Q1 2023 Ryerson Holding Corporation Earnings Call

Speaker 1: Good day and welcome to the Ryerson Holding Corporation's first quarter 2023 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 1 on your telephone keypad at any time.

Speaker 2: Again, that is star one to ask a question. At this time, I will turn the conference over to Mr. Jorge Berstein. Please go ahead, sir. Good morning. Thank you for joining Ryerson Holding Corporation's first quarter 2023 earnings call. On our call, we have Eddie Laner, Ryerson's President and Chief Executive Officer.

Speaker 2: Mike Burbach, our Chief Operating Officer, Jim Clausen, our Chief Financial Officer, and Molly Cannon, our Chief Accounting Officer and Corporate Controller.

Speaker 2: John Orth, our Executive Vice President of Operations, and Mike Hamilton, our Vice President of Corporate Supply Chain, will be joining us for Q&A.

Speaker 2: 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-locked statements. These risks include but are not limited to

Speaker 2: Those set forth under risk factors in our annual report on Form 10-K for the year ended December 31st, 2022, our quarterly report on Form 10-Q for the quarter ended March 31st, 2023, and in our other filings with the Securities and Exchange Commission. Your caution is not to place undue reliance on these forward-looking statements which...

Speaker 2: to the most directly comparable GAAP financial measures is provided in our earnings release filed on Form 8K yesterday.

Speaker 2: I'll now turn the call over to Eddie.

Speaker 2: Thank you Jorge and thank you all for joining us this morning. I want to start by expressing my heartfelt thanks and appreciation to our 4200 plus strong Ryerson team which now includes BLP Holdings and its divisions for their dedicated efforts today.

Speaker 2: and commitment to a safe work environment that enables our mission of delivering great customer experiences throughout our network of intelligently connected industrial metals service centers.

Speaker 2: The first quarter was a period of solid seasonal demand.

Speaker 2: characterized by robust inventory restocking better than expected price drivers and sustaining customer order backlogs.

Speaker 3: While noting ongoing supply chain distortions.

Speaker 3: credit market distress, rising interest rates, and still tight labor markets.

Speaker 3: Secular manufacturing strength got the better of counter cyclical indicators during the first quarter of 2023 as an ever present reminder around the promise and potential of our industry and business.

Speaker 3: while these cyclical factors may be framed in clocked in quarters.

Speaker 3: Our business is investing for the years ahead as we look forward to the growth opportunities engendered by long-term emerging trends that we expect will lead to a growing and sustainable industrial economy in North America.

Speaker 3: Overall, our first quarter started the year with encouraging results.

Speaker 3: whereby we generated positive operating cash flow.

Speaker 3: Solidly exceeded our expectations on earnings per share, increased our quarterly dividend, and maintained our net leverage ratio at the low end of our target range.

Speaker 3: We continue modernizing and growing our business through construction progress at our 900,000 square foot.

Speaker 3: state-of-the-art service center campus in University Park, Illinois, which will be operational later this year, as well as adding to our Ryerson family of companies with the acquisition of value-added processor BLP holdings, which will enable us to do more for our customers.

Speaker 3: across various end markets while expanding our footprint in the Southwest United States.

Speaker 3: Additionally, during the quarter, we participated significantly in our largest shareholders' secondary share offering through the repurchase of 1.5 million shares of Ryerson stock for $53 million, further increasing free float.

Speaker 3: while simultaneously accreting more ownership to non-selling shareholders.

Speaker 3: as we demonstrate further our commitment to shareholder returns and will continue to do so in a balanced and prudent manner.

Speaker 3: The progress of our past work sets the stage for our future.

Speaker 3: The years ahead will be shaped by emerging trends in onshoring, shifting trade paradigms favoring American manufacturing, fiscal investments in infrastructure, and climate transitioning, which we expect will lead to an imperative recyclable metals-intensive overhaul.

Speaker 3: of our society and economy.

Speaker 3: industrial metals are the reusable and sustainable enablers.

Speaker 3: essential to shaping the world around us and paving the way for the required advances in the human experience.

Speaker 3: living conditions, and societal well-being. In this new paradigm, Ryerson's investments in value-added manufacturing, customer-centric connected distribution networks, as well as modernized plants, equipment, and systems position us squarely at the nexus of these global mega trends.

Speaker 3: and propel us toward a brighter future for all of our stakeholders.

Speaker 3: With that, I'll now turn the call over to our Chief Operating Officer, Mike Burbach, to further discuss the pricing and demand environment.

Speaker 2: Thank you, Eddie, and good morning, everyone. I want 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, where our extensive offering and capabilities can provide value while improving their overall experience.

Speaker 3: In the first quarter, we saw a continuation of the shifting price trends for the commodity prices underlying our product mix that were led by supplied ribbon factors.

Speaker 2: Since late in the fourth quarter, domestic steel mills raised prices, increasing HRC spot prices from approximately $650 per ton in December to just north of $1200 per ton as of April .

Speaker 2: Additionally, HRC lead times extended from recent lows late last year to six weeks by the end of March.

Speaker 2: Supply side dynamics, low imports, and strong seasonal restocking have helped support a surge in domestic spot pricing. Conversely, compared to the end of 2022, prices for our bright metals franchise experienced some reversion mid-quarter with declines in alamine nickel and aluminum.

Speaker 2: On balance, our average sales price for the first quarter was $2,709 per ton or just over a 2% sequential decrease in line with our guidance range.

Speaker 2: Turning to the demand environment, over the first quarter, sales volumes improved as customers accelerated the restocking as meal prices rose.

Speaker 4: while we continued to see healthy customer order backlogs. The first quarter sales volume grew by 11.6%

Speaker 4: coming at the high end of our guidance expectations of up 10 to 12 percent.

Speaker 4: With sequential shipment increases across almost all end markets,

Speaker 4: Notably, with commercial ground transportation up 20%, food processing and agriculture equipment up 19% and industrial machinery up 17%.

Speaker 4: As for our industry, in the first quarter, North American industry shipments as measured by the Medal Service Center Institute or MSCI grew by 15.7% quarter over quarter.

Speaker 4: compared to Ryerson's North America volume increase of 14.5%.

Speaker 4: Ryerson's performance delta was largely in market exposure related.

Speaker 4: There was a strong uptick in auto industry and non-residential flat carbon shipments, areas where Ryerson does not have a high end market presence. To briefly discuss the macroeconomic factors, high interest rates, high inflation, cost of input materials, as well as the availability and cost of credit way on.

Speaker 4: Emergency Managers Index or PMI.

Speaker 4: after indicating slowing growth starting the second quarter of last year, continues to report below the growth threshold of 50 as of March.

Speaker 4: The trend of this report indicates that overall companies are slowing outputs to better match demand.

Speaker 4: Finally, as a continuation of that theme, I would like to say that while demand can fluctuate quarter over quarter and cyclical factors can weigh on the cost of doing business, we run our business serving the growing needs of our customers as well as planning for the long-run trends that will shape industrial manufacturing in the future.

Speaker 4: The investments we have made in our technological capabilities and distribution network, including our new state-of-the-art service center in Centralia, Washington, as well as the upcoming 900,000 square foot modernized facility in University Park, Illinois, are geared for the current and future needs of our customers.

Speaker 4: As our customers have experienced over the past few years, change in supply chains can have a large impact on a business.

Speaker 4: While upcoming changes in decarbonization are fluid and the evolution of product needs present a changing landscape.

Speaker 4: Ryerson can serve as an important one-stop shop.

Speaker 4: business partners that can help navigate change through solutions based on our interconnected network in advanced service capabilities.

Speaker 4: As we look forward to the rest of 2023 and beyond, we are excited about the work we can do with our customers and the future we can build together.

Speaker 4: And with that, I will turn the call over to Jim for our second quarter outlook, as well as first quarter review of cash flow, net debt, and shareholder returns.

Speaker 4: And with that, I will turn the call over to Jim for our second quarter outlook as well as first quarter review of cash flow, net debt, and shareholder returns. Thanks, Mike. And good morning, everyone.

Speaker 4: Looking to the second quarter of 2023, we expect volumes to be effectively flat compared to the first quarter of 2023.

Speaker 4: second quarter of 2023, we expect volumes to be effectively flat compared to the first quarter of 2023. As such, we expect volumes to be effectively flat compared to the first quarter of 2023.

Speaker 4: We see second quarter revenues to be in the range of $1.4 to $1.44 billion with average selling prices up slightly, or 0 to 1%. Based on these expectations, we forecast adjusted EBITDA for the second quarter of 2023, excluding LIFO in the range of $93 to $97 million.

Speaker 4: and earnings in the range of $1.28 to $1.36 per diluted share.

Speaker 4: We also expect LIFO expense of approximately $5 million.

Speaker 4: In the first quarter, we generated $80 million of operating cash flow from our operations.

Speaker 4: which included $54 million released from our balance sheet. We ended the period with $395 million in total debt and $351 million of net debt. Ryerson's leverage ratio increased slightly quarter over quarter to 0.8 times

Speaker 4: but remains low historically and at the low end of our leverage target range.

Speaker 4: While the company's available global liquidity remains near historic highs at $856 million.

Speaker 4: Capital expenditures were $28 million in the first quarter, largely in line with our annual budget of approximately $95 million.

Speaker 4: This amount comprises both maintenance and growth projects, including service center modernizations such as our upcoming state-of-the-art facility in University Park, Illinois, which replaces the previously sold Central Steel and Wire facility in Chicago.

Speaker 4: We look forward to opening the facility in the second half of 2023. Additionally, we acquired BLP Holdings during the first quarter, a specialty service center which is comprised of three divisions that provide value-added capabilities to customers in the oil and gas, aerospace, and telecommunications markets.

Speaker 4: as well as creating broader industrial applications.

Speaker 4: We're very excited about welcoming the BLP team to our family of companies and the future we will create together.

Speaker 4: Turning to shareholder returns, Ryerson returned approximately $59 million in the form of share repurchases and dividends.

Speaker 4: The largest contributor to that figure was an opportunistic $53 million repurchase of 1.5 million shares from our largest shareholder, Platinum Equity, in their secondary offering.

Speaker 4: Their sell-down and our repurchase has contributed to our free float reaching 67%.

Speaker 4: During the quarter, we also returned $6 million to shareholders in the form of a quarterly dividend of 17 cents per share.

Speaker 4: We announced a second quarter cash dividend of 18 cents per share, an increase of 6%, marking our seventh consecutive quarterly dividend raise.

Speaker 4: Finally, on May 1st, the Board of Directors approved increasing the share repurchase authorization by approximately $80 million to $100 million and extending the term from August 2024 to April 2025.

Speaker 4: With that, I'll turn the call over to Molly to provide further detail on our first quarter financial results. Thank you, Jim, and good morning, everyone.

In the first quarter of 2023, Ryerson reported net sales of $1.4 billion, which met our guidance and was 9% higher sequentially, driven by a combination of 12% higher volumes offset by 2% lower average selling prices.

In the same period, gross margin of 18.8% was an expansion of 610 basis points versus the previous quarter.

We also recorded LIFO expense of $4 million. Excluding LIFO expense, gross margin was 19.1% as cost of goods sold reflected consumption of lower cost of materials through our metal sales mix.

On the expense side, warehousing delivery, selling general and administrative expenses increased 2% sequentially to $194 million primarily driven by variable expenses related to higher sales volumes as well as expenses at our recent acquisitions.

and let's keep progressing together. With that, we look forward to your questions. Operator. And as a reminder, that is star one if you would like to ask a question. And if you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, star one if you would like to ask a question. We'll take our first question from Samuel McKinney with KeyBank. Hi, good morning. Hi, Sam. Good morning. How are you doing?

Good, good. I'd like to start off asking about the demand evolution in the second quarter, specifically if you could talk us through April versus sort of the average you saw in the first quarter, and then specifically any differences among your key in markets.

Sure, I'm going to go ahead and turn the question over to Mike Burbach in a second, but just for context, we felt demand was good in the first quarter. B to B was stronger than B to C, which you would expect just given the cyclical dynamics in place through the quarter.

Given that early April we had a holiday, we're still looking for those demand trends to emerge and solidify through the quarter. But so far, there's still, still, I mean everywhere I look there's demand. The question is whether that demand is going to get led or not.

Everywhere we look there's demand. We're just looking to see that demand come through And see the backlogs to over that you know we think are still pretty robust So I'm going to go ahead and turn over to Mike Burbach, and he can give you some more color.

Thanks Eddie and hi Sam. Yeah, I think Eddie hit the key points here. As we look at Q2, what we hear from our customers is generally positive. Backlogs remain fairly robust.

There are a couple of themes that seem to happen more often than not. When we are talking to customers, the biggest concern people have is still labor shortages from a lot of our OEM and manufacturing companies, customers. But generally speaking, the sentiment is positive.

No serious differences in the end markets Q2 versus Q1 that we see. Just more of the same and should be a fairly steady and good quarter. Yeah, the only thing I would have pinned on to that is the CapEx economy is strong. And that B2B CapEx economy seems to be strong.

Okay, thank you. And then balance sheet inventories were down more than 10% quarter over quarter in the first quarter. Was that more a function of pricing or volumes in your opinion? And how has that dynamic playing thus far into the second quarter? Sure. With respect to inventory, we saw lead times come in from Q4 into early Q1 before those lead times started to inch out again. But the extension of lead times was not dramatic. And so it just gave us an opportunity to bring our cycle in, to bring our purchasing cycle in.

and take out some excesses that accumulated throughout COVID. But I'm going to go ahead and I'm going to flip this to Mike Hamilton. He can give you some more color on that.

Thank you Eddie. Sam, I think Eddie covered off most of the points and the reality is imports have remained subdued. Lead times are manageable and in line with what we would expect. So with shipments in line with what we expected for Q1, we were able to take the inventory down and get some better working capital management through the cycle.

Okay, thank you. And then lastly for me, just if you could provide an update on your internal growth initiatives and the progress of the new facilities at Centralia and University Park. Thank you.

Sure, I'm going to go ahead and tip this over to John worth in just a moment, but for context. We're really pleased that we've been able to continue to execute our growth plans through mini counter cycle in the second half of last year and to continue to be able to invest in growth.

with really good shareholder returns alongside of those initiatives. So in terms of building these systems, and in terms of bringing up and starting up Centralia, and starting up University Park at the end of Q2 and end of Q3, Sam, this is all part of how we have to modernize our business across.

of the 100 plus locations that we have now.

In order to provide the customer experiences we want to provide we really have to be able to provide a very low friction or frictionless experience sharing inventory sharing equipment being able to buy inside and out and moving moving our materials inside and out of our network even to third-party.

outside processors. So we need to make those investments to bring that vision about and to get to that next level operating model that we think is going to try to keep it a growth and allow us to meet and surpass our next stage financial targets that we discussed during our investor day last November in New York.

But specifically to Centralia and University Park, I'm going to ask John to give you a little bit more of a color on that.

Thank you, Eddie, and good morning, Sam. As Eddie mentioned, we have really focused on the investment and growth specifically around value-add investments, safety, productivity, and throughput. At Centralia, our team has successfully and safely brought that facility into operating status.

and we are ramping up production and completing some of our automation projects around plate processing investments. And at University Park, construction is proceeding very well. We have actually taken possession of the facility now and we will be

begin moving into the facility in Q2 and begin operations in H2. And just to touch on a key point here also, we're utilizing proprietary systems and tools that we've developed around the Ryerson Production System so that we can optimize that end-to-end fulfillment process for our...

Katja Janczyk with BMO Capital Markets.

Thank you for taking my question. First, you're guiding for pricing in the second quarter to be flat to up 1%. Now, I would expect that would be better given the significant increase in the carbon – many carbon steel pricing.

So could you provide some of the color of why the pricing only flat to up 1%? Hi Katja, good morning and I hope you're doing well. With the pricing we're really seeing just some early quarter offsets where you had some reversion in aluminum and nickel pricing or price drivers.

that although they turned up recently and they are more range bound, that just needs to work its way through our P&L from a spot and contract perspective. And you are right, carbon resets particularly in our program business, we should start to see those come through as accretive to average selling price through the quarter.

But taking a little bit more of a conservative stance just in terms of price, just given the timing and the flows of when does aluminum and stainless come back up and I would say level out from being down.

I'd say in the second half of Q1, while carbon continues to...

second half of Q1 while carbon continues to incrementally increase.

And it seems that margins in the first quarter were better than expected. Is that driven by mix?

Or can you talk about that?

Yeah, so coming out of Q4 and the tailing effects of Q4 and what we reported in Q4, we were certainly seeing margins expand even towards the end of the year and going into Q1. But I would really direct your focus to our value add mix and we did more value adding change.

And as we've said, the more transactional business and the more value-added business we do, that will drive that margin profile higher. So we certainly saw a lift from Excelsior. We saw a lift from Howard aluminum. We also saw a lift from our Ryerson advanced processing business.

and those fabrication margins that have been a strategic target for us for some time now.

Can you remind us how much value added processing currency is of revenues? Yeah, so we were, during investor day last year we had.

excuse me, communicated that it was presently at 14%. Our target is 20 and we came in, excuse me, we came in at about 17 and a half in queue.

So we made some nice progress. And is that sustainable or is that just a first quarter and maybe it's going to trend over? How should we think about that? I think the regression line is certainly up and to the right just based on cyclicality. I mean we could have quarters where we dip down a few basis points here and there, but I think the trend is...

is decidedly up when you look at it on a regression-line basis.

Okay, thank you very much. Thanks, Katya. And once again, that is star one if you would like to ask a question.

Good morning, how are you? Hi Alan, how are you doing? Good. So can you talk about, first the acquisitions that you've made, you know, since really most, most since the third quarter of last year, how fully integrated are they? And you know, kind of, how do you think about the potential when you look at a year or two, you know, in terms of EBITDA like that? Thanks Alan, without getting into specific targets for those acquisitions, I would say this.

When we buy businesses like Howard, and like Excelsior, like DLP, we first take the Hippocratic oath, and that is to do no harm. Those are strong businesses with really good franchises and value adds. So we really look to work with them in terms of that post-close synergy case where we want to get those capabilities that they have, and things that they do really well.

Things where we really lend a helping hand, lower cost of overall capital. But with those businesses that really do have goodwill and they've proven that they have sustaining goodwill, we really want to increase that commercial envelope while training our people on those products, on the things that they do well, and then getting those things expanded throughout the network with that value add within that, I'd say in Howard's case, aluminum. That is how it's looking.

Excelsior being more broad-based, BLP being more broad-based, but maybe more carbon-centric. We want to drive more opportunities into those plants and also take their best practices and apply them to other plants in our network.

So I realize each acquisition is different, but when you think about kind of long, like how do you think about, when do you think about it being, getting all those benefits? Does it take a year, two years? How do you think about it? I love it.

In the case of Excelsior and Howard and BLP, the benefits accrued on day one, I think, going back to 2018 when we acquired Central Steel & Wire, those benefits, they continue to play out, but they take longer to realize. When we do investments in new service centers, those benefits may be stretched out over a slightly longer horizon as that facility gets commissioned and really starts to season out. But it's the potential that is really so enticing.

and that really gives us so much optimism. Because once those facilities are fully equipped, once you go through that shakeout process you really see a significant leap forward in service. You see a leap forward in the types of customer solutions you can provide. So in that continuum, it can be day one depending on the acquisition and some of them that I've named, others as well from our past. And at the same time, some of those investment cycles are a little bit longer. So we're going through an enterprise resource planning system upgrade throughout our network to facilities that were on legacy systems.

that really need to be in place, and really for us to make that next leap forward, we need to be on a uniform, even key platform. So a lot of the digital tools that we are developing, they can scale throughout our enterprise. So that's going to continue to unfold and fulfill its promise over the next several years, and even beyond.

over 100 million last year. How do you think about the amount that really is maintenance versus growth?

That's a good question. I would say just given the increase in our overall footprint, maintenance, capex, I would tell you is probably at a run rate of 30 to 35. If we go into a protracted downturn, I mean we can go ahead and we can knuckle that down.

to 25. But right now, given the expansion in our footprint over the last several years, 30 to 35 million on maintenance cap x and no shortage of good growth opportunities. But as I've discussed with the stakeholder community before, there's a very, there is a point of intersection between

even the amount of capital that may be available to you to invest and what you can successfully deploy because your organization can assimilate that capital investment and put it to the best use to where you stay on schedule on time and you generate the returns along the time horizon that you expect. So, 95,

good number for us. We have no shortage of good projects to do. Frankly, right now we're seeing some lead times extend with equipment suppliers, which is the other half of that demand answer I gave earlier, which is we would have expected in a counter cycle, in a downturn, we would have expected that equipment lead times would have already come in.

And then maybe there would be cancellations or the ability to substitute pieces of equipment because of order cancellations or pauses in other people's spending. But we haven't seen that yet. So really from a perspective of ongoing supply chain tangles and extended lead times to procure CapEx. Thank you.

Surprisingly, those lead times are still somewhat extended, which is maybe causing a little bit more of a...

an extension of when we would like to get that equipment in, get it installed, and running revenue across it. And I guess my last question is obviously given your financial improvements over the last few years, can you talk about acquisitions, how you're thinking about acquisitions today and how you're thinking about acquisitions today.

extension of when we would like to get that equipment and get it installed and running revenue across it. And I guess my last question is obviously given your financial improvements over the last few years, can you talk about acquisitions, how you're thinking about acquisitions today and like that?

Yeah, absolutely. So we have a good pipeline now. I really, I can't stress enough, not just what's in the pipeline, which I can't discuss, but given what we have completed and executed upon, really, really pleased with the acquisitions we've made.

And I would say that we look at everything from smaller to larger. It's really just a question of does it really fit our strategy? I go back to a conversation I had years ago with another CEO just talking about how important it is to stay disciplined.

when it comes to M&A. It's really easy to make mistakes in M&A, and you really have to keep the discipline to make sure that the companies you acquire are really gonna deliver the goods. And so we have to keep that discipline, but no shortage of opportunities.

Okay, great. Thank you very much. Thanks, Alan. And as a final reminder, that is Star 1. If you would like to ask a question, we'll pause for just a moment. And it appears there are no further telephone questions. Okay, thank you.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.

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