Q3 2023 Ryerson Holding Corp Earnings Call
Good day and welcome to the Ryerson holding Corporation third 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 one on your telephone keypad at anytime again that is star one to ask a question.
At this time I'd like to turn the conference over to platinum Deer. Please go ahead Sir.
Good morning, Thank you for joining Ryerson holding corporations third quarter 2023 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.
Routing officer, and corporate controller, John <unk>, our executive Vice President of operations like Hamilton, Our Vice President of corporate supply chain and Jorge Bernstein, Our Vice President of finance will be joining us for Q&A.
Our comments on this call contains 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.
These risks include but are not limited to those set forth under risk factors in our annual report on Form 10-K for the year December 31, 2020 to our quarterly report on Form 10-Q for the quarter ended September 32023, and in 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.
In addition, all of them.
Marks 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 measures 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 turn the call over to Eddie.
Thank you Pat and <unk>.
You all for joining us this morning.
I wanted to start by expressing my heartfelt, thanks, and appreciation to our 4300 plus strong Ryerson team for their continued emphasis on creating and sustaining a safe and productive operating environment, which is paramount to our mission of delivering.
Great customer experiences throughout our network of intelligently connected industrial metal service centers I would also like to welcome Northern incorporated located in Central Wisconsin.
Ryerson family of companies founded in 1964, Norland is an excellent fit within Ryerson strategy of acquiring high value added industrial metals processors.
Third quarter of 2023 saw a continuation of counter cyclical headwinds for the second quarter characterized by falling average selling prices.
Compress margins, particularly within our stainless steel franchise.
Hello, and customer demand for industrial metals as reflected in decelerating transactional customer quoting activity and reduced OEM order sizes through the quarter were consistent with broader macro manufacturing indicators, such as metals price indexes and the purchasing.
<unk> Index PMI.
I would note. However that we are encouraged by recent inflections and HRC index pricing manufacturing PMI and stimulated policy announcements in China, indicating that price and demand conditions may be stabilizing as we move through the balance of the year inside Ryerson, while navigating through ongoing counter.
Cyclical conditions, we continued making important investments on new and enhanced service centers machinery and equipment acquisitions homegrown software development and.
Ongoing ERP conversions to build out our next generation operating model. These investments woven together afford us the opportunity to create the best industry customer experiences within our value added scalable network of intelligent service centers as we work toward our next stage financial targets.
And desired shareholder returns.
We're doing the hard stuff, but the smart stuff that creates and sustains next level capabilities in returns as.
As we look ahead to the fourth quarter of 2023 and longer term, we will continue balancing the necessary management of cash.
Hunter cyclical business conditions, while bringing our growth and improvement initiatives to harvest with that I'll now turn the call over to our Chief operating Officer, Mike Burbach.
Discuss the pricing and demand environment.
Thank you Eddie and good morning, everyone.
In the third quarter price trends for the commodities that underlie our product mix continue to ease.
Domestic hot rolled coil prices declined on average $70 per ton per month over the quarter as lead time shrink and steel mill capacity utilization remains low.
Similarly prices for our bright metals franchise were affected by declining nickel and aluminum prices during the third quarter contributing to margin compression.
Due to pricing turbulence and sales mix, our average sales price came in slightly below our guidance range for the third quarter at $2608 per ton or down 4% sequentially.
Turning to the demand environment third quarter sales volumes met guidance expectations.
We're in a period of Destocking, where easing conditions in our end markets were compounded by orders slowing in reaction to a period of falling prices.
[noise] tighter credit conditions, and a dampened economic outlook for the industrial manufacturing sector over the near term.
These macroeconomic impacts were felt across our industry during the quarter.
North American industry shipments as measured by the metals Service Center Institute or MSCI declined 5% quarter over quarter.
Reflecting these conditions sequentially Ryerson as volumes were lower by three 6% led by shipment decreases in construction equipment food processing and agriculture.
Which were partially offset by shipment increases in oil and gas and metal fabrication and machine shops.
Although counter cyclical conditions as previously noted continued into the third quarter and that persisted early into the fourth quarter industry inventories are normalizing to better match demand.
Finally, I would like to say that while the current cycles characteristics have resulted in demand from our customers.
We expect that our customers plan for increasingly needs from emerging trends are modernized facilities and increased capabilities are well positioned to serve them at greater speed scale and efficiency throughout our integrated network of service centers.
As we've noted.
<unk> continues to partner with our customers for their long term needs and we continuously look for growth opportunities to better serve our customers.
In that regard. The addition of New Orleans to our family of companies is a great fit.
Their expertise in automation and robotic manufacturing is a capability expansion to our network.
As we noted last quarter, our value add percentage of sales has increased to 18%.
Growing from approximately 14% a year ago, and we reiterate that our target.
At least 20%, which is expected to translate to higher and more durable margins through the cycle.
And with that I will turn the call over to Jim for third quarter financial highlights as well as our fourth quarter outlook.
Thanks, Mike and good morning, everyone.
Before discussing guidance for the fourth quarter I would like to highlight the drivers for our third quarter performance compared to our guidance expectations.
During the period, we met our guidance range for adjusted EBITDA, Excluding LIFO.
Exceeding our guidance on earnings per share generated positive cash flow decrease net debt, while also maintaining our net leverage ratio within range and return cash to shareholders through dividends and share repurchases, while continuing to execute our organic and acquisition growth investments.
Facing an environment of easing prices and softer demand, we reported adjusted EBITDA, excluding LIFO of $45 million, which came in within our guidance range of 43 to 47 million.
While our earnings per share of $1 was notably higher than our guidance range of 31% to 43 <unk> per share.
The beat on earnings per share was driven largely by the LIFO income recognized over the quarter, which also benefited gross margins.
Looking to the fourth quarter of 2023, we expect volumes to be down sequentially compared to the third quarter in line with normal seasonality.
As such we expect fourth quarter revenues to be in the range of $1 billion to $1.15 billion with average selling price was down 3% to 5%.
Based on these expectations, we forecast adjusted EBITDA for the fourth quarter of 2023, excluding LIFO in the range of $28 million to $32 million in earnings in the range of 18 to 22 per diluted share.
We expect LIFO income of approximately $8 million to $12 million.
In the third quarter, we generated $79 million of cash flow from our operations, which included a $15 million release from lower working capital requirements.
We ended the period with $366 million of total debt and $329 million of net debt.
Ryerson is net leverage ratio remains stable quarter over quarter at 1.4 times and remains within our leverage target range, while the company's available global liquidity remains robust at $807 million.
Benefiting from a healthy balance sheet, we remain focused on investing back in our business through the cycle.
Capital expenditures were $22 million in the third quarter.
This amount comprises both maintenance and growth projects, including service Center Modernizations.
We're very excited about the modernization effort, taking place across our network, which will continue to drive better customer experiences enhanced long term potential of our equipment and improve asset utilization.
Turning to shareholder returns Ryerson returned approximately $10 million in the quarter, which was comprised of $6 million in dividends and $4 million in share repurchases.
We paid a quarterly dividend of <unk> 18 in one quarter cents per share and have announced our fourth quarter cash dividend of 18, and one half cents per share an increase of one 4% our ninth consecutive raise.
As for share repurchases after repurchasing $4 million in shares in the open market. We currently have approximately $46 million remaining on our $100 million authorization, which has a term until April of 2025.
As part of the capital allocation policy highlighted in our next phase targets, we will continue to prudently evaluate our shareholder return opportunities as well as our overall capital allocation strategy to maximize long term shareholder value.
With that I'll turn the call over to Molly to provide further detail on our third quarter financial results.
Thank you Jim and good morning, everyone.
And the third quarter of 2023, Ryerson reported net sales of $1 2 billion, which was 7% lower sequentially driven by roughly an equal split of lower volume and lower average selling prices.
In the same period gross margin of 20% wasn't expansion of 60 basis points versus the previous quarter.
Excluding LIFO gross margin fell 140 basis points from the second quarter to 17, 3% as average selling prices for our bright metal sales decreased faster than cost of goods sold.
On the expense side warehousing delivery, selling general and administrative expenses decreased 5% sequentially to 193 million driven by lower variable expenses.
Lower accrual for our personnel and lower professional fees.
Fully offset by higher reorganization expenses related to system implementation and startup costs associated with the University Park Service Center.
For the third quarter of 2023 net income attributable to Ryerson was 35 million or $1 per diluted share compared to a net income of $37 6 million and diluted earnings per share of $1.06 in the prior quarter.
Finally, ryerson achieved adjusted EBITDA, excluding LIFO of $45 million in the third quarter of 2023, which compares to $70 million in the prior quarter.
Free cash flow generation was $57 million this corner and compares to $69 million in the prior quarter period, driven by operating earnings as well as working capital really.
In the first nine months of 2023, Ryerson has generated 205 billion and adjusted EBITDA, excluding LIFO and 179 million in free cash flow.
And with that I'll turn the call back to Eddie.
Thank you Molly.
During the third quarter, we navigated counter cyclical conditions, well and expect a flattening of these conditions as we move through the balance of the year, reflecting familiar holiday seasonality.
We firmly believe metals are the perennial materials, enabling both the remedial and transformative manufacturing and building required to meet the formidable challenges of these times, while improving the human experience and quality of life for the greatest.
There are people there.
The investments Ryerson is making through the cycle.
In our network of intelligently connected industrial metals service centers that deliver customer solutions with joy speed scale.
Now you add and consistency position Ryerson and its stakeholders well for an enduring and valuable future as these secular trends play out in the years ahead with that we look forward to your questions.
Operator.
And if he would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to the lawyers signal to reach our equipment.
Again star one if you would like to ask a question.
Well now take our first question from Carter Johnson with BMO capital markets.
Hi, Thank you for taking my questions first on the Norland acquisition can you provide a little more information on what the EBITDA and margins in that business are.
Hi, good morning Happy Halloween.
We don't usually disclose the breakout.
On acquisition.
Margins.
Our top line.
I used to say that the fabrication margins.
In a business like.
For EBIT margins are.
More than <unk>.
At mid cycle.
Yes, the revenue at Norland is comparable to the.
The average service center size in the industry, which is between 25 and $35 million.
Okay.
Okay, and then <unk>.
Given that the environment currently is a bit more challenging how does the acquisition pipeline look like is there a potential for increase in M&A activity over the next few months.
Okay.
The bolt on M&A pipeline is really good.
Its stock.
We have a lot of really good opportunities that we're evaluating.
And so where we're bullish on our on our business development pipeline.
And maybe just one more if I may on the Capex heading into next year and I understand it's still early but how should we think about it.
Yeah, I'll go ahead and turn it over to Jim for a little more detail, but we look at it in terms of three buckets whats our current maintenance Capex what are the big projects that we're doing that we need to finish such as University Park in Shelbyville for example, and then how much.
Growth Capex.
Around the rest of the network. So Jim do you want to provide some additional detail.
Yeah, Thanks, Eddie and good morning Gotcha.
What I would say is for the balance of this year. Our expectation is it's still in that $125 million range for Capex spend.
And then.
This quarter. We're currently working through our Capex plans for for 2024 in the next couple of years. So.
We'll we'll be able to talk more to a direct number in February.
Yeah.
Okay. Thank you.
Yeah.
Well now take a question from.
Hey, apologize we will take our next question from Phil Gibbs with Keybanc capital markets.
Hey, good morning.
Hey, good morning itself.
Jim can you talk a bit about the about the end markets.
Quickly.
What youre seeing in class eight.
Energy.
H back in general Durables.
Yeah.
Yeah.
Mike you want to.
Do you want to take that one.
Sure.
Yes, nothing really to talk about it learns a lot.
[laughter].
That's part one.
Why do we keep drifting upward for Halloween, So that's what I want to know.
Yeah, well, we'll have a chat afterwards.
Good morning, Phil Thanks for the question.
Ill different different activities going on in the various markets as you as you probably well know specifically ask about class eight.
I I would say 2023 has been a an up year for class eight in general compared to 2022.
And it looks like that activity level that we're experiencing a short term here might lead into first part of next year, but.
Our forecast for them from the industry would indicate there's going to be a downturn sometime.
Maybe second third quarter for the balance of 2024.
We're watching that very carefully listening to customers. There is a variety of opinions. Besides what the industry is publishing so we stay close to it but so far this year, it's been fairly strong and in the near term appears to remain that way as far as.
Oil and gas we saw an uptick in Q3 compared to Q2, we also saw year over year uptick.
You know, what when I look at oil and gas.
Our involvement in it it's not our largest end market in the sense compared.
Compared to say class eight and some of the others, but.
It's the business we've been enjoying.
Largely driven by well completions and it's all about speed and service, we've got some great inventories well positioned and really it's a game with speed to get back to customers quickly and effectively and make sure that we got the REIT products at the right place at the right price so.
We enjoy the business and the outlook right now is pretty much more of the same on a go forward basis, and then you mentioned as fee HVA see yes.
Sort of a mixed bag there.
The customers are probably supply and more of the.
Housing related activities.
Activities, maybe are having some tougher times than the ones that might be going on some non res construction. So that all adds up to something that's maybe down year over year compared to what we had last year.
Outlook is a little fuzzy there with with interest rates high in the housing starts still still although at a slow level. So.
Near term more of the same but the.
Long term I think it's a function of the.
Non res construction trends as well as housing starts.
So I would I would add this to Mike's answer I would say that.
With the exception of stay aerospace and automotive, which which even though it looks like the strike is in the process of getting settled.
With certain end markets being relatively stronger.
The general demand environment has been it's been a buyer's market. So you see smaller quoting you.
See smaller quoting opportunities you see less quoting opportunities.
<unk> certainly been encourage you kind of you have to take the data points as they come. These days certainly been encouraged by industry inventories the level of those inventories recent price increases.
Stabilization, even around I'd say stainless pricing components aluminum is I'd say neutral to trending better carbon of course.
It has really trended higher over the last six weeks.
<unk> looked like they are trending up a little bit could be a restocking.
The environment as we move into Q1 of next year or could it be better than that but current indicators have been encouraging, but certainly still experiencing a lagging counter cyclical effects.
Now seasonal slowness.
As we move through the balance of the year.
Yeah, Eddie do you have an update on the the project in Chicago and in timing Wise you know when does it start where are you through the through the process.
Yeah, so equipment has been.
Installed.
Racks are up.
Some limited production is taking place in the value add arena.
Long products processing, we should be fully operational in University Park.
By early April of 2024.
Big undertaking it you know as I referenced in the script I mean hard stuff with smart stuff I mean, these things will ultimately make a big positive difference as we look to.
See our earnings stream become more consistent and higher through the cycle.
But I'll ask John <unk> to maybe provide some additional detail on University Park.
Thank you Adam Hi, Phil with regards to the investment at University Park.
The work on the value add side is actually ahead of schedule and as Eddie mentioned, we are actually doing limited production now on the long product side and our teams are really focused on bringing the automation to drive safety and productivity fully up to speed and we absolutely.
We see a clear runway to be fully operational in April of next year.
Thank you.
And then a couple of questions just one on net working capital on a one on one on pension what are you anticipating for we're not working capital in the fourth quarter, because I know you did take some of the inventories down this quarter, which was a nice tailwind, but as you said.
And Cummings or are starting to starting to stabilize.
And then on the pension I know rates have been climbing, which helps the liability, but you know the outcome of the remeasurement will depend on.
The mix of the mix of our bonds.
Bonds and equities in the portfolio so.
How does that potentially shape up if we just looked at it as a.
As is today, meaning if we mark to market pension and OPEC today. Thanks.
Yes, sure so I'll kick it to Jim and just the second I'll give you some some broader based color on on the question.
Net working capital is going to come down.
Thank you.
With some of the better news that's occurred recently it also means lead times are going to get stretched out we know the mills are still struggling with on time delivery issues on a mill by mill basis.
So that's sort of a built in I would say that's a built in regulator of how fast you can build inventories even if you wanted to get a little bit long.
You want to improve the quality of your inventory.
So I mean, just given where our guidance is net working capital should come down.
And we're doing some good work around the pension and Oracle legacy liabilities at present, so I'll kick it over to Jim and he can give you a little bit more a little bit more detail on.
With respect to those questions.
Yeah.
Yeah. Thanks, Eddie.
I think Phil I think Eddie Eddie pretty much covered the working capital.
Question, the only thing I would.
Pinned down to that is yes.
As you know with less shipping days in Q4 would also expect our nominal AR balance to fall a little bit.
Better days sales outstanding.
Fairly consistent on the on the pension front.
Certainly obviously, the Remeasurement will occur at the end of the year with.
Discount rates and asset returns you know taken into account.
What I would say is we have gone through a very thoughtful exercises in the past several years.
With either a new innovations to derisk the plan or some lump sum payouts.
In order to take that liability down.
Far lower than it was historically and we'll continue to do that work.
Yeah.
Thank you.
They sell.
As a final reminder, that is star one if you would like to ask a question. We'll now take a question from Alan Weber with robotic advisors.
Oh good morning, how are you.
Hi, Allen good morning, how are you.
So can you talk about the ERP kind of two things.
Well, it's maybe three what's your hope when when it will be complete what you hope it accomplishes and then.
Where it fits in as you've often talked about customer service.
Yeah, absolutely so some a brown stand so I'm perpetually hopeful.
ERP is difficult Alan its just as difficult when you when you finally make the decision we made the decision at the right time, we finally had to make that call I mean before Covid, we had done ERP conversions, maybe one at a time.
Slowly getting to a common ERP environment on SVP.
And there is always puts and takes when you do that you definitely take hits in the short term there's no question about it.
But if you really wanted to and if you want to engineer your way to a.
Who do you want to engineer your way towards your strategic objectives, especially around.
The customer experience and you wanted to digitalize. Your network you really need to have that uniform platform. So you are not constantly developing in two to three to four different environments and theres a lot of other costs you have to carry when you do that so you really want really want to have it be ruining uniform master data environment, which really allows us to offer next level.
Services to your customers very quickly very efficiently.
In a way that you should be able to garner Ricci business. When it's done so it's a big undertaking it's a big investment, but ultimately it's the investment you have to do if you want to elevate yourself to the next level. When it comes to things that we talked about before such as our E. Commerce capability is our ability to quote really fast our ability to develop.
AI use cases, which we have a couple in development for example, so I.
There's no way you can get around it you just have to do it.
And it's not easy.
But the rewards are there on the other side as you begin to assimilate that digest that and then you can develop.
Then on that one uniform platform that runs your business transactional.
By the second by the hour by the day, so on so forth.
So I guess, it's still unclear, though and I realize its one of these things where you never fully done I guess in some ways, but when when do you really start to see you.
Kind of the benefits of the investment.
Yeah.
You see the benefits of the investment.
Usually I would say hey take.
Take from the time that the conversion is finished.
It usually takes six to nine months before the business unit Thats converting really learn the rules and the controls.
All of this system and how to use it, especially when they didn't using let when they've been transacting in a legacy environment for a long time. So it's usually six to nine months we have.
One of our biggest multi markets is in the process of converting now we've got a couple smaller divisions that are going to convert in the first quarter of next year that we're going to take a nice long pause and we're going to settle in and I believe at that point in time once we get past Q1 of 2024.
Going to start to see good returns from our investment as we move through the balance of the year dependent on the macro of course, but I think that really helps our self help initiatives going forward.
Okay, great. Thank you.
Thanks Alan.
And it appears there are no further telephone questions I would like to turn the conference back to our presenters for any additional or closing comments.
Wishing everyone, a safe healthy and enjoyable holiday season, and we look forward to being with all of you in the new year to discuss Q4 and full year 2023 results.
Take care. 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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