Q2 2022 Ryerson Holding Corp Earnings Call
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Good day and welcome to the Ryerson holding corporations's second quarter 2002 conference call. This conference is being recorded. There will be a question-and-answer session later. If you'd like to ask a question, please press star one on your telephone. Keep ad at any time. Again that is Star one to ask a question.
At this time. I'd like to turn the conference over to or hay beriststain. Vice President, finance. Please go ahead, sir.
Good morning. Thank you for joining Ryerson holding Corporation. Second quarter 2022 earnings call. On our call we have Eddie laner, Ryerson's President and Chief Executive Officer, Mike burbck, our Chief Operating Officer, Jim clawson, our Chief Financial Officer, and Molly cannon, our Chief accounting Officer and corporate Controller. John orth, our Executive Vice President of operations, will be joining us for QA.
Certain comments on this call contain forward-looking statements within the meaning of the federal securities laws. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those implied by the forward-looking statements, and are not limited to those set forth under risk factors in our annual report on Form 10-K for the year ended December 30 first, 20 and 20 one. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made and are not guarantees of future performance. In addition, are remarks today refer to several non-GAAP financial measures and are intended to supplement, but not substitute for, the most directly comparable GAAP measure.s, a reconciliation of non-GAAP to the most directly comparable GAAP financial measures, as provided in our earnings release filed on Form 8-K yesterday, also available on the Investor Relations section of our website. I'll now turn the call over to Eddie.
Thank you hohey, and thank you all for joining us this morning to discuss our second quarter 2022 results.
As the second quarter of 2022 gave us yet another strange brew of challenges to surmount, I want to express my heartbelt banks to our 4000 -plus strong Ryerson team for their hard work and dedicated effort in delivering a safe and profitable quarter characterized by many important actions and accomplishments toward and always improving Ryerson.
Although we always prefer the upcycle to the countercycle, we found the signs and signals of a countercycle by the middle of the second quarter. That continued into July .
The market environment we experienced in the second quarter was characterized by declines in metals commodity prices and decelerating demand. During this time, we noted some customers continuing to experienced supply side and labor constraints. We noted another subset of customers temppering spot materials purchases amidst falling metals prices and another set of customers that saw order rates decline during the quarter due to broader inflationary pressures and shifting consumer spending priorities for a triple whaming of countercyclical activity.
These occurrences presented some resistance to our demand estimates for the quarter. Despite these challenges, Ryerson managed well through these volatile economic and industry inflections by delivering.
Diluted earnings of $5 in 10 cents per share and adjusted diluted earnings of $5 and 31 cents per share, both all-time records for the company.
This second quarter represents an important milestone in our company's history and our capital structures, composition and strength.
During the second quarter and is noted in our subsequent events disclosure. We retired the remainder of our hyield notes, reduced net debt, lowered cash interest cost, completed our share buyback amended an. Extended our asset-based credit facility, increased liquidity, increased the dividend, announced a new and larger share repurchase authorization, increased net book value and made important growth investments across our service center network in new plants, equipment and systems to further our company's potential and enhance the customer experience.
Now that's a list of accomplishments of which we can all be proud that are worth repeating.
Over the past decade, we have used these countercycles to good effect, as higher cash flow generation through such countercyclical periods has enabled rierson to meaningfully improve its operating model. Only now we have much preferred uses for that free cash flow, as seen through increased investments in modernization and growth, as well as increased returns to shareholders through dividends and share repurchases.
Ryerson's continued execution of its strategy to drive long-term profitable growth amidst positive secular drivers. Supporting such growth opportunities can be seen through increases in planned infrastructure anddecarbonization investments, underpinned by supply chain onshoring and increased demand for recyclable and sustainable industrial metals. With that, I'll now turn the call over to Mike to further discuss the pricing and demand environment.
Thank you Eddie, and good morning everyone.
Now turning to the pricing and demand environment.
Metals commodity markets experienced volatility in the second quarter of 2022 and at a global macro level, we are seeing carbon, stainless and aluminum TRIM lower.
This has been driven by international factors, including decreasing demand from China's coed-related shutdowns.
Russia's invasion of Ukraine.
Continuing pandemic knock-on effects, as well as domestic deceleration of demand due to rising interest rates, as well as a slowdown in industrial purchasing activity.
Over the past three months we saw a faster-than anticipated reversion in nickel prices.
The sharp decrease in prices impacted ryarson's stainless steel volumes.
Where our customers pivoted from building inventory in the first quarter to just-in time buying later in the second quarter.
The increase of nickel prices on the London metal exchange, or LME, in March, along with increases in stainless crap, Chrome and other alloys, led to a 10% sequential increase in average sell prices, or ASP, of our stainless steel product mix in the second quarter of 2020 -two.
The increase in stainless steel ASP was offset by an 11% sequential decline in sales volues.
Due to the previously mentioned factors, as well as an increase in steainless steel imports in the quarter, which were additive to competitively priced inventory.
Carbon deals represent half of ryarson sales mix.
And experienced a revenue decline of 3% sequentially, as an approximately 1% higher quarter-over-quarter sales volume growth was offset by a 4% lower ASP.
Our aluminum franchise delivered another solid result.
With 2% higher volumes sold sequentially in ASP gaming: 10% quarter-over-quarter.
In the second quarter of 2022, Ryerson reported net sales of $1.74 billion.
Which came in slightly lower than guidance.
Benefiting from sequentially higher ASP per ton, but impacted by weaker-than forecasted steamless steel volumes.
Ryerson's higher ASP per ton, sequentially gaining zero 0% to $3.327 thousand in the second quarter, was driven by favorable pricing in aluminum stainless steel and partially offset by decline in the price of hot rolled coil quarter-over-quarter.
The benefit in pricing was offset by lower volumes declining in zero 1% quarter-over-quarter, driven by weaker-than-expected stainless steel volumes.
With respect to Ryerson's end markets.
At a macro level, key industry indicators are showing a slowdown in growth in the second quarter of 2020. -two and.
While U's industrial production has reported a 4% year-over-year increase in June .
The year-over-year increases have been slowing over the past three months. At the same time, global metals commodity prices have trended lower in the second quarter on increased material availability, shorterly times and slowing demand.
Additionally, the U's purchasing managers' index, or PMI, while still above the growth threshold 50, reported continued slowing growth in frfactory activity in July .
North American industry shipments, as measured by the metal service center Institute, or MSCI, grew at a moderate zero- 0% quarter-over-quarter compared to a zero- 1% decline for rerson's North American volumes.
However in the first half of 2022, Ryerson's North American business performed better than the msa- MCI defined North American service center industry, with ryarson's volumes declined in 3% compared to an industry declined of 4%.
Ryerson's sequential volume shipment performance was led by an approximate 7% increase in oil and gas.
A 4% increase in commercial ground transportation and a 2% increase in metal fabrication and machine shops.
Most other end markets experienced declines in volumes.
The outlook for North American manufacturing for the second half of 2022 remains cautiously optimistic.
However we expect headwinds of rising interest rates.
Continuation of supply chain issues, as well as a slowing in demand.
Our discussions with customers led us to believe that supply chain issues, such as component shortages and tight labor, continue.
And while some backlogs remain healthy, there is evidence of customer destocking.
Moderating quoting activity and smaller size spot transactional purchases.
From a pricing side, three months ago we had expected stainless and aluminum pricing to remain favorable into the second half of 2022, reflecting an improved secular demand outlook.
However.
The federal reserves's inflation fighting actions, plus weaker-than expected China economic data, have contributed to a sharp reversal in many commodity markets.
Through the end of July .
Although we note a recent stabilization in LME aluminum and nickel prices, admitsst.
Historically low exchange inventories.
With that, I'll turn the call over to Jim for our third quarter outlook.
Thanks Mike. Good morning everyone.
Ed y's comments summarized how the second quarter was an important milestone in our capital structure transformation.
The reconstitution of our balance sheet paves the way for us to reinvest in the business, as well as providing capital returns to shareholders.
Looking forward, we acknowledgeed that the outlook for both volume and pricing has moderated into the second half.
As such, we expect third quarter revenues.
To be in range of one point four five to $1.55 billion, with ASP down four to 8% and sales volumes expected to be down four to 6% sequentially as customers assess the impact of the Federal Reserve tightening cycle and the typical summer seasonality kicks in.
While global metals related commodity prices have corrected.
They remain above ten-year averages.
And based on the most recent forward curves, we now forecast LIFO income at $35 million in the third quarter of 2020 -two.
Adjusted EBITDA for the third quarter of 2022, excluding LIFO, is expected to be in the range of 110 to $12 million, and earnings are expected to be in the range of $2 and 40 cents to $2 and 60 cents per diluted share.
Now turning to the company's cash flow and balance sheet.
The company's cash conversion cycle increased slightly to 78 days in the second quarter of 2022, compared to 77 days in the first quarter.
Accounts payable and receivables were favorable by a cumulative $61 million but offset by $174 million inventory build or a networking capital use of $113 million in the second quarter.
We expect this to be the high mark, as lower commodity prices imply a working capital release going forward.
Overall Ryerson generated $85.5 million of operating cash in the same.
And ended the period with $534 million of total debt and $492 million of net debt.
A decrease in net debt of $14.5 million compared to the first quarter.
Ryerson's leverage ratio remained flat, quarter-over-quarter at zero: five X, a record low since our IPO in two thousand and fourteen.
The company's available global liquidity increased $894 million as of June thirtieth 2022, from $76 million as of March thirty-first 2022, due to the successful increase of our revolving credit facility from one to one point three billion dollars during the quarter.
While the sequential net debt reduction was $14.5 million, compared to the $67.7 million of free cash flow.
It is important to note that $52.4 million was returned to shareholders in the form of share repurchases and dividends. During the second quarter of 2022 we.
Additionally, during the second quarter, the company incurred $14.5 million and losses on retirement of debt related to the early high-yield bond redemption, which are nonrecurrent.
Capital expenditures were $24 million in the second quarter of 2022, compared to 18.8 million in the first quarter.
We reaffirm our anticipated capital expenditures, excluding acquisitions, of up to approximately $1 million for 2020 -two.
This amount comprises both maintenance and growth projects related to digitalization initiatives and our service center modernizations in centralia, Washington and University Park, Illinois.
During the second quarter and concurrent with our controlling shareholders, secondary offering Ryerson repurchased one point six million shares of our common stock.
These repurchases exhausted our previous $5 million repurchase authorization 14 months ahead of expiration.
The Board has approved a new two -year $75 million share repurchase authorization, which we expect to deploy opportunistically.
During the second quarter and through July .
Through a combination of open market purchases, a tender offer and the exercise of a special redemption right in July .
We retired the entirety of our $237 million, gaining outstanding 8% senior secured notes.
The retirement of our high-yield debt is expected to save Ryerson over $2 million in annualized pretax interest.
Finally on August third, Ryerson's Board of Directors declared a third quarter cash dividend of 15 cents per share of common stock.
A sequential increase of 20% from the second quarter. Dividend of Twelve point a half cents per share.
With this, I'll turn the call over to Molly to provide further detail on our second quarter financial results.
Thank you Jim, and good morning everyone.
Ryerson generated revenue of one point seven four billion in the second quarter of 2022 and gross margin expanded by 320 basis points to 27%, up from 24% in the first quarter of 2022, as conceptant of sold reflected lower costed carbon steel material.
Included in gross margin is LIFO income of 73.8 million, a reversal from the two point two million LIFO expense both in the first quarter of 2020 -two.
Excluding the LIFO impact. Second quarter gross margin contracted by 110 basis points from the first quarter of 2022 to 22%.
In the first quarter of 2022. We discussed our election to recognize the interim effects of the LIFO inventory evaluation method by projecting expected year-end inventory levels and LIFO costs and pro rada allocating that projection to interim quarters.
We believe this change is preparferable as it resulted in a better estimate of LIFO for the full year and typically creates less volatility in earnings on an interroom basis. However, the second quarter sharper and sooner-than-expected commodity price corrections resulted in the higher-than forecast LIFO income of 73.8 million, versus our prior guidance for zero.
Net income attributable to Ryerson for the second quarter of 2022 was 196.4 million, or $5 in 10 cents per deuted share, compared to 163.6 million for $4 and 17 cents per deuted share in the previous quarter.
The second quarter includes a charge on the retirement of debt of 14.5 million and the $3.8 million gain on the sale of assets.
Excluding these onetime items and the associated income taxes, adjusted net income attributable to Ryerson was 204.4 million, or $5 inand 31 cents per diluted share, compared to one hundred and Sixty seven point five million, or $4 in 27 cents per diluted share for the first quarter.
In closing, Ryerson achieved adjusted EBITDA excluding LIFO of 224.2 million in the second quarter of 2022, compared to first quarter 2022 adjusted EBITDA excluding LIFO of 250.6 million.
And with this I'll turn the call back to edbie.
Thank you, Molly. At Ryerson, our mission is to create great experiences for our customers employees shareholders, suppliers and communities.
Our ongoing development of, and investment in, and intelligent network of, value-added industrial metals service centers. Delivering industrial metal solutions with joy speed, scale and consistency is the backbone of these efforts.
The world of today and tomorrow.
That provides for a better quality of life and broader-based prosperity will be largely created and built with recyclable and sustainable industrial metals. That is, wide metal matters. Agile experience when visiting us.
At Ryerson com and why the build-ma movement at MSCI org are so vital and imperative. Let's keep advancing together and with that let's take your questions operator.
Thank you. If you'd like to ask a question, Please signal by pressing star one on your telephone keyp. If you're using a speaker phone, Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question.
And our first question today comes from Alan webber- with roboti.
Oh good morning.
First first question is: when you talk, when you look at through, when you think about the second half of the year, how much cash do you expect will be generated out of the work at a change in working capital?
Hi M good morning, are you doing?
Good Thank.
Yes we expect to be certainly working capital release. In the second half of the year. I wouldn't give you a number. I would only tell you that past as prolog if you go back and you look at what the working capital release has typically been and then you.
Apply a ratio to.
How our overall working capital balances have changed in this.
Cycle versus prior ones.
You can get a pretty good idea what the cash releasees.
To be, but we expect to have working capital release to the balance.
Here ok, and then any any. Your general question. You know, a few years ago in these kind of presentations you talked about, you gave like A- I want to say a longer term target. You talked about, you know, 350 to four million of EBITDA. You gave an EBITDA margin projection. Can you talk about, given the improvement in the balance sheet today, where things stand, how you think about the company, say five years out?
I mind sh projection. Just just a thought process in terms of you know again, because even the target back a few from only a few years ago you would targeting two times leverage and obviously that's not the case today. Just is curious how you think about the business, the competition and like that, because everybody, I assume, has improved balance sheets also.
Sure sure. So look, first of all. I like the sound of that.
But going back to and I remember we had, we had an investor meeting sever several years back in New York.
And we put down next-stage targets of.
Gross margins which we.
Which we pegged 20% at that time.
Market share gains of getting up to 6% of the market. We did give somewhat of a bracketed next cycle EBITDA.
I think of 35 million, of memory serves.
That was in our presentation materials and I would say that.
We surpass those metrics, those KPIs over the last.
Say five to six quarters.
But when we we look at midcycle, we look at through the cycle, going forward. I would say that we've positioned ourselves very well.
In terms of being able to assess what I would say next stage targets.
Are going to, are going to be from here. We've got an Investor Day coming up in November , which I really hope by ceu at, and at that time, at that Investor, I thinkwewillll be in a much better position.
To share with those nets.
nextstage targets are going to be, but so far mission accomplished.
Okay if you you just talk about it as you think about besides, the recycling of metals, how you think about you know, you know in the industry the improvement and how you expect to you know. Think about market share over the next few years, excluding any acquisitions.
Yeah I think that first of all very.
On a secular medium-term long-term basis I mean we always have these cycles and counter cycles and.
The world is certainly a very interesting place at present.
But I will tell you the long-term future of industrial metals. We're very optimistic and bullish about that.
Future when you look at now. Now I've said this before: all people can make all kinds of.
In the short term, they can defer spending.
They can go without, do without, but I think what's been demonstrated you look at. Well, how do you?
How do you solve for the productivity Riddle? A big part of that's got to be fixed asset investment to automate, modernize.
And gender higher productivity rates. So you've got the productivity side of it. That is going to include industrial metals, certainly because of their sustainability and recyclability attributes.
If you've talk about transition metals- and how do, how do you build structures and how do you build electrification?
Infrastructure how do you improve public health if you come back to?
Industrial metals to make those investments and to get those kind of outcomes So very bullish, for that's concern in terms of the EA, environment and consolidation.
There'll be more consolidation in our industry. I mean we. We hear from more owners through our our EA work and to our business development pipeline. We hear from more owners that they'd like to do more. Business development is not retire and that they really don't want to handle them. I'd say the back-office functions.
That can really be done at scale as part of a bigger enterprise. So.
As we move through this countercycle very, very optimistic and very bullish about our industry and the products that we distributed, that we add value to.
ok great, Thank you very much.
Welcome.
And once again, if you'd like to ask a question, you may signal by pressing star one on your touchstone phone.
And we'll hear next from Phil gibs, with KeyBank capital markets.
He good morning.
Beg good morning. How are you doing Phil?
Good how are you?
A question on just general general inflation within in the business obviously metals prices are what they are but just trying to think about the conversion costs side of things and whether.
Things like people packaging energy, transportation and whether you're starting to see that ll level out. I don't think you were last quarter.
But curious what, what you're seeing and just in terms of those pressures.
Sure.
So where I would say I'd say between the second half of 2020 through.
I'd say, the first half of 2021. As you know pH, the prices of metals really I would say, went higher and went ahead of, I'd say, broad based inflationary pressures and general economic.
ationary pressure.
I would say, now we're seeing the tail end of those pressures, come into our PL.
morein various, in various line items of our, our general ledger. I'm going to, I'm going to let members of the team to give a more.
illumination around that, but certainly we're seeing. What I would say is: I feel like it's that last.
Of a kind of that inflationary whiblass where you're going to see folks continue to.
Price higher because they have some price power. Maybe they got off to a slower start trying to push those price increases to the market on the OpEx side. Certainly we know that there's been.
There's been pressures on the labor side, but it feels like we're two thirds of the way through it and I think we're in that last third of where you start to see cost increase.
isbut they start to level off, they peak, and then we'll some of those costs peel off and I do think there's a higher embedded level of cost. I mean throughout, whether it's in materials, whether it's going to be.
In the OpEx.
In the OpEx ledger there's a higher embedded level of cost but certainly the rate of change in the rate of increase on those expenses will start to come down andi feel like kind. We're in the last third of of this inflationary period. But let me, I'm going to have johnwork, our udvp of operations, Tal about what he see.
On the OpEx side of the business.
Hi good morningphil.
There has definitely been inflation on the OpEx side of the business and it's moved into our operating expenses. However, we've we've managed to maintain expense leverage on a percentage basis and the areas where we see the highest impact of inflation are in delivery, primarily driven by fuel cost and search charges, along to a smaller extent, contract resets and, as you mentioned, packaging supplies. Those have inflated quite a bit from from Q1. However, we are seeing that rate of increase begin to slow down substantially.
At the end of the day, the the key for us is using the tools in our toolbox- the ring production system- to identify the best practices and share those across the network to make sure that we are reusing and reducing and being as safe and productive as possible.
Six.
Thanks very much for that. And then at IE, just on the pricing viewpoint for the third quarter: what are the biggest's? What's influencing that? The most is at the nonferirous side and the ferirous i.des a little bit more stablers are a little bit of everything, because I know you have some contracts in there too.
Yeah absolutely, and I'm going to ask like to.
Used to more color on that in just just a minute, But as as an overview, we thought we saw significant oun of nonpr, probably from say, early may, you know through mid July , but now we've seen some stabilization around nickel prices. I mean the direction is down. But we've seen some stabilization in aluminum, you know in stainless, after some pretty significant.
drawups and you- I've been talking for a decade now, more so we. We know what that invites. We know that starts to feel and look like a countercycle. We don't know what the duration is or what the intense.
Is going to be, but you know we've used countercycles to really good effect in the past. So I think in stainless aluminum.
It looks like it's trying to consolidate around a base now, with maybe some fluctuation in other elements like Chrome, certainly in nickel, but it looks like it's starting to conceal around maybe a range.
And then carbon carbon. Right now the.
People's indexes are showing.
eight 50 other painder of the year not far off now for the parts start that cur part apartment but it drop a little bit more with some of past the introductions as we move through the balance of the year yet could. But I also think that there's just that higher embedded level of costyou you know in those material cost curves. I mean if you look at aluminum going back about a second've got a lot of alum smeldters that are claiming that they're really into their cash curves. At this point you know not they're you know not their gap accounting curves but.
Their cash curves. But you know, going back to carbon will see some capacity coming of the market.
Ways But I also don't think we're going to see a return to a tenure averages that were in place before the pandemic. But I'll help my comment on pric, N' even my caml.
A a little bit more about what supply with the supply chain.
Yeah I build this a mickerobox, say you know. I think haddy he ated pretty good with this, with his comments and in thoughts about where we are today.
You.
I I don't have a lot to add to that, other than trying to predict what's going to happen on commodities is proven to be a foolish exercise at times.
manyinety days ago, when we were talking, the outlook was considerably different than it is today. We've seenus.
Significant roller coaster on virtually everything we sell from late March into the early Q2.
That gave us a head fake thinking thinking things might be hheading one way and then quickly revert it back to where we are today and so.
What we see in here is exactly what Ed just described: the futures curves, what we're hearing from our suppliers, what we think is the activity levels are going to be. I think we're settling them to.
Uh something that's a little more stable, but it was a rather interesting path to get here.
From from early Q2 till now.
' know if you have any extr. We've got my Hamilton with's our P supply chain and he'she's really in touch of our suppliers on on a Reg basis be.
Comments sure thanks thanks, edd. I think the only addition I would I would make is that you know.
Additional capacity in carbon is is a leg.
This year when I'm not started to see some of that.
And we'll see how that plays out with the price on nonferrous capacity additionsare, you know.
23 and beyond scenario here in North America. So it's far too early to predict what that influence is going to be.
We looked at where prices are and so I would say it feels like two or three quarters to really see average cost kind of meet up with replacement cost again and we'll get a good margin reset and that'll be a really good time to take a look at where we go from there. But I do think where we're going to bottom out is going to be above where the 10 year averages were before, before the pandemic.
All that makes sense that y in terms of the price and commentary as just the company and as Ryerson enterprise.
How are you thinking about this?
Countercyclical period, differently than you were the last UH, the last couple of times, and you know certainly certainly, you can breathe the a heck of a lot easier this time. You know, materially easier. So, but just as a company this, this time around, what? What are the?
The big difference is in mentality.
I mean 'est ly, I'm not hot, I'm not Ho, I'm not heartbroken about not having to go into the hiyo markets again.
So certainly certainly I'm not pondent about that I mean.
We're obviously in a much better position now when we look at.
We certainly have to include our results in the last couple of years, you know.
To are even a generation over the last 10 years. But looking at the investments that we've made.
In the company.
Insistence and equipment, even in new facilities like in centralia University Park. We've got more plans on the Board where that's concerned.
When we look at our ability now to take that free cash flow repurpose that to shareholder returns but also to.
Visit to growth, and I mean smart allocation of capital sometimes.
You can get ahead of yourself and you do that because you've got to match up that capital allocation to growth to your organizations to.
Need to deploy that capital at the desire rate to return. But we've got a good M a pipeline. We've got a really good business development function. Our P M O office is really working through some projects that we really think are going to improve.
The customer experience and give us better expense leverage as we start to prepare for the next up cycle.
So obviously it's a much different mindset.
If you don't have to go back into the high-yield markets, you don't have to roll over Deb, you're not paying for the past, you're not paying creditors the Lion's share of your free cash flow. So certainly a different countercycle for us, and I thought that we manageed through the prior countercycles.
Extraordinarily well, but certainly now we have a much better opportunity to invest in thein the.
Future of ryers, So which I think is going to.
Is going to pay, pay a lot of dividends bigger of being literally.
Thanks adie, and in bassel luck really appreciate it. Thanks Phil, hope you caught that resouarri home run yesterday and I was a monster.
I was close.
Thank you very much.
Would' the end if you'd like to ask a question.
My pologies. Please go ahead. Looks like the que is clear out, So we thank you for your continued support of an interest in ryuson. Stay safe and well and we look forward to being with you all again in November when we review our third quarter results. Thank care.
And this does conclude today's conference. Thank you all for your participation. You may now disconnect.
No.