Q2 2021 Ryerson Holding Corp Earnings Call

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Okay.

Please standby were about to begin.

Good day, everyone and welcome to the Ryerson holding Corporation second quarter 2021 Conference call. Today's conference is being recorded at this time of day turn the conference over to MS. Justine Carlson. Please go ahead ma'am.

Good morning, Thank you for joining Ryerson holding corporation second quarter 2021 earnings call and here. This morning, with Eddie later writers and the President and Chief Executive Officer, Mike Burbach, Our Chief operating Officer, Jim Costa and our executive Vice President and Chief Financial Officer.

Here and now.

And the cannon, our controller and Chief Accounting Officer.

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 that could cause actual results to differ materially from those implied by the forward looking statements.

The 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 31.2020.

You are cautioned not to place undue reliance on these forward looking statements, which speak only as of the day. 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 the non-GAAP financial measures discussed on today's call. So for the most directly comparable GAAP measures is provided in our second quarter 2021 earnings release filed on form 8-K yesterday, which is available on the Investor Relations section of our website.

I'll now turn the call over to Eddie.

Thank you Justin and thank you all for joining US this morning to discuss our second quarter of 2021 results.

I would like to begin this morning by thank you and all of my Ryerson teammates for executing and extraordinary quarter as we posted our strongest quarterly revenue since 2008 and record adjusted EBITDA excluding LIFO.

Every day across the organization, we demonstrated our say, yes and figure it out culture by always finding a way to get the job done safely amidst an environment of rolling turbulence.

And also want to thank our customers for every opportunity to earn your business and our suppliers for their continued support in this pandemic infused supply constrained economy at the macro level elevated pricing dynamics are and ongoing consequence of supply.

Being unable to meet demand and the short term, but there are cyclical and secular factors signaling.

Longer duration recovery for fixed assets and manufactured goods.

And we emerge tenuously from the pandemic and its unpredictable twists and turns.

We see supporting variables of monetary policy physical policy trade policy demographics infrastructure investment the carbonization domestic supplier consolidation and demand fundamentals as net favorable again ongoing public health risks labor shortages and supply.

Si dislocations and.

And geopolitical volatility, we're not declaring and and cyclicality in our industry, but noting strong secular growth underpinnings that have been suppressed for a long time as.

And as well as changing societal need favoring recyclable industrial metals, and likely higher floors and ceilings for demand and price over the next several years.

Relating this base case environments of Ryerson and through the first half of the year and looking forward, we have realized favorable operating leverage because of decisions made and actions performed since our IPO in 2014 that are enabling us to build a stronger and better Ryerson under all conditions, we have manage the business.

<unk> well, despite being far from perfect.

Evidenced by our EBIT generation debt reduction of legacy liabilities, you're risking the asset monetization and working capital management expense management and safety performance.

And what we believe is the future trajectory of the company given present conditions past performance and confidence and the ongoing execution of our strategic plan around the customer experience Ryerson Board of directors approved 2 new and vital elements to our capital allocation plan and 8 cents per share quarterly dividend.

And of $50 million share repurchase program.

This is the confidence marker and a clear indication that the enterprise value shift from debt to equity is underway and that the.

The multiple.

Is more of a relic of the past that of fair evaluation representation of the present and future I'll now turn the call over to Mike to discuss the second quarter pricing and demand environment.

Thank you Eddie and good morning, everyone.

Turning to the commodity environment, the price increases and carbon products that began in the second half of 2020 and continue to decline as lead times remain extended.

No capacity has been above 80% for the past several months and futures prices remain elevated through the year.

Likewise <unk> aluminum ended the second quarter of approximately 11% above the first quarters and Dean price. It has continued to rise into the third quarter.

<unk> global demand against the tightening supply conditions, driven by recently announced export fees in China and Russia for example.

Yes, let me nickel price and similarly appreciated during the quarter rising approximately 9% and the same periods supported by strong demand constrained supply and longer term secular events around electrification.

At this point, we anticipate the prices across the 3 of our primary commodities will remain elevated through the third quarter.

And that price normalization will be gradual given supportive demand conditions and longer term trends.

Expanding on the demand environment macroeconomic indicators continue to report improved conditions and the second quarter.

The ISO manufacturing PMI index right.

Above 60 for each month, and the second quarter, well above the growth threshold of 50.

The U S industrial production reported strong year over year growth rates against the pandemic environment experienced last year.

While north American industry shipments and.

The measured by the Metals Service Center Institute, or MSCI reported relatively flat volumes quarter over quarter right.

<unk> North American volumes and the same periods grew by 2.9%, resulting in the market share growth.

Turning to Ryerson second quarter customer activity.

No the shipment improvement and our industrial equipment and for.

Food and agriculture sectors on a per day basis compared to the first quarter of 2021.

We also noticed sequential strength and <unk>.

Ground transportation sector, and we continue to receive positive demand forecasts for these customers, despite persisting and supply chain challenges.

However, our consumer durable metal fabrication of the machine shop, and Hvac's sectors reported declines relative to the first quarter of 2021.

All of the North American per day basis as backlog turnover has been hampered by ongoing supply side disruptions.

With that I'll turn the call over to Jim for a third quarter outlook.

Thank you, Mike and good morning, everyone.

Building on the market dynamics that Mike discussed.

We remain mindful of the challenges posed by our current operating environment right.

Ryerson is optimistic for the third quarter business environment, and anticipates reported another record quarter.

At this point pricing across all 3 of Ryerson primary commodities continues to be elevated.

And we are expected to soften modestly affected by normal seasonality and the.

And I can reduce volatility and ongoing supply side tensions.

Therefore, ryerson anticipates third quarter 2021 revenues of $1.5 billion to $1.6 billion.

Assuming sequential average selling price growth.

10% to 12%.

And shipments flat to down 3%.

LIFO expense in the third quarter is expected to be and the range of $88 million to $92 million.

As replacement costs continue to increase relative to average inventory cost.

Given these expectations.

Just and EBITDA, excluding LIFO is expected to be and the range of $208 million to $212 million and earnings per diluted share are expected to be and the range of $1.63 to $1.73.

Turning to Ryerson and asset management in the second quarter inventory days of supply increased to 63 days.

And from 61 days and the previous quarter.

Our inventory levels remained slightly below our through the cycle target range, but are reflective of the industry wide supply tightness low channel inventories and the effective inventory management practices.

Our inventory levels, coupled with continued management of our receivables and payable cycles resulted in a cash conversion cycle of <unk>.

The 5 days.

Our free cash flow was strong at $126.3 million and our average free cash flow yield was 23% and the second quarter.

Capital expenditure investment and the quarter totaled $6.8 billion for.

$13.3 million year to date.

Ryerson continued focus on deleveraging and Derisking the balance sheet.

Yielded a substantial reduction of our annual fixed cash commitments over the past few years.

This effort led to the newly announced the capital allocation plan, which provides additional returns of shareholders, while still allowing us to continue our deleveraging path and provide ample liquidity to fund our growth initiatives.

Celebrating 3 years within the Ryerson family Central Steel <unk> wire company for CF and W has made remarkable progress on its transformation since the acquisition.

CSW as effectively repaid $107 million of.

It's $164 million adjusted purchase price through working capital optimization of the loan.

Realized $50 million and 3 year structural cost takeouts.

Sold non core assets of $44 million.

Completed the ERP conversion to <unk>.

And introduced proprietary software and systems to the business.

And all over the 3 year period, the <unk> ROI is.

The expectation and it operates at a much stronger franchise today.

For the second quarter.

<unk> generated $140 million and revenue.

Proximately $20 million and adjusted EBITDA excluding of LIFO.

For approximately $250 million and $30 million, respectively for the first half of 2021.

With further capital improvement plan, we are optimistic about <unk> future as the business progresses towards its annual and long term mid cycle target of $600 million and revenue.

And $50 million and adjusted EBITDA, excluding LIFO.

Now I will turn the call over to Molly.

Further detail on our second quarter financial results.

Thank you Shannon and good morning.

And the second quarter of 2021, Ryerson generated revenues of 1 for 2 billion, which exceeds the range communicated and our second quarter guidance with average selling price was up 20.

Percent and volume up 2.9% Q1, 2020.1.

Gross margin expanded to $18.1 per cent compared to 17 point for.

But the first quarter of 'twenty 'twenty 1.

Selling price growth outpaced inventory.

Reflective of the environment continued rapid and escalating industrial metal price increases, most notably and carbon steel and.

And it and second quarter 2021 gross margin as the LIFO expense of 105 million, which exceeded the previous periods of LIFO expense of $84 million.

Excluding the impact of lifestyle second quarter gross margin expanded by 90 basis points for the first quarter of 2021 to 25, 5%.

Net income attributable to Ryerson holding corporation for the second quarter was the 113 million or $2 and 91, and that's principally of the share compared to net income of 25 million or 66 cents per diluted share for the previous.

Included in second quarter 2021, net income is a gain on the sale of assets of 87 million related to the sale leaseback transactions completed during the period.

Putting opportunistic monetization as other.

<unk> of Ryerson of ours.

And the appreciated industrial property portfolio.

These transactions, which generated net proceeds of approximately 137 million and enabled the company to improve the capital structure.

And out higher cost debt and its related interest expense.

Adjusted net income attributable to Ryerson holding corporation of excluding the gain on sale of assets and the associated income taxes was 48 million and for the second quarter of 2021, or a dollar and 24 cents per diluted share.

This compares the first quarter 2020, 1 of adjusted net income of $10 million or 26 cents per diluted share.

This excludes the gain on sale of assets and the associated income taxes.

Ryerson generated adjusted EBITDA, excluding LIFO of $197 million and the second quarter of 2021 and increase of 74 million compared to the previous quarter.

The results since the perspective.

Our adjusted EBITDA, Excluding LIFO was 321 million and the first 6 months of 2021, which not only exceeded the first 6 months of 2020 of <unk>.

And 55 billion, but also exceeded full year 2000, eighteens $308 million, which was our previous period and which we saw record results.

And that's Ryerson was acquired by platinum and the 2007.

Ryerson decreased total debt during the second quarter by 141 million of through repayments for the asset backed credit facility.

As a result of this reduction and are increasing and trailing 12 month adjusted EBITDA, excluding LIFO and the company achieved a leverage ratio of 1.5 times for the quarter down from 3.3 times and the first quarter of 2021 and well within our long term strategic target range.

Of 1 to 2 times.

In addition, we furthered our financial transformation during the quarter I closed and the aforementioned sale leaseback transactions and.

And utilized the proceeds to repurchase the 100 million of our outstanding 8.5% senior secured notes due 2028.

At a price of 104% in July.

During the quarter, we also announced our second $50 million notes redemption, and a price of 100 of 3%.

These July redemptions decreased the amount of our outstanding senior secured notes the <unk>.

300 million.

The decrease of 40% compared to the original 500 million principle.

This $200 million reduction and the notes has reduced our annual interest expense by $17 million.

At the same time Ryerson of liquidity again increased significantly and the company ended the second quarter with $890 million of global liquidity.

This increase was driven by proceeds from the sale leaseback transactions and excellent working capital management as well as the Companys rising adjusted EBITDA excluding LIFO.

And all Ryerson and second quarter results highlight both our improved operating model and the important balance sheet and improvements we have made to date.

That I will turn the call back over to Eddie to conclude.

Thank you Molly.

As we move through the third quarter, we remained resilient amidst the persisting challenges.

<unk> 2 of our self help strategies and above all optimistic about ryerson future as we see proof that our advancements are synchronizing and compounding.

While Ryerson and durability has remained intact for 179 years, we are not the same company that we were just 7 years ago.

Our improved operating model is producing strong results and our financial transformation is taking shape, enabling us to reduce our leverage multiple and fixed cash commitments and.

Instead Ryerson is entering its next phase with higher through the cycle earnings stronger free cash flow generation and increased investments in digitalization and value add capabilities.

All of this reconstruction and delivers greater value to shareholders.

Both through our new quarterly dividend and through equity value of accretion as we continue to create exceptional customer experiences and speed and scale through our intelligently interconnected network of service centers.

With that let's take your questions operator.

Thank you, Sir if you'd like to ask the question. Please do so at this time by pressing star 1 on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again that is star 1 if you'd like to ask the question.

And for just a moment to line everybody of the opportunity of the signal.

And we will take our first question from Michael the shock with Keybanc capital markets.

Hey, good morning.

Good morning, Michael.

So my first question I just wanted to ask in terms of daily demand. What did you see in July versus <unk> as the whole.

I'm just trying to get a feel for the cadence of momentum that you saw in the quarter.

Yeah.

Yes, im going to kick it over to Mike and just the second I would I would preface it by saying that.

Demand was slower coming out of the extended for the July holiday and.

It's very consistent with what we noted and the release and in the script around there being supply side constraints that are kind of throttling or metering backlog realizations Mike.

Yes, Thanks, Eddie and Hi, Michael I think Eddie you hit it right you know July historically has had some seasonal issues.

Which which was true again this year, but I think besides what we see in the numbers what were hearing from our customers is positive sentiments remains strong we continue to hear about the build schedules that are growing and and the number of end markets.

But we also continue to hear about the challenges that our customers are facing with labor and different supply chain challenges. So it's a good message I think the demand is there I think it's a reality that.

Sometimes of.

And our customers have more demand and we were able to produce but the backlogs are growing.

Got it and.

And is there any incremental opex creep that youre seeing and the third quarter.

Given any any further inflationary pressures and and if there are what are the primary costs that are driving that whether it be labor freight and raw materials or otherwise.

Yeah, we've been we've been pleasantly surprised and that we know that the.

The the cost push pressures of certainly.

Very apparent throughout the economy and and the industrial economy.

Done a really good job verbalizing, our cost structure. So we're seeing cost increase.

Much more on the variable side of the ledger, whether it is variable compensation awards and things that really.

Move up and down with volume, but certainly there is some cost inflation through the value chain and I'm going to go ahead and kick it over to John <unk> and John can give you a little bit more color on that.

Thanks, Eddie Hi, Michael.

There are definitely inflationary pressures that we encountered throughout the year looking into Q3, though however, we feel our work around optimizing our India and supply chain and looking at best practices from an operating perspective, we are offsetting.

As many of those as possible freight and.

As you know continues to be a very tight market. However, it appears to be easing slightly and once again the algorithms that we are developing around managing our interconnect and freight network allow us to offset as many of those as possible.

Got it that's very helpful.

And then I.

Wanted to ask on the Mark what market from an end market perspective are stronger than others, and specifically within oil and gas I wanted to get your take what youre seeing there given the oil price run up and maybe the beginning of some modest improvement in Capex budgets.

What's your outlook there.

Yes, I mean, starting with the oil and gas I think the keyword is modest and I.

I think theres a lot of information.

And the in the General press supporting the idea of that investment is going to be gradual in terms of offsetting decline curves and hydrocarbon extraction.

But we're seeing we're seeing really.

Really strong demand report out it's just getting of that demand is getting through those backlogs with the input constraints and we see those backlogs extending and rolling over and I'm going to I'm going to kick it over to my brother, Mike Burbach, and he's going to give you some more info on that.

Thanks, Eddie and.

And Michael again, so, yes, Eddie Eddie touched on what we're seeing and oil and gas.

I would say incremental at this stage of our volume in Q2.

Relatively flat compared to Q1 and in that space.

We think we will continue to see incremental gains we're.

We're seeing the inventory levels and the supply chain normalizing a bit so that that could change the dynamics of little bit, but right now lots of puts and takes that are keeping large swings happening from 1 way or the other due to the supply chain challenges be up beyond oil and gas as we noted and the.

And the release, we saw some end markets are sequentially showing improved conditions and <unk>.

Just real equipment food and agriculture commercial ground transportation.

All 3 of which continued to grow as the year progressed.

And the story is that he mentioned is positive.

And the feedback we get on backlogs, and then and future production requirements that the our customers are expecting us to help them come.

Come up with the materials is pretty solid there were some softness in Q2, but I wouldn't say it was something too.

And get alarmed about consumer durables and HVAC in particular.

And they've been very strong and markets for us.

Through the pandemic and the early part of this year and they had a little slight decline and in Q2, but remain very strong and.

And our fabrication and and machine shop and.

And markets as well ahead of its.

The softness in Q2.

1 of the things that would know Michael is that some of the and markets that were lagging.

For the pandemic and even through the early stages of the reopening are really starting to come around and it's more of a backlog of it's more of a backlog turnover.

Challenge, but some of the more lagging verticals, especially around.

Machinery and equipment, whether it's in AG and mining more ore general machinery and equipment supporting the broader industrial economy and really were.

Cyclical and secular investments are going we're starting to see.

Starting to see real pickup and activity across those end markets, which is a real positive for us.

And then lastly for me how much of your tap the import markets given how tight domestic capacity has been and any color you could give around imports going forward. Thanks.

Yes.

Look I think I think imports are sort of the comforting of extraction at this point and even though the numbers are up and they tend to be more of it tends to be more flat slab oriented. There is the more finished product coming in but the lead times are all over the place and they are extended and long and I think with some of the.

The recent.

Indicators.

From the pandemic and the variance getting getting those orders filled and getting them dependent dependably.

And across the water is the continuing challenge so theres no theres no doubt the I think folks are going to are going to look to import more as a relief valve, but we we are not.

We're not importing more and and we really don't see the opportunities as being all of that attractive relative to the risk.

Yes.

Great. Thanks, guys for the color.

Alright, and once again that is star 1 if you'd like to ask the question. We'll go next to Joel <unk> with BMO.

And that's quite an entourage of your buildup over there.

[laughter], if the hell of it teams all of its a hell of it yeah, you got everyone's everyone definitely deserves a lot of credit. This is unbelievable from since the first day I met you pretty a pretty amazing transformation.

Is there anything you'd get it.

We keep getting better and you keep cash and bigger fish.

Yeah, I don't know about the.

Is there anything to read into the receivables going up anything worrying people not paying or is it just that the extraordinary the selling off of some of the receivables.

I'm going to I'm going to ask Jim Claussen, and give you a little bit more color I would tell you in general.

Our credit our credit team and our risk management team has done an outstanding job.

Our exposure.

And has improved frankly, our bad debt experience is down.

Our collection cycles as you can see have improved it is real.

Is it really volumetric and it's.

It's the inflation driven so it's more of it's better quality and working capital assets of of higher value, but I'll I'll spin it over to Jim.

Yeah, Thanks, and Hi, Joel.

Eddie hit on it really the increase in receivables is is simply revenue driven revenue side, driven our collection cycles are good and.

Really.

And nothing of any consequence on the.

And the bad debt side so.

Folks are folks or folks are paying current and really it's just a reflection of the AR.

Revenue growth.

Okay, and can you give us any sort of stab at what year and 'twenty 'twenty 2 debt looks like.

Looking out to year end 2022, I just wanted to really wanted to stay on the on the space side of the zero of I would say the past is prologue. It there was the time as you know 6 years ago, when we manage.

For the 11 times leverage and we took that we took that high yield debt for 950.

Sitting out there and 300 right now and what we indicated and the releases and you look at the trajectory just based on precedent events and you look at our history. I think you can model very easily where where that high yield piece of winds up.

As we come upon our first call the and so we're going to take we're going to continue to deleverage.

And the most intelligent way possible, but I think as we also indicated given the amount of liquidity liquidity, we have and given how we see the Ryerson operating model working going forward.

We're playing a much better hand, then we Bob and we've been able to play for a long long time. So we're going to continue to delever. So those multiple stay within that 1 to 2 range throughout the cycle and we also think we're going to have opportunities to invest more of the business and return capital to shareholders.

And then just last 1 and while you guys are puffing out your chest a little bit here is there anything like if we think like transformative Lee over the next 5 years like.

Or there are things that that really make a lot of sense like you always have such a great vision of of where the industry is going and how you guys are going to be unique and all of that is there a sort of you know potential for merger of equals or is it is it better to.

To focus on sort of building out your technology and being able to support all of the the Evs and all of the different direction that we're going in from a lower carbon standpoint.

Yeah, I mean look we keep our eyes and ears open as far as I've always said debt.

And there's a little bit of what I'll call safe cracking going on where you got to get 1 Tumblr at a time and you got to take them and the right sequence you got to take them in the right order.

Sequence is really important in terms of when you decide to do so.

We did a major acquisition as you know when we when we did central steel <unk> wire and.

And that was that was the heavy lift and it's working out great and the team has done a phenomenal job and I mean, everybody involved has done a phenomenal job. So we've shown that we'll take some big swings, but I think right now the <unk>.

Sequence of events is around.

Building future state systems, getting some capital back to shareholders and really.

Finishing the work that we've that we've done.

Around the balance sheet, but we'll keep our eyes and ears open and we've got a we've got a very strong.

Bolt on pipeline and.

We're always running different scenarios, Joel thinking about what might what might make really good sense.

And the future, but getting that sequence right is really important.

Okay, great and there's always the.

The suck up analysts to congratulate the management team, but I think you guys really deserve at this time.

No.

So we really appreciate it thank you okay.

Okay.

Alright, and once it kind of everyone that is star 1 if you'd like to ask the question, we'll pause for some other moment everybody of the opportunity of the signal.

Okay. So it looks like we have no further questions at this time I would like to turn it back over to Mr. Eddie Lehner to have any additional or closing remarks.

Thank you very much so I just want everybody out there to stay safe be healthy and we look forward to seeing you.

And on our next earnings call take care.

And that does conclude today's call. We thank everyone again for their participation.

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