Q1 2021 Ryerson Holding Corp Earnings Call
Mhm.
Mhm.
Yes.
The.
[music].
[music].
Good day and welcome to the Ryerson holding Corporation.
The first quarter 2021 earnings conference call today's conference is being recorded.
At this time I would like to turn the conference over to MS. Justine Carlson. Please go ahead ma'am.
Good morning, Thank you for joining Ryerson holding corporations first quarter 2021 earnings call and.
Here. This morning, with Eddie later, Ryerson as President and Chief Executive Officer, Mike Burbach, Our Chief operating Officer, Jim Claussen, Our executive Vice President and Chief Financial Officer, and while the cannon and our controller and Chief Accounting Officer John.
John <unk>, our executive Vice President of operations will be joining us for Q&A.
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 and uncertainties, including the impacts of COVID-19 and related economic conditions.
And 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 for annual report on form 10-K for the year ended December 31 2020.
And you are cautioned not to place undue reliance on these forward looking statements, which speak only as of the day of 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.
The Asian of the non-GAAP financial measures discussed on today's call to the most directly comparable GAAP measures is provided in our first quarter 2021 earnings release filed on form 8-K yesterday, which is available on the Investor Relations section of our website.
Now I'll turn the call over to Eddie.
Thank you Justin and thank you all for joining us this morning.
Our first quarter 2021 results.
I Hope this call finds you all safe and well.
And I want to begin by thanking my Ryerson colleagues for making the most of our opportunities and overcoming the many challenges engendered by the pandemic now and its second year as we together achieve truly outstanding results safely and productively and the first quarter of 2021.
And I also want to thank our customers for every opportunity to earn your business.
And to our suppliers as we work through the supply side challenges.
And by this very unique time and our shared history.
At this point the pandemic is still very much with us however.
Vaccination of efficacy data looks to be promising indicating that better days are ahead.
Where do we debate commodity and demand regular cycles with super cycles.
Why change squeezes and their duration.
And monetary policy support effects the carbonization.
Supply chain, reorientation, and rotations and ongoing secular growth stories.
And as clear as of the current environment of higher prices and recovery and demand looks to be stronger for longer.
This is evidenced clearly and channel inventories that are still well below restocking parity for.
Before you had mentioned in inventory levels necessary to support growth.
The PMI reports for.
For this week.
Illuminated what we're experiencing and that demand is recovering and getting stronger but for acknowledged shortages of various manufacturing of inputs, whether it is labor transportation lumber metal semiconductors, foams sealants and you name it.
EBIT and markets, which had been trailing of the recovery such as heavy truck and trailer and machinery and equipment.
Of strengthening backlogs of.
Amidst the aforementioned supply side constraints.
We see continuing strength and commodity price drivers supporting stainless steel aluminum and carbon steel average selling prices and margins through the second quarter, given the trifecta of pandemic trade policy and de carbonization of impacts.
The spells of favorable setup for the second quarter and argues well for tailwind supporting improving program pricing and gradual improvement and supply chain bottlenecks for.
For the balance of the year.
2021 base case is shaping up as an opportunity for ryerson to accelerate.
The deleveraging of the balance sheet to further de risk legacy liabilities and to advance our operating model as we continue executing on our customer centric operating model for.
And by our overarching mission of consistently delivering great customer experiences at speed scale and value add.
Route are intelligently connected network of service centers.
I'll now turn the call over to Mike to discuss the first quarter pricing and demand environment.
Thank you Eddie and good morning, everyone.
Returning to the commodity environment, the aggressive price increases and carbon products that began in the second half of last year have continued to unprecedented levels.
And as lead times remain extended there appears to be of.
A little give and futures pricing until possibly later in the year early next.
Depending on when new capacity becomes available and input constraints abate.
Likewise <unk> aluminum ended the first quarter eight 6% above the year and price and continues to appreciate and to the second quarter.
Yes, let me nickel prices had on the other hand softened slightly by the end of the first quarter compared to year end, but of recently trend higher again, given the global stainless steel demand and emergent and EV battery.
Needs. Despite the recent nickel mat processing and refinement of capacity announcements and Indonesia.
At this time, we anticipate the prices across all three of our primary commodities will remain elevated throughout the second and third quarters.
The supply chains recover and we expect that price normalization will be gradual given supportive demand conditions.
Expanding on the demand environment macroeconomic indicators continued to report recovery and the first quarter.
North American industry shipments as measured by the Metals Service Center Institute or MSCI reported first quarter volumes, only one 2% below year ago pre COVID-19 levels, while U S. Industrial production reported year over year growth in March after 18 months of <unk>.
Traction.
Ryerson as North American customer activity also continued to improve on balance and the first quarter.
Paired with the fourth quarter of 2020.
He noted shipment of improvement across all of our end markets, except oil and gas on a sequential per day basis for.
Commercial ground transportation.
It'll fabrication and machine shop, and and the industrial equipment sectors showed the strongest improvement quarter over quarter.
<unk> by renewed strength and the class eight market and improving the manufacturing activity.
Our construction and Hvac's sectors also showed strong sequential improvement on a per day basis benefiting from healthy construction activity.
With that I will turn the call over to Jim for our second quarter outlook.
Thank you, Mike and good morning, everyone.
Building on the market dynamics that Mike discussed, although pandemic, driven uncertainties pursue ryerson and optimistic about the second quarter business kind of environment.
At this point and the quarter and.
And momentum continues to build and coupled with supply tightness or elevated pricing across all three of riders and the primary commodities.
Therefore, ryerson anticipates second quarter 2021 revenue of 132 billion to $1 three 4 billion.
Assuming sequential average selling price growth of 12% to 14% shipment growth of 1% to 3%.
<unk> expense in the second quarter is expected to be and the range of 74, the $78 million as replacement costs continue to increase relative to average inventory cost.
Given these expectations adjusted EBITDA excluding LIFO.
<unk> to be and the range of $131 million to $135 million.
And earnings per diluted share are expected to be and the range of 49 to 60.
Turning to Ryerson and asset management, and the first quarter inventory days of supply decreased to 61 days below our normal market environment target range of 70 to 75 days, but reflective of the improving demand conditions and simultaneous industrywide.
<unk> applied tighten up.
Lower inventory levels, along with further improvements and our receivables and payable cycles drove our cash conversion cycle of 53 days for.
The lowest achieved since 2007.
And the first quarter working capital investments and pension contributions drove of use of operating cash of $47 $3 million.
During the quarter Ryerson was able to grow sales volume.
821, net working capital ratio through leveraging our interconnected network supply chain analytics and mapped inventory database.
First quarter capital expenditure investments totaled $6 5 million.
At this time, we affirm our previously announced maintenance and growth Capex budget base case of $40 million and 2021.
Turning to expense management, while warehousing delivery selling general and administrative expenses increased by 10, 3% compared to the year ago period.
Ryerson realized expense leverage in the first quarter as expenses as a percentage of sales decreased by 40 basis points and comparison to the first quarter of 2020.
There are inflationary effects noted in the areas such as lumber delivery packaging materials that are working their way into costs.
Variable incentive compensation expenses also increased by $26 million compared to the year ago period due to the significant increases and revenue gross margin dollars and adjusted EBITDA, excluding LIFO realized during the first quarter of 2020.
One.
However, this increase was partially offset by reduced salaries and wages expense that is true.
<unk> reduced workforce adjustments during 2020 resulted in lower head count.
Our progress continued with respect to the turnaround the central steel <unk> wire.
Since we acquired the company on July one 2018, we of optimize working capital.
<unk> expenses sold non core assets completed and ERP conversion to <unk> and.
And introduced new systems to the business and are pleased to report the central steel and admired generated $108 million and revenue and $10 $4 million and adjusted EBITDA, excluding LIFO and the quarter.
We see good things ahead for the central steel and wire business and franchise as we move further up the transformational curve.
Now I'll turn the call over to Molly to provide further detail on our first quarter financial results.
Thank you Jim and good morning.
And the first quarter of 2021, Ryerson achieved revenues of $1, one 5 billion, which exceeds the range communicated and our first quarter guidance with average selling prices of 21, 9% and volume up 10, 4% from Q4 2020.
First quarter revenue represents an increase of 13, 6% compared to the first quarter of 2020 with average selling price was up 18, 4% and tons shipped down for 1%.
Gross margin contracted to 17, 2% to the higher cost of goods sold recognition of <unk>.
Paragon 19, 4% for the first quarter of 2020.
Reflective of the periods of rapid and steep industrial metal price increases most notably and carbon sales included in first quarter 2021 gross margin of LIFO expense of $83 8 million, which significantly exceeded our guidance expectations.
And the inventory average costs rising more than estimated.
Excluding the impact of LIFO first quarter gross margin expanded by 720 basis points.
And from the first quarter of 2020 and sequentially from the fourth quarter of 2020 by 530 basis points the 24, 6%.
Net income attributable to Ryerson holding corporation for the first quarter was $25 3 million or <unk> 66 cents per diluted share compared of net income of $16 4 million or <unk> 43 per diluted share for the year ago period.
Included in first quarter 2021, net income as the gain on the sale of assets of 23 million related to the sale of our Renton Washington facility.
The sale of the of the facility is consistent with Ryerson plans and the past actions to optimize the asset portfolio to improve the capital structure by taking out higher cost debt and the results and interest expense.
Last year's bond refinancing and contain special redemption features to pay down the bonds on and accelerated timetable on favorable terms and we believe we have an opportunity to reduce our long term debt balance by up to $115 million by year, and thus potentially reducing cash into.
<unk> expense by another $12 75 billion.
Adjusted net income attributable to Ryerson holding corporation.
Excluding the gain on sale of assets and the associated income taxes was $10 2 million for the first quarter of 2021 or 26 cents per diluted share.
And if we were to also exclude the impact of actual of LIFO and excess of our estimate of LIFO expense per our fourth quarter 2020 earnings release.
And the associated income taxes, adjusted net income attributable to Ryerson holding corporation.
And $34 6 million for 90 per diluted share.
Ryerson achieved adjusted EBITDA, excluding LIFO of of $123 5 million and the first quarter of 2021, which represents a year over year increase of 259%.
The company's first quarter total debt remained relatively consistent with net debt rising slightly since the fourth quarter by $19 5 million the $698 1 million as revenue increases and pension contributions required less net working capital then and <unk>.
Fire recovery cycle.
The significant debt reductions made in 2020, coupled with our increasingly trailing 12 month adjusted EBITDA. Excluding LIFO produced the leverage ratio of three three times for the quarter down from five seven times at the end of the year and just outside of our <unk>.
Long term strategic target range.
At the same time, Ryerson and liquidity increased significantly and ended the quarter with $583 million of global liquidity.
As the company's adjusted EBITDA, excluding LIFO and the working capital assets rose and value consistent with higher underlying commodity drivers and recovering demand.
And all Ryerson and its first quarter results highlights the important balance sheet improvements, we have made to date and display our enhanced operating profile.
With that I'll turn the call back over to Eddie to conclude.
Thank you Molly.
During the NFL draft last weekend the <unk>.
Following with said about my beloved Cleveland Browns and I quote.
This really is about the process.
Because over time process of wins.
Plans win.
There will be misses along the way maybe big ones.
But if you believe and smart ideas and stick to them.
Good things start to happen long term.
Can almost look and feel easy like <unk>, new moves would happen before they happen.
It's clear two years in that Andrew berries Big plan for putting together the Browns roster is to always have a plan on quote.
Now I will say, it's never been were felt easy, but as the joined nonetheless.
Our progress amidst the many great and small turbulent day experienced since I joined Ryerson and the summer of 2012.
I thought this comment about the brown transformation was particularly relevant to Ryerson and our journey as we have a plan we have of process and we've executed that plan within our process and and under the radar, but always advancing way despite existential.
Industry crises, and 2009, 2015 and 2000 2021.
I thought it useful to do a freeze frame.
And to look back not just year over year of sequentially, but over the past 24 months for Q1 of 2019 and would note the following.
Ryerson delivered just under two times the amount of adjusted EBITDA, excluding LIFO at $123 5 million than we did during the first quarter of 2019, and we did that with 85% of the full time equivalent head count and a cash conversion cycle lower by 24 day.
As of.
And net debt lower by $436 million and deferred employee liabilities lower by $40 million.
We could stay over 179 years and the.
The past 13 years in particular.
We are not exactly and overnight sensation.
Slide feel good stories and make good stories about companies that truly transform themselves without a lot of fanfare of notoriety and <unk>.
<unk> might be the story Youre looking for.
We expect the bus for ourselves by giving our stakeholders the best of ourselves.
If we take a look back to our IPO in 2014, Ryerson had and enterprise value of approximately 175 billion with fixed cash commitments of $181 million net debt of $1 1 billion and legacy liabilities of $396 million.
Today, we have and enterprise value of approximately $1 $4 75 billion, our fixed cash commitments today are squarely under 100 million of installing our net debt is a little more than half what it was at the time of our IPO and falling and our legacy liabilities are nearly half of what they were.
And falling.
Looking at our current financial position I believe it might be time to have a more substantive discussion as to where enterprise value is and goes as math is ultimately math.
And when debt declines and legacy liabilities declined structurally while the operating model continues to improve price value would go.
And we look forward and making our case for the shareholder community and the months and years to come.
Whether this recovery cycle lasts for one year two years of three years, the merchant base case for Ryerson as a company with the plan.
<unk> execution and performance that is poised to accelerate debt reduction further derisk legacy liabilities and drive operating leverage and deliver increasing value accretion to shareholders. The.
The infrastructure needs of society of yourself evident and with that clearer reality industrial metals are once again, making the case is the one since future of essential and recyclable material kings of how societies want and need to live and prosper now and in the future.
So tying it altogether, let's say it one more time and harmony, it's time to build and we're grateful the ryerson through its 170, not the Aaron's business isn't the uptick of the action with a plan of <unk>.
The passion and purpose ready to write the best chapters, yet and our organizations fantastic journey with that we look forward of your questions operator.
Yes.
Hey, Matthew in line to ask a question. Please signal of my company.
Star one on your telephone keypad and.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
<unk> pumped on your phone line will indicate when your line is open.
Got it.
I would like to ask a question and.
We'll pause for just a moment.
And once again that is star one of you would like to ask a question.
And we will now take a question from.
Sales with bank of America.
Hey, Eddie.
Hey, everyone. Good morning.
A couple of sort of general questions first and then maybe some more detail of what's on the balance sheet.
And.
And obviously the demand for steel and very high and the U S. But.
It seems like mills are holding back production on one hand by not sort of opening up blast furnaces.
But it seems like with auto slowdowns and chip shortages, if they can divert tons to the spot market.
Imports coming up but not quite alleviating.
The demand.
And why why isn't the service center community able to respond and get the.
And that are needed and sort of balance of supply and demand.
Hey, Matt Hope you're doing well.
Boy, that's the that's a mouthful right.
Look I think.
I think if we go back for the last August and we look at the <unk> number of $4 30 for and it wasn't where the prices today youre not going to find anybody.
And then I know that debt really predicted that and I think.
And whether it's weather.
Certainly mostly pandemic related but you see all of these dislocations, whether it's Ben.
Semiconductors labor.
Work force dislocations lack of containers logistical bottlenecks.
Various inputs that just don't seem to be and the right place at the right time Theres just a lot of things that are are being remediated right now as the result of economic reopening that are really a synchronous.
And I don't think and theirs.
I don't think anything is.
That intentional right now I think that you know everything that's been reported as more of less accurate and.
I think this is the response, even though it feels like a clumsy response throughout the value chain. This is a response to the.
Those.
Dislocations that are really quite extreme and stacking on top of one another so and when we look at service centers and what we can get our lead times of extended domestically. They almost tripled since August September of last year of international lead times are longer and are less predictable. The overall have a support of dollar you've got.
The low import availability and international prices of rising.
As economies reopen and as demand for goods and maybe more so than services demand for goods is clearly outpacing supply and we mentioned this and our comments that.
We're still we're still a long ways away from.
What I'll call it inventory parity, where you're really not longer short and your inventory is able to support maybe a midpoint of cyclical demand.
So the demand indicators of appointing our.
Pointing us above.
And average demand when we look back over the last 10 years of the pre pandemic level. So.
Right now there is the positive catalyst far outweigh the negative catalyst right now looking out over the next several quarters and we would expect for supply chain is the repair and for them to incrementally get better I don't think people are holding back capacity.
Intentionally I think everyone's trying to work through bottlenecks that.
Really start with labor frankly, and then move on to other inputs in terms of getting your entire workforce back.
And then being able to apply those resources to backlogs and schedules and Ah.
And of more and more balanced way.
I mean from the from the important point of view it seems like China is ramping up production iron ores just hit another record so that they're not holding back anything.
Is the problem getting steel from other parts of the world to the U S not.
Availability of steel and other parts of the world.
And Matt there's a lot of different of.
And Theres a lot of different cross currents right now I mean, you've got to put some waiting on decarbonization efforts.
Certainly China's consuming most of the or pretty much consuming all of what they're making and they are actually a net importer for the first time and probably I don't know 13 14 years.
And so when you look around the world and you look at these asynchronous recoveries, but you look at how people are trying to ramp up capacity and where it's going.
Clearly the availability of import.
Yeah.
That really is of.
Not.
And I'm really recent memory going back.
Two years three years four years five years 10 years.
Net availability just hasnt been there and that available availability of that is there is price much higher and the longer lead time so.
These things these things are going to take a while I think to smooth out and I think eventually of course, we'll get to some type of equilibrium, where a better balance of what we're seeing today, but the.
It's hard to see that happening over the next three to six months right now I mean.
Hard to see based on based on all the indicators, we have and the information we have so.
Alright, everybody says of the cure for high prices is high prices, but it doesn't the.
And we seem to be breaking that paradigm right now.
Yeah, I mean, there's no shortage of material itself and there's no shortage of information map. That's out there I mean people are talking about okay. Eventually high prices will cause demand destruction or canceled backlogs, but we're just not seeing it right now and this could be a time, where secular growth catalysts and infrastructure.
And and reopening and recovery this could be a time, where we do see a more sustained the.
And more sustained up cycle, and then what you've seen over the last decade.
Okay.
And then on the balance sheet, I think you mentioned and opportunity to reduce debt by $150 million.
I was just kind of wanted to.
Go over how you how you break down that number.
Is that focused on the ABL pay down debt using your special bond redemption features whether its the $50 million of one or three or and equity claw or what just walk me through how you get to 150.
Sure. So there is a.
There is a special redemption feature we have and the indenture that allows us to redeem.
$100 million using real estate sale proceeds and that's it at one of the three and and we can do that anytime.
Theres also.
And second of three we already exercised the first one and October of last year, but there is the second of $350 million amortization options, where we can use general liquidity to.
To reduce the outstanding principal of our high yield notes.
So I mean, it's certainly reasonable to expect as the base case based on how the year is is emerging and how the base cases emerging for the year that we would have the ability to prospectively exercise those options and pay down debt high yield.
Pay down debt high yield note balance take out $12 $75 million of cash interest and accelerate deleveraging take down fixed cash for the commitments and really accelerate that virtuous cycle of fixed cash commitments continuing to fall and we look at fixed cash commitments its cash interest expense its pension contributions.
And its maintenance Capex and so we're getting to a point now where as we mentioned and our comments, where there's two things that we see when we look at Ryerson and we look at intrinsic value and enterprise value clearly, we're getting to a point now where we're liberating ourselves for more of an LBO capital structure, where liberty, we're liberating ourself.
And from these fixed cash commitments that we're really weighing us down and.
And we should have really much better options going forward in terms of how we look at allocating capital to the stakeholders going forward.
Okay, Great and then and then just on the timing of that the $50 million.
And at 103.
And you can't use that again until October of 2021.
No I believe it's I believe it's 12 months from the actual date of the indentures. So it would be it would be August 1st of them.
And if my recall is correct and the August 1st.
We'd be able to notice the noteholders that we intended to redeem the $50 million amortization piece and the real estate piece, we can do as soon as we have proceeds from real estate sales right.
The.
And on the I'm, sorry on the real estate front you sold.
$29 million of proceeds this quarter, you still have about $70 million to go.
$7 million to go on the total yeah 70 million and go into total board My man, yet, but as soon as soon as you do it you can you can the announced the redemption and like the next day.
And I'm going to ring that bell and the town square.
Perfect.
Listen out for that thanks, a lot of Eddy and good luck.
And as always.
Thanks, Matt appreciate it and take care.
And once again that is star one if you would like to ask a question.
And we will now take a question from Alan Weber with robotic advisors.
Oh, good morning, I had a question about when you talk about the warehousing and delivery expenses ex depreciation.
We don't really measure that versus.
And so and I would think over time shouldn't you be able to get that leveraging of the kind of the infrastructure.
And as opposed to just revenue.
Hi, Alan how are you doing.
So should.
And we look we look at it three different ways, we're consistent with how we've always reported it which is as a percentage of revenue are also because we were really looking for expense leverage is.
How are our warehousing selling and.
And delivery expenses and administrative expenses and our selling expenses how are those really reacting to changes.
Changes in the cycle and counter cycle right. So we're looking for for that expense leverage as revenues go up and then of course, we're looking to verbalize our.
Cost structure.
As we get into of counter cycle, and then and then revenues decline on a.
On a price and on a on a volumetric basis, but having said that we look at it three ways, we look at it and we've been reporting and historically as of.
Opex as a percentage of revenue. We also look at it as a percentage of gross margin.
There are times and you make investments.
And in capabilities, where you expect to get gross margin to justify the incremental cost of surf or an incremental investment and and machinery and equipment and then we also look at it as you mentioned and you look at it volumetric we as well.
Okay that was really minor.
I mean, but again all things considered over time.
You should be able to get some leveraging of.
And the relative to volume.
Yeah, absolutely I mean, we.
We have initiatives that are ongoing and the company to get those efficiencies and get that productivity up I mean, I'm really pleased to say and really just have the compliment all of my Ryerson teammates productivity has been up significantly over the last six months, particularly and the first quarter and that's and that's that's a difficult.
That's a difficult equation of balance right now just given all of the different upsets that have been caused by the pandemic.
Productivity is on the rise of safety performance has been really really good and and we have projects underway to always optimize our footprint. We have of project and the company Thats headed by John Worth called project Copernicus, and we look at.
How to optimize the Ryerson network consistently in terms of facilities footprint equipment positioning and inventory positioning and and how we make the most of that network.
Okay, great. Thank you.
Thanks, Al and take care.
And Anthony and final reminder of that is star one of you would like to ask a question and well pause for just a moment.
And it appears there are no further telephone questions I'd like to turn the conference back over to Mr. Weiner for any additional or closing remarks.
Thank you. We appreciate your continued support and interest and riders and please stay safe and well and we look forward to being with all of you again in August when we review our second quarter results take care.
And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.