Q4 2022 Ryerson Holding Corp Earnings Call
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Good day and welcome to the Ryerson holding corporation fourth quarter two.
22 Conference call. Today's conference is being recorded there will be a question and answer session. Later, if you would like to ask a question. Please press star one on your telephone keypad at any time.
That is star one to ask a question at any time I would like to turn the conference over to Jorge birthday, Vice President of Finance at Ryerson. Please go ahead Sir.
Good morning, Thank you for joining Ryerson holding corporations fourth quarter and full year 2022 earnings call.
On our call, we have Eddie Lehner, <unk>, President and Chief Executive Officer, Mike Burbach, Our Chief operating Officer, Jim Claussen, Our Chief Financial Officer, and Molly Cannon, our Chief Accounting officer and corporate controller.
John <unk>, our executive Vice President of operations, and Mike Hamilton, Our Vice President of corporate supply chain will 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.
Year ended December 31, 2022, and in our other filings with the Securities and Exchange Commission <unk>.
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.
Build on form 8-K yesterday also available on the Investor Relations section of our website.
I will now turn the call over to Eddie.
Thank you Jorge and thank you all for joining us this morning.
We reflect on the fourth quarter.
And full year 2022 results.
I want to start by expressing my heartfelt appreciation.
Our 4200 plus strong.
<unk> team for their hard work and continued dedication, which now includes new businesses added to Ryerson family of companies.
For tool steel.
Apogee fabrication.
Howard precision metals and.
And Excelsior metals.
As well as our first additive manufacturing investment in Freeform technologies.
Our team is integral to our mission to deliver great customer experiences.
Which we provide.
Through our network of intelligently connected industrial metals service centers.
Industrial metals are recyclable reusable and sustainable enablers essential.
Is shaping the world around us.
And paving the way for the required advances.
In the human experience.
Living conditions and wellbeing.
The fourth quarter.
With a period of rolling headwinds.
And re emerging tailwind.
As we saw continuation of.
The counter cyclical environment for most of the quarter.
Prices for the metals commodities in our product mix.
Starting to find support in November and have continued to see.
Eddie increases into the first quarter of 2023.
Domestically, we saw volumes experienced familiar seasonality via slowdowns in industrial purchasing.
As well as distortions requiring rebalancing.
That had accumulated earlier in the year.
<unk> with respect to stainless steel.
And carbon steel.
While the pricing and demand landscape.
Youll obeys the laws of general cyclicality.
Note the more important changes in Ryerson atmospherics as well as those pertaining to industrial metals, which support our optimism about our company and industry.
During 2022, we set the stage for <unk> future.
Blade that we are a much stronger company through the cycle.
As we saw higher highs.
As well as higher lows.
During a period of heightened volatility.
Otherwise by ongoing pandemic and geopolitical distortions.
While this was another transformational year for our business.
To employ an overused, but in our case through descriptor of our progress.
Accomplishments have come from years of intentional efforts.
To eliminate our high yield debt.
Prove our capital structure.
And invest in the next stage and phases of our strategic business plan.
I can't fully expressed to you in the script how great it feels.
It could be high yield debt free and better yet how it feels to see beyond that.
Of counter cyclical conditions, knowing we can continue investing in our business.
Through the cycle, while confidently returning capital to shareholders Ryerson.
<unk> has come a long way over the past decade, but.
But the opportunities within our sights to innovate.
And bring forward an industry, leading operating model for all stakeholders is now front and center.
Free of legacy burdens.
On September nine we shipped our first customer order.
From our new state of the Art Service Center.
In Centralia, Washington, and expect our new.
<unk> W University Park service center to be operational in the third quarter of 2023.
On November eight we celebrated 180 years.
Operating under the Ryerson brand.
At our Investor day.
In the New York Stock Exchange, where we showcased our operational financial and digital initiatives and unveiled our next phase financial targets.
In December we were proud to publish.
Our inaugural ESG report.
Which showcases the integrity with which Ryerson operates in.
<unk> outlined important sustainability initiatives, we have underway for a cooler.
And cooler feature.
Including our target of reducing scope, one and two emissions by 80% by 2040 as well as the release of our proprietary emissions illuminator application.
Our team efforts over the past few years.
And especially in 2022 have culminated in modernizing our service Center network.
Transforming our balance sheet and.
And making material down payments.
Toward Ryerson next stage of growth.
Okay.
Emerging trends in onshoring shifting trade paradigm and.
And critical investments in infrastructure.
Climate transitioning.
In semiconductor manufacturing.
Will likely mean, the beginning of an imperative metals intensive overhaul.
All of our society and economy.
This new paradigm.
<unk> investments in value added manufacturing cut.
Customer centric connected distribution networks and modernized operations position us for a bright future for all of our stakeholders 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 a safe and productive working 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.
In the fourth quarter, we saw shifting trends in pricing for the metals commodity prices underlying our product mix.
While decreasing through October stainless and aluminum pricing increased in November amidst firming international demand increased energy and input costs as well as tighter supply at <unk> warehouse inventory levels.
Closer to home domestic hot rolled coil or HRC.
It's declined for most of the quarter.
Finding supports in December .
Since that time HRC prices have steadily risen headlined by six price hikes for mills and longer lead times.
Also helped along by falling import levels and increases in iron ore and scrap pricing.
Despite the late quarter price increases due.
During the fourth quarter U S Midwest HRC declined 4%.
On the other hand due.
Due to the sharp price increases starting in November <unk> aluminum increased by 8% and <unk> nickel prices rose by 36%. These.
These price changes translated to our metals mix meeting our guidance expectations with an 8% sequential decrease and average sell price to $2770 per ton.
Looking to the future, we see supportive demand factors influencing pricing, including the resurgence of demand for industrial metals internationally, particularly from China's economy, reopening and the and to their zero Covid policy.
However, domestically.
The fourth quarter saw holiday seasonal slowdown in manufacturing.
Combined with the effects of higher interest rates and high inflation continued to impact the demand for industrial goods.
The slowdown in demand in the U S was reflected in key macroeconomic indicators.
United States industrial production continued to decelerate through the fourth quarter.
Additionally, the U S purchasing managers' index or PMI.
After continuing to indicate slowing growth since the second quarter declined below the growth threshold of 50 in November .
In the fourth quarter, North American industry shipments as measured by the metals Service Center Institute or MSCI contracted eight 3% quarter over quarter compared to Ryerson North American volume declines of 9%.
However, on an annual basis, North American MSCI shipments contracted by two 3% compared to Ryerson shipments contracted by one 9%, implying a slight market share gain.
Early first quarter indicators point to improved demand trends from the fourth quarter of 'twenty two.
In addition to typical sequential seasonal trends factors influencing our sales volume and pricing include incrementally normalizing supply chains.
Interest rate policy and inventory restocking as metal pricing appears to have been reflected from a mid quarter reference file.
Similarly, our industrial customers.
While still evaluating lag effects from current and future Federal reserve interest rate increases are still working through durable order backlogs.
Turning to our end markets and market performance saw normal seasonal softness.
As such <unk> noted sequential shipment decreases across all of our end markets in the fourth quarter of 2022.
On a full year basis commercial ground transportation oil and gas HV AC.
In construction equipment increased sales volumes, while consumer durables and food processing and agriculture equipment.
Slight volume declines.
Finally, I would like to Echo <unk> earlier statement. The investments we have made in our technological capabilities and distribution network, including the new emissions Illuminator App and service center in Centralia.
Geared for the current and future needs of our customers.
As our customers have experienced over the past few years changes in supply chains can have large impacts on our business.
Upcoming changes in de Carbonization are fluid and the evolution of product needs presents a changing landscape.
Ryerson conserve is an important one stop shop business partner that can help navigate chase.
Change through solutions based on our interconnected network and advanced service capabilities.
As we look forward to 2023 and beyond we are excited about the work we can do with our customers in the future that we can build together.
With that I'll turn the call over to Jim for our <unk>.
Fourth quarter results and first quarter outlook.
Thanks, Mike and good morning, everyone.
I will start by addressing the LIFO charge, we took in the fourth quarter.
We had previously expected LIFO income in Q4 based upon trends in carbon steel aluminum and stainless steel related indexes.
From March through November and carbon and for aluminum and nickel from June through October .
We note that carbon steel disc inflationary trends and resulted life in LIFO credit impacts behaved as model and we're consistent with broader manufacturing leading indicators.
For aluminum.
<unk> index and futures pricing stabilized in October and moved higher through year end for.
For nickel the inflection was more dramatic as the price of nickel increased by 50% from trough to peak during the September through December of 2022 interval.
Although this caused an unexpected LIFO expense for stainless on higher stainless inventory levels, let us say, we werent disappointed at all in the positive shift in stainless price fundamentals, but had to appropriately recognize the Q4 2022 GAAP estimation methodology.
Impacts on this welcome change in the nickel and molybdenum markets relative to how it looked through our Q2 through Q3 forecasting lens.
These factors then led to average inventory costs ending the year higher than we had projected and our annual LIFO credit was lower than previously anticipated.
This led to LIFO expense of $34 $6 million being recognized in the fourth quarter.
Inventory days of supply in the fourth quarter ended at 90 days.
Coupled with commodity cost inflections upward in the back half of the quarter led to the average cost in inventory remaining elevated.
Although this had a one time negative impact to margins in the quarter for the annual true up.
Increased commodities future prices into the first quarter for our products provide a more promising outlook for the start of 2023 than previously expected.
Looking to the first quarter of 2023, we expect volumes to sequentially increase slightly more than typical seasonality.
As such we expect first quarter revenues to be in the range of $1 three $7 billion to $143 billion with sales volume is expected to be up 10% to 12% sequentially and average selling price to be down 1% to 3%.
Based on these expectations, we forecast adjusted EBITDA for the first quarter of 2023, excluding LIFO in the range of $78 million to $82 million in earnings in the range of <unk> 98.
To $1 <unk> per diluted share.
In the first quarter, we expect a LIFO expense of approximately $5 million.
In the fourth quarter, we generated $182 million of operating cash and ended the period with $367 million of total debt and $328 million of net debt.
Decrease in net debt of $98 million compared to the third quarter.
Ryerson leverage ratio increased slightly quarter over quarter to 0.6 times, but remains low historically and at the low end of our leverage target range, while the company's available global liquidity is at historic highs and increased slightly quarter over quarter to 909.
For the full year, we generated $501 million of operating cash and decreased net debt by $260 million.
In the past year, we transform the capital structure of our business by redeeming $300 million of.
Of our eight 5% senior secured notes, which retired all our existing high yield debt and is expected to save ryerson over $25 million in annualized pre tax interest.
Going forward as we continue our focus on operational and financial efficiency, we will use our one 3 billion revolving credit facility strategically to fit the nature and needs of our business.
In terms of shareholder returns Ryerson returned approximately $7 million in the form of share repurchases and dividends in the fourth quarter.
Specifically, we repurchased close to 33000 shares of our common stock returning approximately $1 million to shareholders and paid a quarterly dividend of <unk> 16 per share amounting to a cash return of approximately $6 million.
On a full year basis, Ryerson returned approximately $70 million to shareholders, which represents $1 7 million of shares repurchased and 54 of dividends declared per share.
Finally, we announced our first quarter of 2023 cash dividend of <unk> 17 per share, which is the sixth consecutive increase in our quarterly dividend.
With this I will turn the call over to Molly to provide further detail on our fourth quarter financial results and our Capex plans for 2023.
Thank you Jim and good morning, everyone.
In the fourth quarter of 2020 to Ryerson reported net sales of $1 3 billion, which was at the high end of our guidance range and the same period gross margin of 12, 7% was impacted by a LIFO expense of $35 million of average inventory costs came in higher than forecast.
That's it on better than expected commodity price inflection later in Q4.
Excluding LIFO expense gross margin was 15, 3% as cost of goods sold reflect the consumption of higher cost of material through our metals Nick.
Our average selling price declined in line with guidance.
On the expense side warehousing delivery selling general and administrative expenses increased.
Two 1% to $190 million, primarily driven by operating costs related to newly acquired company.
For the fourth quarter net loss attributable to Ryerson was $24 1 million or 65 cents per diluted share.
This includes the reorganization expenses of $5 3 million, primarily related to ERP system conversion costs as well as relocation expenses for our new state of the art facility in Centralia, Washington.
For the full year net income attributable to Ryerson with a record $391 million for $10 and 21 per diluted share.
This includes a loss on the retirement of debt of $21 3 million.
Jane on sale of assets of $3 8 million and a bargain purchase gain of zero point $6 million.
Excluding these one time items and the associated income taxes.
The net income attributable to Ryerson was $403 6 million or $10.54 per diluted share.
In the fourth quarter Ryerson achieved adjusted EBITDA, excluding LIFO of $28 7 million and generated $148 million in free cash flow.
For the full year 2020 to Ryerson achieved adjusted EBITDA, excluding LIFO of $582 million and generated $404 million and free cash flow.
Capital expenditures were $34 million in the fourth quarter and for the full year, we invested excluding acquisition approximately $105 million in our business in line with our budget.
This amount comprises both maintenance and growth projects, including service Center, Modernizations, and Centralia, Washington, and University Park, Illinois.
As we look forward to 2023, we anticipate full year capital expenditures to be.
Around $95 million.
This was comprised primarily of our base maintenance and growth capex spend as well as spending on the completion of our state of the art facility and University Park, which replaces the previously sold <unk> facility in Chicago.
We look forward to the opening of this facility in the second half of 2023.
And with this I'll turn the call back to Eddie.
Thank you Molly.
As we look forward to 2023.
And the next stage of Ryerson advancement.
We would like to emphasize.
That our efforts are underpinned by our mission, which is to create great experiences for our customers employees.
Shareholders suppliers and communities.
Our ongoing development of an investment in an intelligent network of value added metals service centers.
Delivering industrial metal solutions with Joy speed.
You add scale and consistency.
Is the core of these efforts.
Does it want and need better experiences.
In every facet of life and work.
The world of today and tomorrow.
That provides for a better quality of life and.
And broader based prosperity will be largely created and built with the cyclable and sustainable industrial metals.
That has wide metal matters.
As youll experience when visiting us.
At wireless in Dot Com and why the build now movement.
At MSCI Dot org.
So vital and imperative.
Less all passionately advocate for manufacturing.
And all the good that it creates.
Let's keep progressing together.
With that we look forward to your questions operator.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask.
Question.
And our first question is going to come from Phil Gibbs Keybanc capital markets.
Please go good morning, Andy and team how are you.
Yes.
Hey, good morning, Phil how are you doing.
Thank you.
Fourth quarter operating expenses, I think a $190 million plus from what I remember the Maui called out $5 million of ERP, but still probably would've been a little bit higher than we thought.
Relative to where you were in the third quarter with the lower volume. So whats the level of operating expense that we should expect for <unk>.
For the first quarter relative to the fourth because I know there can be some volatility in that based on.
True ups.
Yes of course, I mean, we have to account for the business that we acquired and sort of some of the lagging effects of those expenses post acquisition, even though we're really happy with the synergy cases that we're seeing.
Early in the post acquisition period, and I would also say that we lost a little bit of expense leverage in the fourth quarter, just given the dip in revenue, but we still feel that we're operating within.
Our best operating traditions of being able to realize expense leverage, particularly with some rebound in price and then some of the initiatives that we have underway to take cost out, especially non value added cost and variables verbalization of our cost structure. So we would expect expense leverage.
Certainly.
In Q1.
What about just the absolute level of operating expense versus the fourth quarter baseline.
Yes.
Seen some opex cost come down.
A little bit and transportation, a little bit in energy.
There are some what I'll call remaining inflationary.
Cost impacts that are coming through.
Opex P&L.
Really think our management of those expenses is going to be strong assets as it's been historically I am going to ask John warrant two.
Provide a little bit more color on that thanks.
Thanks, Andy Hi, Phil from an expense perspective, when we look back at 2022 first off our teams did an outstanding job of managing through the supply chain challenges and making sure that we had all manufacturing supplies operating supplies to provide service to our customers.
The area, where we saw the greatest inflation was around fuel.
With diesel being up substantially in 2022.
That is forecast to come down from a high of over $5 a gallon to about $4 50 per gallon. This year. So that's an area that we do expect to see benefits and Additionally, our team in central Dispatch continues to use our digital tools looking across the network to combine loads and to maximize utilization.
One of our fleet.
And just a couple other couple other data points certainly we certainly look to capture the R are the restructuring impacts of ERP conversions and also facility conversions as we moved from retina Centralia and even some what I'll call very early pre operating and start.
Of course in University Park, and as those things transition through.
Our steady state operating cost environments for those modern and new facilities should help bring our overall cost curve down as well.
Okay, perfect and then.
Looking into the first quarter from the fourth what type of <unk>.
What type of margin improvement are you expecting on a LIFO or FIFO basis. However, here youre looking at or thinking about it and I also know that typically.
One when hot rolled prices rise, particularly as much as they have that.
And that can be a good thing for you all but it does take a little bit of time to filter through given the quarterly lag. So I would've thought you would have actually seen some margin pressure.
Given you're probably still selling in some some old prices.
The sheet side so.
Maybe.
Maybe kind of dissect all that.
Sure.
I'll take I'll take a first cut at it.
So you are right I mean, we've certainly you and I have known each other for a long time and talked about sort of the phases. The oscillations in the industry, especially when you have a program book of business and you've got a spot transactional book of business spot transactional business is usually more responsive as replacement cost changes relative to the average cost of inventory that you have.
So you see more positive effects at that inflection in turn in that spot book and then of course program book It takes longer to adjust so for us it's probably it looks like a tailwind really from mid Q2, right now if you project through which.
C contract price improve on that lag while transactional margins continue to improve so based on a 50 50 split book of business.
It's a good tailwind for us assuming that.
This mini cycle extends and prices continue to move.
Higher or at least maintain their present levels.
Thank you.
Okay.
And again, if you'd like to ask a question. It is star one.
And our next question comes from Carter.
From BMO capital markets.
Hi, Thank you for taking my question.
Can you talk a little bit about the stainless side, specifically I know the prices are increasing but how are the inventories and what are you seeing right now.
Yes, good morning Katja.
I'm going to I'm going to have Mike Burbach.
Give me a healthy assist here in just a moment what I would tell you about stainless and it was really a.
It was puzzling in this way.
The stainless market.
So tight for really I would say 12 to 15 months was extraordinarily tight it was very much avail.
Availability market, if you really track through the first quarter of 2021, probably to April or May of 2022, and then you started to see inventories accumulate and imports were very very high particularly.
Particularly from Taiwan for example, and.
The channel got clouded the channel really got Glenn and I mean, we haven't seen.
We haven't seen stainless industry inventories about five months.
As a matter of fact in all my time in the industry I haven't seen industry stainless inventories of five months.
So there was certainly a glut and you had import prices that we're firmly in the market. So even as stainless inflect it even as nickel inflicted molybdenum as tight even though the underlying cost drivers of the product. We're improving you still had to clear this major inventory overhang against demand.
It was falling particularly on the consumer side, where now we've started to see some some rebounds and some positive inflections in the market both on the price side and on the demand side Q.
Q4, certainly saw all those things come home to roost at one time until you could kind of clear that and rebalanced market for stainless which is still in progress, but showing signs of returning to some reasonable health Mike.
Okay got you. Thanks, Eddie I think you hit it pretty good the biggest.
Issue that hit Us really really in Q3 and Q4 second half of the year was that important piece there was a pretty decent bubble that came in after months and months. So very tight supply. So we went from a situation of <unk>.
Very little channel inventory too far too much and so fast forward to today.
The important piece seems to normalized considerably and the amount of imports coming in.
Back to historical levels, if not lower than normal as things have been correcting themselves. So.
We're seeing overall inventories in the industry start to tick back down.
Activity, so far in Q1, and the stainless side is ticking back up.
That normalization is starting but it's still a few months ago.
Okay, and maybe just on your cash conversion cycle. It has been picking up.
Can you talk a little bit about that and how should we look at it going forward.
Yes.
Im going to have some caution.
Chime in here in just a moment, let me just say this I mean, we.
We could've done a better job when it came to our cash conversion cycle and we have higher expectations for ourselves when it comes to managing that component of our business. However, I wouldn't say this given the pandemic hangovers and the extreme oscillations in <unk> in that working capital environment in terms of.
Past due deliveries of metal and then certainly trying to manage on the customer side, what I would call.
Difficult flow through the value chain really for the entire industry and I think you've even seen it now in some of the dynamics that exist relative to price and demand just theres a lack of flow.
I heard a humorous metaphor that.
Everybody had a report out like the NFL reports out on their injury reports you have all these different companies that would be telling you what their interests are and so I. Just think there is a lack of fluid throughout the supply chain and Thats certainly showed up in working capital management in the second half of the year, but we we.
We expect to get back to our historical.
And really our own performance expectations when it comes to networking capital management, and where that cash conversion cycle should be Jim yes. Thanks, Andy.
Gotcha.
I think really.
Any any.
Really well there I think on the.
On the cash conversion cycle uptick we really saw.
On the days of supply on the inventory front.
As noted as we moved up.
A little bit outside of our target range of 70 to 75 days and would expect that to moderate.
The <unk>.
Syed you expect that to perform seasonally thats been very consistent across the board. So it was really an inventory driven event.
Our performance.
<unk> has been outstanding and continues to be outstanding on the inventory side. We believe we can do a better job just in terms of managing through some of these distortions that have turned out to be pretty protracted.
Okay. Thank you very much.
Thanks Katja.
Yeah.
I have no further questions in the queue I will turn it back over to you.
Thank you for your continued support of and interest in Ryerson and please stay safe and be well and we look forward to being with you. All in May for our first quarter 2023 earnings release and conference call take care.
Yeah.
And this concludes today's call. Thank you for your participation you may now disconnect.