Q3 2022 Ryerson Holding Corp Earnings Call
And ladies and gentlemen, please standby.
Good day and welcome to the Ryerson Holdings Corporation's third quarter 2022 conference call.
Today's conference is being recorded there will be a question and answer session. Later, if you'd like to ask a question. Please press star on your one on your telephone keypad at anytime again that is star one to ask a question at this time I would like to turn the conference over to Jorge Bernstein. Please go ahead.
Good morning, Thank you for joining Ryerson holding corporations third quarter 2022 earnings call.
On our call we have Eddie leaner Ryerson is president and Chief Executive Officer, Mike Burbach, Our Chief operating Officer, Jim Claussen, Our Chief Financial Officer.
And multi Kennedy, our chief accounting officer, and corporate controller, John <unk>, Our executive Vice President of operations will also be joining us for Q&A.
Certain comments on this call contain forward looking statements within the meaning of the federal Securities laws. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those implied by the forward looking statements and are not limited to those set forth under risk factors in our annual report on Form 10-K.
For the year ended December 31, 2021 are.
Our quarterly report on Form 10-Q for the quarter ended September 32022.
And in our other filings with the Securities and Exchange Commission.
You are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date. They are made and are not guarantees of future performance.
In addition, our remarks today refer to several non-GAAP financial measures that are intended to supplement but not substitute for the most directly comparable GAAP measures a reconciliation of non-GAAP to the most directly comparable GAAP financial measures is provided in our earnings release filed on form 8-K yesterday.
Also available on the Investor Relations section of our website I'll now turn the call over to Eddie.
Thank you Jorge.
And thank you all for joining us this morning to discuss our third quarter 2022 results.
I wanted to start by expressing my heartfelt appreciation.
Our 4000, plus strong Ryerson team.
For their hard work and continued dedication.
For delivering a safe work environment, while working with great passion on delivering great customer experiences.
This year in this month, we celebrated wire since 180 at the anniversary as a company a rare milestone for <unk>.
Business.
As we celebrate and embrace our long and distinguished history.
It is the present and future vision, we have for Ryerson that we believe has so much to offer to all of our stakeholders.
That vision is simply stated as delivering great customer experiences across the industrial metals landscape with speed scale value add enjoyment and consistency throughout our network of intelligently connected industrial metals service centers.
As we estimate that there are more than 25 million of these experiences to be provided annually and are part of the industry. There is significant opportunity in growth available to ryerson and providing the best customer experience in our competitive space.
Additionally, we continue to innovate grow and invest for the future by adding new capabilities.
Modernizing our facilities.
Adding new value added services to our customers.
And growing our family of companies.
This was on full display.
Throughout the quarter as we continue preparing to new state of the art service centers to come online.
Washington, and University Park, Illinois in 2022, and 2023, respectively. While also acquiring Howard precision aluminum in August of this year.
This is in addition to acquisitions made earlier in the year, when we acquired apogee steel fabrication and for tool steel, while making a strategic investment.
In additive manufacturing company three form technologies.
I'm also pleased to welcome Excelsior metals.
Ryerson family of companies as we announced via press release this past Tuesday.
This is in addition to investments we have made in growth capex around productivity and quality enhancing our machinery and equipment capabilities as well as ongoing investments.
In digital infrastructure and future state customer experience systems.
From quoting to final mile delivery, we will get to the counter cycle in a minute.
But wanted to illuminate the actions, we're taking to improve through the cycle earnings potential and preparing ryerson for the next upturn.
Bringing it back to the third quarter of 2022.
We recognized and responded skillfully.
The unmistakable conditions, marking the onset of an industry counter cycle, we managed expenses well inventory management is progressing toward our targets and replacement costs gross margins are tracking higher than average Cogs gross margins.
I would note that through my time with Ryerson. This is my fourth counter cycle and although each one is unique in its own way, we have excelled as an organization in battery Ryerson through every one of them.
This counter cycle now underway is showing significant dollar strength.
Commodity price reversion.
<unk> average cost gross margin compression inventory destocking reduced mill operating rates and demand declines as the world continues grappling with extremes.
Distortions shortages and excesses engendered by the pandemic.
War climate geopolitics as well as a synchronous and contrasting policy choices that are all mixed together.
A strange and erratic brew.
The economic conditions.
As we have done before we are.
And expect to continue generating healthy counter cyclical cash flows while the investing through the counter cycle in preparation of the next industry upturn, while having the welcome benefit.
Of not needing to refinance or raise high yield debt as we did during the past week counter cycles of my tenure with Ryerson.
It makes all the difference as our balance sheet is strong we are investing wisely in support of our strategic plan.
And returning capital to shareholders.
As counter cycles tend to galvanize our immediate attention.
We want to reaffirm our view of the positive and enduring secular drivers.
Porting, the privacy of recyclable and sustainable industrial metals as those secular drivers supporting long term industrial metals demand haven't gone anywhere.
If anything given that demand was not satisfied due to supply chain breakdowns.
Not yet fully repaired and healed.
Demand deficit continues to grow.
Favorable demand momentum we've gained tackled by supply side induced inflation that is being commanded by the most aggressive interest rate hikes.
40 years.
Taking a more holistic view of things tells us that commodity inventories are still historically low reinvestment in mining and refining of industrial metals is still inadequate and commodity prices are again nearing or already below their cash cost curves given overall.
Cost of production and reinvestment hurdle rates.
That is to say nothing about the many logistical network breakdowns that occurred over the past three years.
<unk> now impaired water levels.
On the Mississippi River, impeding barge transportation significantly and it all leads us right back to the need for greater sustained investment in fixed assets required industrial metals.
Add to that emerging trends in onshoring near shoring and friend shoring given rapidly shifting trade paradigms, along with physical investments in infrastructure climate remediation and semiconductor manufacturing and the case for circular.
<unk> industrial metal demand optimism and Ryerson optimism holds up very well 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.
I wanted to start by thanking our team for continuing to prioritize the safe environment as well as creating a culture of partnership with our customers and suppliers to address their needs throughout the business cycle as well as anticipate where our services equipment and capabilities can add value.
As <unk> continues to grow and invest in our business. Our employees are the backbone building a path to the future.
<unk> third quarter sales volume of 512000 tons was representative of traditional seasonal patterns as the quarter progressed, we witness some relief at many end customers is supply chain constraints eased and lead times for materials shortened.
This easing was countered by overall demand softening in the U S evidenced by key industry indicators.
U S. Industrial production continued the trend of deceleration through the third quarter.
Additionally.
As an indicator of new order demand the U S purchasing managers' index or PMI, while still above the growth threshold of 50 reported continued slowing growth in factory activity in September .
In the third quarter.
Decelerating demand environment was evidenced by the previously referenced slowdown in industrial production.
In addition facts.
Factors, such as normalizing supply chains and inventory flow as well as excess international supply have led to supply and demand dynamics changing from the start of the year.
Which have influenced declines in industrial metals pricing.
The metals commodity prices underlying our metals products mix experienced a decline of approximately 4% to 23% over the quarter, depending on the commodity due to the factors just mentioned the.
The decrease in prices of our metals mix led to a 9% sequential decrease in our average sell price to $3014 per ton, which was outside of our guidance range of a sequential pricing decrease of $5 to 8%.
Turning to end markets Ryerson did see a 5% increase in our consumer durables and a 2% increase in the HVAC sectors, which were more than offset by a sequential volume shipment decrease.
Cross effectively all other end markets.
Our expectations for North American manufacturing for the fourth quarter of 2022 is a continuation of the current business conditions, driven by headwinds of rising interest rates higher inflation.
As well as slowing demand our.
Our discussions with customers lead us to believe that while supply chain constraints are gradually resolving with.
With the economic uncertainty and approaching holiday season companies are destocking.
Finally, I would like to take the opportunity to welcome Howard precision metals, and Excelsior metals to the <unk> family of companies.
Howard operating out of Milwaukee, Wisconsin is a high value added service center that provides precision cutting services and has been in operation for the past 80 years.
<unk> operating out of Fresno, California is a full service fabrication company with advanced processing capabilities and has been operating for the past 2006 years.
Both companies are a great fit into our current offering and help us expand into new areas of growth.
We are very excited about the future we will create together.
With that I will turn the call over to Jim for our fourth quarter outlook.
Thanks, Mike.
Everyone.
We are a stronger company today than at any time in the recent past with.
With our balance sheet transformation, now, allowing us to meaningfully reinvest cash for growth as well as increasing returns to shareholders.
Looking forward to the fourth quarter, we do expect both volume and pricing to continue trending lower as.
As well as being impacted by normal seasonal softness with a lower number of shipping days sequentially and typical holiday shutdowns.
As such we expect fourth quarter revenues to be in the range of one to five to $1 3 billion.
Average selling prices down 7% to 10% and sales volume is expected to be down 8% to 10%.
Based on our expectations, we forecast adjusted EBITDA for the fourth quarter of 2022, excluding LIFO in the range of $40 million to $44 million in earnings in the range of 70 to 78 per diluted share.
In the fourth quarter, we expect LIFO income of approximately $20 million.
In the third quarter, we generated $152 million of operating cash and ended the period with $477 million of total debt and $426 million.
Of net debt.
A decrease in net debt of $66 million compared to the second quarter.
EBITDA generation, coupled with our net working capital release of $76 million.
The strong cash generation.
Our working capital release was driven mainly through an inventory release of $84 million.
For the quarter accounts receivable and accounts payable reductions due to the lower price environment, mostly offset.
As a reminder, lower metal prices and receding demand implied generation of counter cyclical cash flow as our higher cost inventory values come off our balance sheet and are replaced by lower cost of inventory.
Overall, Ryerson leverage ratio remained flat quarter over quarter at <unk> five times, a record low since our IPO in 2014.
And the companies available global liquidity remains strong at $906 million.
As part of our reduction in debt during the quarter.
We redeemed the final remaining $50 million outstanding of our eight 5% senior secured notes using a special redemption feature.
Related to this redemption the company incurred a $1 $5 million loss on the retirement of the high yield debt, which is non recurrent.
The retirement of our high yield debt. This year is expected to save Ryerson over $25 million in annualized pretax interest.
Capital expenditures were $28 million in the third quarter and we are on track to complete our anticipated capital expenditures, excluding acquisitions of approximately $100 million for 2022.
This amount comprises both maintenance and growth projects, including the service Center Modernizations in Centralia, Washington, and University Park, Illinois.
During the third quarter, Ryerson returned $6 $4 million to shareholders in the form of share repurchases and dividends.
In the period, we repurchased approximately 34000 shares of our common stock returning approximately $1 million to shareholders under our new two year $75 million share repurchase authorization, which we expect to continue to deploy opportunistically.
Finally, we announced our fourth quarter cash dividend of <unk> 16 per share, which is the fifth consecutive increase in our quarterly dividend.
With this I will turn the call over to Molly to provide further detail on our third quarter financial results.
Thank you Jim and good morning, everyone.
In the third quarter FY 'twenty to Ryerson recorded net sales of 154 billion, which was at the higher end of our guidance range.
In the same period gross margin of 17, 6% was driven by cost of goods sold reflecting the consumption of higher cost of materials through our metals mix, while average selling prices declined at a faster pace.
Included in gross margin is LIFO income of $21 1 million.
On the expense side warehousing delivery, selling general and administrative expenses increased 2%.
<unk> hundred $86 5 million, primarily driven by higher compensation and benefits expense.
For the third quarter net income attributable to Ryerson with $55 1 million or $1 46 per diluted share.
This includes a charge on the retirement of debt of $1 5 million.
<unk> 6 million gain on bargain purchase.
Excluding these onetime items and the associated income taxes.
Adjusted net income attributable to Ryerson with $55 8 million or $1 48 per diluted share.
In closing Ryerson achieved adjusted EBITDA, excluding LIFO of $79 million and generated $124 million and free cash flow in the third quarter of 2022.
And with this I will turn the call back to Eddie.
Thank you Molly.
<unk> our mission is to create great experiences for our customers employees shareholders suppliers and communities.
Our ongoing development of an investment in an intelligent network.
Value added industrial metal service centers, delivering industrial metal solutions with joy speed scale and consistency.
Is the core 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 why metal matters as youll experience when visiting us at <unk> Dot com and why the build now.
<unk> Dot org are so vital and imperative, let's keep progressing together and adds one more reminder, we would be delighted to you to join us for our inaugural Investor Day event on November 8th in person at the NYSE or.
Online.
At Ryerson Investor Day Dot com.
Please reach out to our Investor relations team to reserve your spot with that we look forward to your questions operator.
Ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad do keep in mind that if you are using a speaker phone to make sure that Moody's released so the signal for each of our equipment. Once again star one for questions. We'll pause for just a moment to allow everyone an opportunity to signal.
And we will begin with <unk> Gen sick with BMO capital.
Hi, Thank you for taking my questions can.
Can you discuss how you see our gross profit margin over the next few quarters, specifically when do you think it could stabilize and what needs to happen for the margin to start to expand again.
Hi, <unk> Hey, good morning, this is Eddie.
We did a really nice job on the write up in your summary, paragraph I. Thank you.
I think you did a good job describing the quarter.
Thank you in terms of yeah.
Yeah.
I've got to tell like it is in terms of countercyclical gross margins and how those behave.
<unk>.
We've seen this over and over again as we've gone from cycle to counter cycle.
As those average selling prices peak and then start to head down there is always that lag in terms of cost of goods sold and how those climb over time before those plateaus. So if you think about sign curve and how that phased kind of looks it's about a 2% to four quarter event, we're already two quarters into it first you see the spot.
Transactional book adjust pretty quickly in terms of Asps.
Falling on a spot transactional basis, and then your contract program accounts, which have lags on the pricing formulas that are associated with those accounts those tend to come down after that so when you look at the aggressiveness of margin compression in the quarter I mean, the upside of that is.
It means that we get through with that much faster when we see that kind of aggressiveness in the fallen carbon aluminum and stainless have been a little bit more I would say paused and paste as those.
As those commodity indexes have come down and even move sideways with some volatility so two to four quarters to pretty much get through it and then we look for average cost of an intersect with replacement cost.
And then rips.
Replacement cost starts to move up ahead of average cost and then we get margin expansion again. So that's those are the mechanics.
How that works the good news is our replacement margins and our spot transactional book are tracking well.
Well ahead of average cost margin. So that's a good healthy sign as we move through the counter cycle.
And the thought or transactional business that is about half of your book right.
That's correct.
And just if I may one more question you generated very strong counter cyclical free cash flow and as you mentioned this should continue at least in the near term.
You significantly improve your balance sheet by paying down debt over the past couple of years can you discuss what your capital allocation priorities are specifically in this conference to quicker environment. Thank you.
Yes, absolutely.
Just doing my prep for the call I went back over the last eight years.
So I think it's noteworthy accomplishment our free cash flow yield over eight years has been about 22%, we're projecting free cash flow yield to be 23%.
When we factor in 2022 year to date.
If we look at year to date free cash flow yield Thats, 26%, which is 13 times the free cash flow yield of the S&P. So.
I would say that thats.
That's not a it's not an unimpressive.
If you will so when we look at our ability to generate counter.
Countercyclical cash flow is a well managed company I would expect that to continue the good news is.
As we see our legacy liabilities and the servicing of those legacy liabilities coming down as.
As we see our interest costs coming down significantly our cash interest cost we've shown.
I think an ability now to return capital to shareholders in the form of increasing dividends share buybacks and you can look at.
The magnitude of our Capex in the way we are spending it to modernize our facilities modernize our systems investing a lot in the customer experience and putting a lot of seeds in the ground.
That next harvest in that next upturn, which we're all looking forward to and expect to execute very well upon.
I'm going to kick it over to Jim Claussen, our CFO and he can give you a little bit better idea.
Of the ratios of how we're going to allocate that free cash flow going forward.
Yeah, Thanks, Eddie Hi, Katja.
I think really Eddie Eddie gave you a really complete answer.
And.
As we look going forward, we did just.
Rollout, a new $75 million share repurchase.
Program last quarter after exhausting the first $50 million program.
<unk> raised the dividend up to 16.
After instituting the dividend last year, so really pivoting away.
As we've talked about from someone.
Some of the debt service costs to shareholder repurchases and then on the Capex side really continuing to drive those good growth.
Initiatives, both for value add processing and automation.
And I would <unk> I would just depend on to that I think I think as the quarters go forward now that we're in a much different place we're in a much better place as we as we referenced in the script and in our release in terms of how much free cash flow, we generate and how we put those.
Free cash flows to use and I think if you look at the amount of shares that we bought back in the last year with the dividend with the increased dividend some acquisitions we've done.
Yeah.
And part of the disruption.
Lost audio from the speakers line.
Yeah.
Okay.
Hi, Yes. This is Jim Clark and I think we just lost that one line that that Eddie was on.
Sure.
So everyone just bear with us while we reestablish that line.
And once again, everyone, we're experiencing a temporary interruption in tow.
This conference will be resuming momentarily. Thank you for your patience as we bleed further speaker to reconnect.
And once again, everyone. Thank you for your patience, while we reestablish your speaker's line.
Eddie you have rejoined the conference we see your line is established please continue.
Hey, <unk> are you still out there.
Hello.
Yes.
Sorry about that we had a technological glitch, apparently which goes it really supports our case for more infrastructure spend.
So.
We certainly we certainly just got another signal that we need to invest a lot more.
And our infrastructure and our physical infrastructure so back to the answer I think if you look at this year.
It's really it's a good example, and it's a good benchmark for US if you look at this year, we fulfilled our buyback authorized authorization ahead of time, which was $50 million, we put in a new authorization, we increase the dividend. So when you. When you look at the amount of cash interest we have to pay with pension maybe that looks like $35 million going forward, just given where.
We expect ABL ABL balances and interest rates if.
If you look at our Capex, which is tracking I think as we noted is tracking at about 100 million. This year you look at the business development and M&A work. We've done this year. So far we've certainly made significant investments we have the liquidity and free cash flow to do that and I think as the quarters go forward will get into more of a.
I would say, we will get into more of a steady state in terms of how we allocate those free cash flows between legacy needs creditor needs.
Shareholder returns and investment, but certainly this year. The focus was more on investment in growth is certainly a good time to do it through the counter cycle. When you have this kind of liquidity and free cash flow, but we certainly did not skimp on shareholder returns. If you look at what we've done there and we certainly take advantage of.
This.
This is really good place that we're at with respect to lower cash interest expense and lower legacy liability payments.
Thank you very much.
Thank you we have now.
Another question in the queue, we'll hear from Samuel Mckinney with Keybanc capital markets.
Hi, guys, Sam Mckinnie on for Phil Gibbs how are you.
Hi, Sam how are you good morning.
Good morning.
Visiting margins with gross margins falling to around 18% in the third quarter. If you could walk us through which products that sequential gross margin pressure was the most acute in the third quarter or was it more across the board.
It was more it was more acute in carbon as.
As we as we look at our carbon program book of business and spot transactional business.
Where you saw the greatest move in the commodity indexes was was in the CRE you and.
And in the carbon futures index on the CME. So.
Carbon really was the primary culprit this quarter, but we saw margin compression across the board in aluminum and stainless as well.
Which is really happening at a slower pace on the nonferrous side, but still happening if you look at carbon the moves in carbon even though carbon is still trending lower I think the big moves are pretty much behind us and carbon I think you could argue that if carbon goes down much further youre going to be back into cash cost curves around the world even with the fall in iron ore price.
Mrs. So.
It could still trend lower based on.
Soft demand.
Global recessionary conditions, but.
I think we're closer to the end of disinflation and metals than we are at the beginning.
Okay, and then on the demand front what are you hearing from your key industrial Oems or are they starting to destock inventories at this point.
Yes, we're seeing Destocking, we're seeing this transition between.
I'd say.
Breaks in demand or demand that cannot be fulfilled because of supply chain interruptions in supply chain breakdowns theres still some of that actually going on but it's certainly lessening.
As we move into this counter cycle and now Youre seeing.
Customers adjust their inventories based on order rates, even though demand in this last couple of years I don't think came close to being fulfilled, but I'm going to kick it over to Mike Burbach in he's going to give you a little bit more detail and color as to what happened within our specific verticals and end markets.
Okay.
Great. Thanks, Andy and good morning, Sam Yeah, No I think Eddie hit the high points pretty good there.
It's really a mixed bag.
We're hearing now there's there's.
The uncertainty that's out there be it inflation related be it supply chain challenges labor issues whatnot really.
Really doesn't necessarily allow us to put a blanket statement than any one area because we'll hear about certain industries certain customers with strong backlogs anticipating.
Activity to improve and then we learn after the fact that.
One of those impacts either caused our backlog to change <unk>.
Unable to make the production that they had anticipated. So you could just take that theme and kind of apply it to most sectors that we do sell into.
The forecast as we here.
What people are talking about is also <unk>.
Fixed theres seal people are talking about pretty strong opportunities into the future and egg related equipment.
I think there's there's a mixed story in class eight type equipment.
<unk>.
Auto was talking about larger builds next year, but all of these things wouldn't when put in concert with the factors that you laid out with.
Supply chain challenges inventory corrections.
It really is.
A little cloudy.
I would say I'm cautiously optimistic but.
I think those realities have to be considered.
Okay.
Okay. Thanks. Thank you and then lastly for me with operating expenses up just a little bit in the third quarter are you starting to see that inflationary opex subside into the fourth quarter and what are you seeing on the labor front.
Yes, so when we look at when we look at.
Some inflationary.
Forces that are inevitably going to find their way in.
Our opex is really anybody's opex, when we compare ourselves to the producer price index year over year I think we did a really I think we did a fine job managing expenses as we've done.
Over the last 10 years.
That said I think we find ourselves in and the most inflationary.
Type environment that we've seen in the last 10 years. So so we've done a good job I think of managing those costs and variable lies in our cost structure. We are seeing even though diesel costs are up we're seeing overall freight rates come down we are starting to see supplies expense come down so I would say that.
In our world, we feel that we have seen a peak around opex and we start we're starting to see those opex supply costs come down labor is still tight skilled labor is still tight.
So and with the low unemployment rate and with manufacturing activity still being strong in elevated enough.
To sustain that tightness I would say the market for for skilled operating labor is still tight and I would say, it's still inflationary, but I'm going to kick it over to John worth and he can give you a little bit more color on that.
Good morning, Thanks, Eddie Eddies comments are right on target around Opex and inflation.
Jim mentioned, the majority of our inflation was around comp and Ben in the prior quarter. Our teams out in the field has has really done a great job of looking at how we can control and manage through the inflationary challenges, especially on operating supplies, where we have had.
Our renewed focus on reusing recycling sharing.
Of supplies.
And in particular from an Opex perspective, our fixed opex was flat quarter over quarter, but our variable opex decreased.
Quarter over quarter about 7%, which is really reflective of where we believe we have seen.
And these inflationary pressures on the operating supply side and now we have to continue using our tools and sharing the best practices.
Continue to manage that down.
And I would say Hey, Sam Sam I would say over the medium to longer term. If you look at the types of investments, we're making we're making investments in productivity in automation, we're looking to modernize our network and those are all things that are going to bring down that inflationary curve over time.
And also really improving the employee experience of Ryerson, where everybody benefits from that so I think our investments are well directed and well placed and so in the short term, we're managing inflation, well and I think over the medium to long term are those investments are going to bear fruit as to how we bring down that inflation curve over time.
Okay. That's it for me thanks, guys.
Thanks, Sam I appreciate it.
And once again anyone with a question star one to get placed in the queue, we'll pause to see if there is any further questions.
With no additional questions today ill turn the call back to your host for any additional or closing remarks.
Thank you for your continued support of any interest in Ryerson stay safe be well and we wish you all a happy and meaningful holiday season, and look forward to being with you again in early March of next year for our fourth quarter and full year earnings release and conference call.
Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation and you may now disconnect.
Yes.
Okay.