data point that just supports the direction of of Hot roll. If you take a look at the futures numbers a premium for Q1 is about 60 Bucks a ton over today's number and I think that market is gaining liquidity in terms of the number of contracts over the last couple of years in terms of the buyers and sellers in the future. So.
Any was that that numbers $60 premium over today's spot.
Over the 444.
Yes I.
I think them the print actually came out today. So this was up a couple days ago that directionally, it's about that spread should be about right.
I think the first the first half of showing Fiveseventy and I think you'll Q1 was showing 540, so it's pretty big pretty big spread there, but but again I think on the cost push side. When you when you triangulate iron ore scrap and pig iron there is some support.
For these for these increases.
Alright, thanks, Thanks for that and then.
I appreciate the guidance on on cash flow generation in the fourth quarter is there anyway, we can kind of put brackets around a range of of cash flow generation you're comfortable.
Forecasting.
Well I mean, if you if you took a look at where inventories and Aer has come down in prior years in the fourth quarter, you can get a pretty good sense of the magnitude of what we're going to generate in the fourth quarter.
Together with what you're asked the estimates are on EBITDA in the fourth quarter, but.
Overall, the biggest driver is gonna be.
Depending on where a our balances and the year.
And assumptions on inventory.
So you're kind of working capital adjustments in the fourth quarter of the last three years have been 50 90 90.
We take an average of those or are we in the right ballpark then that's in the right ballpark yet.
Okay cool thanks.
And then lastly, I think I asked the same question kind of every every call.
I'm waiting for it.
[laughter] what are you guys waiting for in terms of other than sort of capital markets to tell you you're going to get a 5% coupon an unsecured bond what are you waiting for.
For for a refinancing is it kind of the leverage number is it a gross dollar amount of debt that you'd like to be at like what do you think is kind of.
The rate trigger.
In a capital market, that's kind of been open for awhile.
Uh huh.
It's open it's opened Matt, but its open it up at a price and I think if you look at spreads between beeson Triple C or even single bees.
Portfolio managers have really have really diagrammed out the play and I think it'll be interesting to see what 2020 looks like once everybody has the chance to digest what was a really really good year for pcms.
You know in the corporate bond market. So I'm just given that were between your three in year two of our coal coal period.
There's no rush to.
The pain incremental premium when we consider the business to be improving and unless we get into a really long dated recession, which again the probabilities don't don't keynote that right. Now we think we're going to have better opportunities moving forward to refinance so.
Let's see let's see what the market looks like when it lets see let's let's see what the market looks like when the lid comes off in 2020.
You know another thing that we did during the quarter as we went out and we got a third rating as you know we had a split rating between S&P and Moody's with Moody's being two notches below S&P and so.
By going out and getting Fitch as rating, which reaffirms the b rating on our notes outstanding which is the same as S&P.
We're hoping that that you know investor education is going to get out into the market as well so that when we.
We go out and do the next refinancing they really sharpening their pencils on what is the right coupon for a new issue going forward and again is that he had said the next step down in our call premium in May of 2020 takes us from 105, five down to one or 275 and that $16 million and savings that that's not.
A small number.
So is it fair to say that may step down as kind of that the first time, we could start to expect something.
That unless someone wants to give us 5%.
All right.
Thanks, Matt.
Thank you I appreciate it guys.
Thanks. Thanks.
Your next question comes on the line of Sean Wondrack with Deutsche Bank. Your line is open.
Hey, guys good morning.
Good morning.
So just a couple of questions on some of the comments on the call again appreciate all the color you're getting here.
When you think about sort of the class eight truck market answer to your expectations for next year.
Given that is one of your sort of bigger markets. How do you expect to mitigate sort of the decline there.
Is there is there anything you can kind of do about that internally or is it sort of just whatever the market kind of Angie.
Yeah, I'm going to I'm going to have Kevin comment on that but when we went through it in 20, when we went through it in 2016 in building back up to this recent.
Build rate peak I think we did a really good job of taking out some costs and a and taken out inventory and really adjusting inventory to build rates and working with our customers too.
To continue to maintain margins from a cost to serve versus margin versus inventory perspective, but I'll, let Kevin give you more color on that.
As shown on the only thing I would add is with 100 locations in a geographic footprint. That's all across North America Theres, all kinds of opportunities to offset any one end market in terms of the investments we've made in value added processing and.
And multiple product lines. So it's not like we're just in aluminum distributor and we're at the mercy of the markets that drive that.
So theres theres plenty of opportunities to offset it we do have a relatively high market share in that that end market. So we go up and down with it it's been a great and market for us over the years and the other thing that I didn't mention is class eight gets all the headlines, but if you look at class five and seven trucks. That's that's a much more moderate decline going into next year that's up.
5% and then Theres other theres other.
Ground transportation vehicles that we service or and parts of the end markets take about ambulances and fire trucks and things like that so it's not just the class eight, but but theres plenty of opportunities to go offset things like that.
Yes. That's helpful. Thank you and then in terms of oil and gas.
You had kind of noted some weakness there.
Have you seen that kind of turned the corner here or are we.
Sort of in a period of uncertainty so that kind of restricting buying to a certain.
Within a pattern to shut.
Hey, Sean as Kevin ill take that one too because I handle the Texas and Oklahoma area.
For starters, that's a relatively small and market for us it's about 5% of our revenue. So is it obviously is more heavily skewed in the in the geographic pockets it services, but to answer your question. It is down we don't see a big rebounded what's interesting. If you look at the production the U.S. oil production right now is at record levels is like.
12, and a half merrell <unk> million barrels per day, but the extraction has become so much more efficient it's just not as capital intensive in terms of the equipment to get it out of the ground. So if you look at the rig counts down 20% from last year and if you look at the drilled and uncompleted wells they've also been declining for the last six months. So there is.
Not a lot that we see going into next year that says that that's going to snap back even with record production, but again on a relative basis, that's a pretty pretty small end market for us well I think we're seeing to a transition from from downhole capex more to above ground and the distribution capacity of how you take it away and get it to where it needs to be.
In the in the oil and gas sector, and I think Mike's got a good perspective too because he's got Mike's got western Canada.
Yes, thanks, Thanks, Sean Eddie.
I think we we see the same things I think Canada has its own set of challenges that might be a little different than what Kevin described but fundamentally.
With the investments we've made in the inventory we put in place.
We've actually been able to.
Fair fairly well considering the overall conditions, so, but the overarching issues that Kevin mapped out or pretty much.
The same up in Canada.
Thank you for that and then any you know just to kind of go back to a couple of comments you made earlier about these deflationary periods that are usually roughly quarters, where about industry quarter now.
Would you say that the magnitude of sort of the impact on EBITDA is felt earlier on in these periods and you're able to sort of.
Table eyes to certain degree kind of in the last.
Few quarters or would you say, it's pretty even throughout.
Oh, no I mean, I think you I think you chase that Boulder down and then and then when you start to get that retracement of as as.
Average cost starts to converged to replacement cost and then moves below replacement cost you really start to see an expansion of margins and you start to see really positive impact on on EBITDA. That's been the history. If you go back in.
And look at how we performed in those counter cyclical in fiscal periods. So so I mean, you do chase it down and I think we're seeing some of that in the results in quarters, two and three but having been through it several times and just looking at the leverage we have positive operating leverage we have in the business coming up on the other side and the acquisitions we've done in the things that we've noted.
I can't help would be positive moving forward I mean again I don't know I mean, if something is argenis happens or we get some type of extended.
I'd say economic downdraft than than you just got to get through that over a couple more quarters, but.
Based on our historical analysis.
We should be well past the halfway point.
Great and then did you do any on the upside how long the upside cycles based last four.
It's interesting the upside duration tends to be a little bit longer, but it's less impactful on the downside duration tends to be shorter and more impactful if that helps so typically about eight quarters.
On the downside say seven to agents typically about nine to 10 on the upside.
And as we've as we've modeled it in the macro.
That upside tends to be a little bit more muted in the downside is but.
But we certainly would look forward to that upside.
Right.
Thank you very much try answering my questions Hey, welcome.
Your next question comes from the line to Phil Gibbs with Keybanc capital. Your line is open.
Doubleshot.
Back at it back at it.
The question is just on the on the value add business in terms of how you define it already in how how much is that right now as a percentage of your mix that value add first stage processing type business and.
Where do you where would you like to get that.
Overtime.
No doubt so let me I'm going it kicked over to Mike and Kevin Let me tell you in general once we get once we get past cut to length.
So you've got as is distribution, you've got cut to length and you get into to what we consider to be the heavier value add as you move for more general on value add to more advanced process and even some some contract manufacturing.
We've seen that trend emerged nicely in our company, but as you know, it's a grinding it move up and down with the cycles, but.
We've seen that progress really nicely in the company, Phil and I would say just over the last fall. The 18 months, we've probably picked up about 50 to 60 basis points, there and I'll have Mike and Kevin give you some some more color on that.
Hey, Phil this is Mike so.
The definition is somewhat.
Objective to the situation, but sort of as a rule of thumb as Eddie mentioned, we process a lot of different things a lot of which are quite simple and we don't put into the value add category, but.
I would say something that has multiple processes done to it so a burn in a band.
Laser cut in the.
Capital whatever whatever those things might be and in many cases. It goes multiple steps. That's that's would be our definition of value add.
In a lot of which we're getting pulled into this direction by a number of customers too.
Helped them takeout processes that they used to do in house and so they're looking to us to matches ship them the plates are to sheets and for us to take that.
Work away from them and they can focus on the areas that they are looking to be better at which would be more in the assembly and marketing them design going forward. So so I would say our value add is multiple step processes and.
And beyond.
Hi, This is Kevin.
Yes, the only thing I would add to that if you look at the acquisitions, we've done prior to central stealing wire. The main focus has been on on value add capabilities laser flex for Nello guide metals and STS of all given as capabilities and.
The idea there was to also build that business and grow with all of the commercial context that Ryerson has so it's a combination of and M&A strategy and also some of the equipment that we have deployed internally.
I get the strategy I'm, just curious where you where you are in terms of the game. The game you said multiple steps and just trying to understand how much of that.
Is relative to your business is a 10% as at 40% Yeah, I mean, the way we the way we measured beyond cut to length. So we're we're moving we're moving towards 11 and longer term, we'd like to see a target of 15.
You are saying that includes cut to length or that does not include.
At the leg Bianca beyond what we consider to be value add beyond just the just general on processing.
Okay.
Thank you and by moving from 10% to about 15% that should add about 30 to 50 basis points to our gross margins on a consolidated basis.
Thanks, Jeff.
Thanks, Phil.
And there are no further questions at this time I will turn it back over to the presenters for closing remarks.
Thank you for spending a part of your morning with US and we look forward to seen all of you in the new year.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Oh.