Q2 2024 Ryerson Holding Corp Earnings Call
Operator: Good day, and welcome to the Ryerson Holding Corporation second quarter 2024 conference call. This 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. Again, that is star number one to ask a question. At this time, I'd like to turn the conference over to Mr. Pratham Dear, Manager of Investor Relations. Please go ahead, sir.
Good day and welcome to the Ryerson holding Corporation second quarter 2024 hour 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.
Again that is star one to ask a question.
Speaker Change: At this time I'd like to turn the conference over to Mr. Pat them Dear manager of Investor Relations. Please go ahead Sir.
Pratham Dear: Good morning. Thank you for joining Ryerson Holding Corporation's second quarter 2024 earnings call. On our call, we have Eddie Lehner, Ryerson's President and Chief Executive Officer, Mike Burbach, our Chief Operating Officer, Jim Claussen, our Chief Financial Officer, and Molly Kannan, our Chief Accounting Officer and Corporate Controller, and John Orth, our Executive Vice President of Operations.
Edward J. Lehner: Good morning, Thank you for joining Ryerson holding corporations second quarter 2024 earnings call on our call, we have Eddie Lehner, <unk>, President and Chief Executive Officer.
Speaker Change: Burbach, our Chief operating Officer, Jim Claussen, our Chief Financial Officer, and Molly, Canada, Our Chief Accounting Officer and corporate controller.
Speaker Change: John <unk>, our executive Vice President of operations like Hamilton, Our Vice President of corporate supply chain at all.
Pratham Dear: Mike Hamilton, our Vice President of Corporate Supply Chain, and Jorge Beristain, our Vice President of Finance, 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 statement.
Speaker Change: Hey, Bear state, our vice President of finance will be joining us for Q&A.
Pratham Dear: These risks include, but are not limited to, those set forth under the risk factors in our annual report on Form 10-K for the year ended December 31st, 2023, our quarterly report on Form 10-Q for the quarter ended June 30th, 2024, 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 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.
Speaker Change: Certain comments on this call contains forward looking statements within the meaning of the federal Securities laws.
Speaker Change: 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.
Speaker Change: 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 ended December 31 2023.
Speaker Change: Our quarterly report on Form 10-Q for the quarter ended June 30th 2024, and in other filings with the Securities and Exchange Commission.
Speaker Change: 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.
Speaker Change: In addition, all.
Speaker Change: 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 measures to the most directly comparable GAAP financial measures is provided in our earnings release filed on form.
Pratham Dear: A reconciliation of non-GAAP measures to the most directly comparable GAAP financial measures is provided in our earnings release filed on Form 8K yesterday and is also available on the Investor Relations section of our website. I'll now turn the call over to Eddie. Thank you, Pratham.
Speaker Change: Four 8-K yesterday.
Speaker Change: Also available on the Investor Relations section of our website.
Speaker Change: I'll now turn the call over to Eddie.
Speaker Change: Thank you proud of.
Edward J. Lehner: And thank you all for joining us this morning. I want to start by recognizing the dedicated effort of our entire Ryerson team and Ryerson family of companies to prioritizing a safe and productive operating environment for our over 110 facilities across North America and China in the second quarter of 2024. Our service center network navigated through counter-cyclical conditions that were characterized by metals, commodity price compression, or our product mix, while we saw overall metals service center industry shipments continue to decline.
Eddie: And thank you all for joining us this morning.
Eddie: Want to start by recognizing the dedicated efforts.
Eddie: Although our entire Ryerson team and Ryerson family of companies.
Eddie: We're prioritizing safe and productive operating environment for our over 110 facilities across North America and China.
In the second quarter of 2024.
Eddie: Our service Center network navigated through counter cyclical conditions.
Speaker Change: Were characterized by metals commodity price compression or our product mix, while we saw overall metal service center industry shipments continued to decline.
Edward J. Lehner: Before going further into my script commentary, I want to convey to our stakeholders that although this counter-cyclical cycle that began in the third quarter of 2022 is getting long in the tooth by historical standards at eight quarters long, with a few head fakes and bungee cord oscillations along the way, there are important insights to be had as it pertains to the macroeconomy, industry conditions, and Ryerson. The most prominent factor currently in play when looking at this particular counter-cyclical and its later stages is disproportionate weakness in bright metals, i.e.
Speaker Change: Before going further into my script commentary I want to convey to our stakeholders, but although this counter cycle that began in the third quarter of 2022 is getting long in the tooth by historical standards at eight quarters long wait a few head fakes and bungee cord oscillations along the way.
Speaker Change: There are important insights to be had as it pertains to the macro economy industry conditions.
Speaker Change: Ryerson.
Speaker Change: The most prominent factors currently in play when looking at this particular counter cycle and its later stages are disproportionate weakness in bright metals.
Edward J. Lehner: aluminum and stainless steel, higher for longer interest rates, China's economic weakness and overcapacity, as well as slow to develop secular trends around reassuring and fiscal industrial policy multiplier impact. As we work to peel back producer inflation effects, there are echoes of the second half of 2015 in play combined with the run-out of post-pandemic supply chain distortions and resultant de-stocking, as well as fatigued consumers and Business Investment in CapEx that has yet to fully operationalize into a recovering demand environment. When analyzing MSCI industry data over the past two years, the two hardest-hit segments of the industry have, by far, been stainless steel and aluminum products.
Speaker Change: I E aluminum and stainless higher for longer interest rates, China's economic weakness and overcapacity as well as slow to develop secular trends around reassuring and fifth school industrial policy multiplier impact.
Speaker Change: As we work to Peel back producer inflation effects. There are echoes of the second half of 2015 and play combined with the run out of post pandemic supply chain distortions and resultant destocking as well as fatigued consumers.
Speaker Change: Business investment in Capex that has yet to fully operationalize into a recovering demand environment.
Speaker Change: When analyzing MSCI industry data over the past two years.
Speaker Change: Two hardest hit segments of the industry has by far been stainless steel and aluminum products.
Edward J. Lehner: These are products where Ryerson is overweight the industry. By contrast, the best performing commodity product over the past two years has been carbon steel, where Ryerson is underweight the industry. Consequently, this counter cycle, when we go behind the music, is delivering some harder and longer knocks to stainless and aluminum products and their value chain participants, such as Ryerson. For example, if we look at industry-wide data from the beginning of Q3 2022 through Q2 2024, industry-wide stainless shipments are down 21 percent over that interval.
Ryerson: These are products, where ryerson is overweight the industry by contrast, the best relative performing commodity product over the past two years, it's been carbon steel, where ryerson is underweight the industry.
Speaker Change: Consequently, this counter cycle when we go behind the music is delivering some harder and longer Knox, just stainless and aluminum products and your value chain participants such as wires.
Speaker Change: If we look at industry wide data since the beginning of Q3 2020 to through Q2 2020 for industry wide stainless shipments are down 21% over that interval.
Speaker Change: Aluminum sheet shipments are down 14%, while carbon sheet shipments are actually increased by 1.5% in the aggregate over the past 24 months.
Edward J. Lehner: Aluminum sheet shipments are down 14 percent, while carbon sheet shipments have actually increased by 1.5 percent in the aggregate over the past 24 months. Not surprisingly, commodity price regression lines and industry inventory levels all tell a similar story for stainless, aluminum, and carbon over the same 24-month duration. I point this out for several reasons.
Speaker Change: Not surprisingly commodity price regression lines and industry inventory levels, all tell a similar story for stainless aluminum and carbon over the same 24 months' duration.
Speaker Change: Point this out for several reasons, one because cyclical trend and its transient short term impacts are abundantly clear and two on a secular basis. We are bullish long term with respect to our stainless and aluminum franchises.
Edward J. Lehner: One, because the cyclical trend and its transient short-term impacts are abundantly clear, and two, on a secular basis, we are bullish long-term with respect to our stainless and aluminum franchises, where we have continued to make investments while recognizing the opportunity we have to gain transactional carbon market share where we are underweight the industry. As much as it stings in the short term, non-ferrous prices and demand should rebound as the secular longer-term outlook for both aluminum and stainless remains strong.
Speaker Change: Where we have continued to make investments while recognizing the opportunity we have to gain transactional carbon market share, where we are underweight the industry.
Speaker Change: As much as it staying in the short term nonferrous prices and demand should rebound as the secular longer term outlook for both aluminum stainless remains strong.
Edward J. Lehner: Although the timing of our investment cycle, which began in 2021, has intersected with a protracted industry counter cycle that began in the third quarter of 2022, particularly within our stainless steel and aluminum products franchises. As noted, we continue to build operating leverage and a better customer experience as more of our recent investments come online and we move closer to a positive inflection point in price and demand. Even amidst a challenging macro and industry backdrop, the investments we have made over the past three years to improve our network of intelligently connected service centers to create a better customer experience with enhanced value-added capabilities for our customers will serve Ryerson stakeholders well in the years to come. Now, let's talk about self-help, optimization, and progress made through the second quarter of 2024.
Speaker Change: Although the timing of our investment cycle, which began in 2021 has intersected with a protracted industry counter cycle that began in the third quarter of 2022, particularly within our stainless steel and aluminum products franchises as noted we continue to build on.
Speaker Change: Operating leverage and a better customer experience as more of our recent investments come online and we moved closer to a positive inflection point in price and demand.
Speaker Change: Even amidst a challenging macro and industry backdrop. The investments we have made over the past three years to improve our network of intelligently connected service centers to create a better customer experience with enhanced value added capabilities for our customers will serve ryerson.
Speaker Change: Stakeholders well in the years to come.
Speaker Change: Now, let's talk about self help optimization and progress made.
Speaker Change: Through the second quarter of 2024.
Edward J. Lehner: Shipments increased year-over-year and quarter-over-quarter as more CapEx investments were operationalized, post-ERP system conversion adaptation improved, and service-level metrics improved for lead times, inventory availability, and on-time delivery. Ryerson got back on track with respect to positive cash flow generation. We released our redesigned e-commerce platform at www.ryerson.com, and please check it out and give it a test drive.
Speaker Change: Shipments increased year over year and quarter over quarter as more Capex investments were operationalized post ERP system conversion adaptation improved and service level metrics improved for lead times inventory availability and on time.
Speaker Change: Liberty.
Speaker Change: Ryerson got back on track with respect to positive cash flow generation.
Speaker Change: We released our designed e-commerce, our redesigned e-commerce platform at Www Dot Ryerson Dotcom and please check it out and give it a test drive.
Edward J. Lehner: We also repurchased 647,330 shares below book value, and we exceeded our cost reduction targets for the quarter. As to margins and prices, no sooner did we communicate guidance on May 1st after an encouraging April, when commodity index curves for carbon, stainless, and aluminum and order activity began a decline that persisted through the end of the quarter. This resulted in greater than anticipated declines in spot average selling prices and margin compression through the latter half of Q2.
Speaker Change: We also repurchased 647330 shares.
Speaker Change: <unk> book value and we exceeded our cost reduction targets for the quarter.
Speaker Change: As to margins and price no sooner did we communicate guidance on may 1st after an encouraging April.
Speaker Change: When commodity index curve sport carbon stainless and aluminum and order activity began to decline that persisted through the end of the quarter.
Speaker Change: This resulted in greater than anticipated declines in spot average selling prices and margin compression through the latter half of Q2.
Edward J. Lehner: This decline in average selling prices and falling replacement costs of inventory relative to inventory average costs will continue to create margin pressure through Q3 along with recessed customer quoting and order rates, all signs of a counter-cyclical bottoming and cyclical inflection as we move toward 2025 with a much improved operating model. As we move into Q3 and through the balance of the year, we will look to further reduce variable and fixed costs, manage working capital to our benchmarks, and generate positive operating cash flow while finishing our investment cycle and making deeper inroads toward investment optimization and further operating model improvement. With that, I'll now turn the call over to our Chief Operating Officer, Mike Burbach, to further discuss the pricing and demand environment. Thanks, Eddie, and good morning, everyone.
Speaker Change: This decline in average selling prices and falling replacement cost of inventory relative to inventory average cost will continue to create margin pressure through Q3, along with recessed customer quoting and order rates all signs of a counter cyclical bottoming.
Speaker Change: Cyclical inflection as we move towards 2025 with a much improved operating model.
Speaker Change: As we move into Q3 and through the balance of the year, we will look to further reduce variable and fixed costs manage working capital to our benchmarks and generate positive operating cash flow, while finishing our investment cycle and making deeper inroads toward investment optimization.
Speaker Change: Further operating model improvements.
Michael J. Burbach: With that I'll now turn the call over to our Chief operating officer, Mike Burbach to further discuss the pricing and demand environment.
Michael J. Burbach: Thanks, Eddie and good morning, everyone.
Michael J. Burbach: During the second quarter, we met our volume guidance through sales of 508,000 tons. Yet, our average selling price of $2,412 per ton came in below our expectations, resulting in our revenue for the quarter of $1.23 billion, which was below expectations. Our average selling price per ton was down 3.2% quarter over quarter due to weaker-than-expected pricing conditions across our product line. During the quarter, metals commodity pricing led to margin compression and was most acutely felt in our carbon products, where the baseline prices for carbon steel, as measured by CRU hot-rolled coil prices, decreased by 14%.
Michael J. Burbach: During the second quarter, we met our volume guidance through sales of 508000 tons.
Michael J. Burbach: Our average selling price of 2000 and $412 per ton came in below our expectations, resulting in our revenue for the quarter of one two or $3 billion, which was below expectations.
Michael J. Burbach: Our average selling price per ton was down three 2% quarter over quarter.
Michael J. Burbach: Due to weaker than expected pricing conditions across our product mix.
Michael J. Burbach: During the quarter metals commodity pricing led to margin compression and was most acutely felt in our carbon products.
Michael J. Burbach: Where the baseline prices for carbon steel as measured by C. R U hot rolled coil prices.
Michael J. Burbach: Decreased by 14%.
Michael J. Burbach: From a trending year-to-date perspective, HRC prices decreased by 33% from January to June. Additionally, following sequential increases in average cell prices for carbon and aluminum products in the first quarter of this year, both product franchises experienced a reversal in the average sale price during the second quarter, with aluminum decreasing 4.9% and carbon decreasing roughly 1%. Additionally, average selling prices were impacted by a 1.9% decrease in stainless steel.
Speaker Change: From a trending year to date perspective, HRC prices decreased by 33% from January to June.
Speaker Change: Additionally, following sequential increases in the average sale prices for carbon and aluminum products in the first quarter of this year.
Speaker Change: Both product franchises experienced a reversal and an average sell prices.
Speaker Change: During the second quarter with aluminum decreasing four 9% and carbon decreasing roughly 1%. Additionally.
Speaker Change: Additionally, average selling prices were impacted by a one 9% decrease in stainless steel.
Michael J. Burbach: Turning to demand and supply, Ryerson's sales volume of 508,000 tons was 2.2% higher quarter over quarter, despite increasingly contractionary indicators from the U.S. Institute for Supply Management's Purchasing Managers Index, or ISM PMI, during the quarter. North American industry volumes, as measured by the Metal Service Center Institute, or MSCI, decreased by 0.2 percent, compared to the prior three. Over the same period, Ryerson's North American shipments increased by 1.7 percent. However, for the first half of 2024, industry volumes for the MSCI were down 3.3%.
Speaker Change: Turning to the demand environment.
Speaker Change: There are some sales volume of 508000 tons was two 2% higher quarter over quarter.
Speaker Change: Despite increasingly contractionary indicators from the U S Institute for supply management purchasing managers' index or PMI during the quarter.
Speaker Change: For the second quarter period.
Speaker Change: North American industry volumes as measured by the Metals Service Center Institute or MSCI decreased by 0.2% compared to the prior three months over.
Speaker Change: Over the same period, Ryerson North American shipments increased by one 7%.
Speaker Change: For the first half of 2020 for industry volumes for the MSCI, we're down three 3%.
Speaker Change: This is compared to down two 5% for wire since North American volumes with Ryerson noted market share gains across all three product lines led by stainless steel and followed by carbon and aluminum.
Speaker Change: Ryerson as overall volume increase in the second quarter of 2024 was driven by selective end market restocking.
Speaker Change: With H B, a C construction equipment, consumer durables and oil and gas exhibiting the strongest growth.
Speaker Change: And with that I will turn the call over to Jim for second quarter financial highlights as well as our third quarter 2024 outlet.
Michael J. Burbach: This is compared to down 2.5% for Ryerson's North American volume, with Ryerson noting market share gains across all three product lines, led by Stainless Steel, and followed by Carbon, and a little. Ryerson's overall volume increase in the second quarter of 2024 was driven by selective and market restock, with HVAC Construction Equipment, Consumer Durables, and Oil and Gas Exhibiting the Strongest Growth. And with that, I will turn the call over to Jim for second quarter financial highlights as well as our third quarter 2024 outlook. Thanks, Mike. Good morning, everyone.
Jim: Thanks, Mike and good morning, everyone.
James J. Claussen: Before discussing guidance for the third quarter, I would like to highlight the drivers for our second quarter performance compared to our guidance expectations. In the quarter, we exceeded our EPS guidance by delivering earnings of $0.29 per share. Our beat on EPS expectations was driven by $10 million in LIFO income recognized during the quarter, compared to our expectation of a $1 million charge. However, our revenue for the quarter of $1.23 billion was lower than anticipated and driven by price declines in all three of our primary commodities in the back half of the quarter. These price declines led to margin compression as inventory values deflated.
Jim: Before discussing guidance for the third quarter.
Jim: I'd like to highlight the drivers for our second quarter performance compared to our guidance expectations.
Jim: In the quarter, we exceeded our EPS guidance by delivering earnings of 29 per share.
Jim: Our beat on EPS expectations was driven by $10 million and LIFO income recognized during the quarter compared to our expectation of a $1 million charge.
Jim: Our revenue for the quarter of one point to $3 billion.
Speaker Change: Lower than anticipated and driven by price declines in all three of our primary commodities in the back half of the quarter.
Speaker Change: These price declines led to margin compression as inventory values deflated.
James J. Claussen: This margin decline led us to generating $42.6 million in adjusted EBITDA, excluding LIFO, in the quarter, which was below our guidance range. In addition to the pricing pressure acutely felt for our carbon products, our stainless franchise experienced counter-cyclical conditions where lower average selling prices met lower volume demand. Progress on our cost reduction program contributed to lower quarter over quarter operating expenses. However, the pricing and margin pressure felt during the quarter offset the cost reduction benefit.
Speaker Change: This margin decline led us to generating $42 $6 million and adjusted EBITDA, excluding LIFO in the quarter, which was below our guidance range.
Speaker Change: In addition to the pricing pressure acutely felt for our carbon products are stainless franchise met with counter cyclical conditions were lower average selling prices and lower volume demand.
Speaker Change: Well progress on our cost reduction program contributed to lower quarter over quarter operating expenses, the pricing and margin pressure felt during the quarter offset our cost reduction benefit.
James J. Claussen: Looking to the third quarter of 2024, we expect volumes to be down two to 4% sequentially compared to the second quarter. As such, we expect third quarter revenues to be in the range of $1.12 to $1.16 billion, with average selling prices down 3 to 5 percent. Based on these expectations, we forecast adjusted EBITDA for the third quarter of 2024, excluding LIFO, in the range of $21 to $25 million, and earnings per share in the range of $0.01 to $0.10 per diluted share. We expect approximately $12 million in LIFO income in the third quarter. In the second quarter, we generated $26 million of cash flow in our operation.
Speaker Change: Looking to the third quarter of 2024, we expect volumes to be down 2% to 4% sequentially compared to the second quarter.
Speaker Change: As such we expect third quarter revenues to be in the range of 1.12 to 1.16 billion with average selling price down 3% to 5%.
Speaker Change: Based on these expectations, we forecast adjusted EBITDA for the third quarter of 2024, excluding LIFO in the range of $21 million to $25 million and earnings per share in the range of one to 10 cents per diluted share.
Speaker Change: We expect approximately $12 million and LIFO income in the third quarter.
Speaker Change: In the second quarter, we generated $26 million of cash flow and our operations we.
James J. Claussen: We ended the period with $525 million of total debt and $497 million of net debt, which were increases from $497 million and $455 million, respectively, during the prior quarter. The company's global liquidity remains healthy, but decreased to $585 million in the second quarter from $684 million in the first quarter. Due to the timing of our business investments, leading to a greater drawdown on our ABL over lower-adjusted EBITDA generation, we ended the quarter above our two-times target range for net leverage at 3.2 times.
Speaker Change: We ended the period with $525 million of total debt and $497 million of net debt, which were increases from $497 million and $455 million respectively. During the prior quarter.
Speaker Change: The company's global liquidity remains healthy, but decreased to $585 million in the second quarter from $684 million in the first quarter.
Speaker Change: Due to the timing of our business investments, leading to a greater draw down on our ABL over lower adjusted EBIT generation.
Speaker Change: We ended the quarter above our two times target range for net leverage at three two times.
James J. Claussen: Our ABL fits the nature of our business, where we can fluctuate our borrowings up and down based on our needs. We remain mindful of our balance sheet and reaffirm the importance of a healthy balance sheet as a central long-term fulcrum, balancing growth and financial discipline. We anticipate being above 2.0 times net leverage as we complete our investment cycle and begin generating revenue and cash across recent and near-term new assets, with our continued commitment to our long-term range of 0.5 times to 2.0 times net leverage.
Speaker Change: Our ABL fits the nature of our business, where we can fluctuate our borrowings up and down based on our needs.
Speaker Change: Well, we remain mindful of our balance sheet and reaffirmed the importance of a healthy balance sheet as a central long term fulcrum balancing growth and financial discipline, we anticipate being above 2.0 times net leverage as we complete our investment cycle and begin generating revenue and.
Speaker Change: Cash across recent and near term new assets with our continued commitment to our long term range of 0.5 times to 2.0 times net leverage.
James J. Claussen: As we announced last quarter, in order for Ryerson to operate more efficiently, we initiated a cost reduction plan to help us reduce operating expenses by $25 million during 2024 and annualize to $40 million. In the second quarter, we were able to achieve a reduction in expenses, partially driven by the reduction of startup and duplicative expenses related to logistics and SG&A from our completed investments over the prior few quarters, as well as streamlining our workforce.
Speaker Change: As we announced last quarter in order for Ryerson to operate more efficiently. We initiated a cost reduction plan to help us reduce operating expenses by $25 million during 'twenty, 'twenty, four and annualizing to $40 million.
Speaker Change: Over the second quarter, we were able to achieve a reduction in expenses.
Speaker Change: Partially driven by the reduction of startup and duplicative expenses related to logistics and SG&A from our completed investments over the prior few quarters as well as streamlining our workforce.
James J. Claussen: While we previously expected to achieve $40 million in annualized cost savings from the second quarter to the fourth quarter of 2024, we now believe we can annualize our cost savings to around $60 million. In the second quarter, we invested $23 million in capital expenditures, which included, most notably, the modernization, automation, and expansion of our Sheldonville, Kentucky, non-ferrous coil processing facility and Strategic Equipment and Infrastructure Upgrades through our network to increase productivity.
Speaker Change: While we previously expected to achieve $40 million in annualized cost savings from the second quarter to the fourth quarter of 2024, we now believe we can annualize our cost savings to around $60 million.
Speaker Change: In the second quarter, we invested $23 million in capital expenditures, which included most notably the modernization automation and expansion of our Shelbyville, Kentucky, Nonferrous oil processing facility and strategic equipment and infrastructure upgrades throughout our <unk>.
Speaker Change: Work to increase productivity.
James J. Claussen: The investments we are making are expected to drive better customer experiences, improve asset utilization, improve working capital efficiency, increase productivity, and provide a safer operating environment for our employees. We are very excited about the modernization efforts across our network and the better customer experiences they will provide. Turning to shareholder returns, Ryerson returned $20.4 million in the quarter, which was comprised of $14 million in share repurchases and $6.4 million in dividends. We paid a quarterly dividend of $0.1875 per share and have announced a third quarter cash dividend of the same amount.
Speaker Change: The investments we are making are expected to drive better customer experiences improve asset utilization improved working capital efficiency increased productivity and provide a safer operating environment for our employees.
Speaker Change: We are very excited about the modernization efforts across our network and the better customer experiences and they will provide.
Rogerson: Turning to shareholder returns Rogerson returned $24 million in the quarter, which was comprised of $14 million in share repurchases and $6 4 million in dividends we.
Rogerson: We paid a quarterly dividend of <unk> 18, and three quarter cents per share and have announced the third quarter cash dividend of the same amount.
Rogerson: As for share repurchases after repurchasing just under 650000 shares for approximately $14 million in the open market during the quarter. We ended the quarter with about $24 $3 million remaining in the share repurchase authorization.
Speaker Change: Subsequent to the quarter end on July 30, our board of directors approved a $50 million increase to ryerson share repurchase authorization and extended the authorization timeframe to April 2026.
Speaker Change: As we look forward to the third quarter and second half of 'twenty 'twenty four we will continue to prudently evaluate our shareholder return opportunities as well as our overall capital allocation strategy to maximize long term shareholder value.
James J. Claussen: As for share repurchases, after repurchasing just under 650,000 shares for approximately $14 million in the open market during the quarter, we ended the quarter with about $24.3 million remaining in the share repurchase authorization. Subsequent to the quarter end on July 30th, our board of directors approved a $50 million increase to Ryerson's share repurchase authorization and extended the authorization timeframe to April 2026. As we look forward to the third quarter and second half of 2024, 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 details on our second quarter financial results. Thank you, Jim. And good morning, everyone.
Speaker Change: With that I'll turn the call over to Molly to provide further details on our second quarter financial results.
Molly: Thank you Jim and good morning, everyone in the second quarter of 2020 for Ryerson reported net sales of one point to $3 billion, which was one 1% lower in the first quarter of 2024, driven by lower average selling prices across our product mix and partially offset by.
Molly D. Kannan: In the second quarter of 2024, Ryerson reported net sales of $1.23 billion, which was 1.1% lower than the first quarter of 2024, driven by lower average selling prices across our product mix, and partially offset by higher volume. Gross margin during the quarter grew by 60 basis points versus the prior quarter to 18.2%, attributable to $10 million in LIFO income recorded in the second quarter of 2024 versus $1 million of LIFO expense recorded in the first quarter of 2024. Excluding LIFO, gross margin contracted 20 basis points from the first quarter to 17.4%, as compression in our average selling price for our sales mix outpaced a decreased cost of goods sold.
Molly: Higher volumes.
Molly: Gross margin during the quarter grew by 60 basis points versus the prior quarter to 18, 2% attributable to 10 million in LIFO income recorded in the second quarter of 2020 or person is $1 million Atlanta expense recall.
Molly: In the first quarter of 2024.
Speaker Change: Excluding LIFO gross margin contracted 20 basis points from the first quarter to 17, 4%.
Speaker Change: <unk> and our average selling price for our sales mix outpaced a decrease cost of goods sold.
Molly D. Kannan: This is especially true for our carbon products, as Mike explained earlier. On the expense side, warehousing, delivery, selling, general, and administrative expenses decreased by $17.8 million, or 8% quarter over quarter, to $199 million. This was driven by reductions in expenses related to personnel, lower fixed and variable operating expenses, and the reduction in costs related to the startup of our University Park, Illinois Service Center, as well as a reduction in the costs related to our network ERP integration.
Speaker Change: This is especially true for our carbon products as Mike explained earlier.
Speaker Change: On the expense side warehousing delivery, selling general and administrative expenses decreased by $17 8 million or 8% quarter over quarter to $199 million.
Mike: Driven by reductions in expenses related to personnel.
Speaker Change: Lower fixed and variable operating expenses and the reduction in costs related to the startup of our University Park, Illinois Service Center as well as a reduction in the costs related to our network ERP integration.
Molly D. Kannan: For the second quarter of 2024, net income attributable to Ryerson was $9.9 million, or $0.29 per diluted share, compared to a net loss attributable to Ryerson of $7.6 million and diluted loss per share of $0.22 in the prior quarter. Finally, Ryerson achieved adjusted EBITDA excluding LIFO of $42.6 million in the second quarter of 2024, which compares to $40.2 million in the prior quarter.
Speaker Change: For the second quarter of 2024, net income attributable to Ryerson with $9 9 million or 29 cents per diluted share compared to net loss attributable to Ryerson, a $7 6 million and diluted loss per share of <unk> 22 cents in the prior quarter.
Speaker Change: Finally, ryerson achieved adjusted EBITDA, excluding LIFO of $42 6 million in the second quarter of 2024. This compares to $40 2 million in the prior quarter.
Speaker Change: And with this I'll turn the call back to Eddie.
Edward J. Lehner: Thank you, Molly. However, counter cycles don't last forever. And it is always important to maintain a healthy perspective when evaluating our business, our industry, and our place in it. As such, Ryerson is happening upon our 10-year IPO anniversary on August 13, 2024. When we completed our initial public offering 10 years ago, Ryerson had a negative equity book value, was more than seven times levered, and had a public float of 11 million shares. Ten years later, Ryerson has increased its net book value of equity by $1 billion, or approximately $30 per share.
Eddie: Thank you Molly.
Eddie: Counter cycles don't last forever.
Eddie: And it is always important to maintain a healthy perspective, when evaluating our business our industry and our place in it.
Eddie: As such Ryerson is happening upon our 10 year IPO anniversary on August 13th 2024.
Eddie: When we completed our initial public offering 10 years ago, Ryerson had negative equity book value was more than seven times Levered and had a public float.
Eddie: Out of 11 million shares.
Eddie: 10 years later.
Eddie: Ryerson has increased net book value of equity by $1 billion were approximately $30 per share our public float.
Edward J. Lehner: Our public float is approximately 30 million shares, and our asset portfolio, both tangible and intangible, has never been stronger. I kindly invite all interested current and prospective Ryerson stakeholders to take a look at the first several slides of this quarter's investor deck to see a compelling, factual representation of all we have accomplished as an organization over the past 10 years as we eventually emerge from what has been a long counter-cycle and bring our three-year investment cycle to fruition.
Eddie: Is approximately 30 million shares and our asset portfolio, both tangible and intangible has never been stronger.
Speaker Change: I kindly invite.
Speaker Change: All interested current and prospective ryerson stakeholders to take a look at the first several slides of this quarter's investor deck to see a compelling factual representation of all we have accomplished as an organization over the past 10 years.
Speaker Change: As we eventually emerge from what has been a long counter cycle and bringing our three year investment cycle to harvest.
Edward J. Lehner: I couldn't be more optimistic about the next 10 years because business cycles don't last forever, and doing the right things pays off in the long run, even when you have to disrupt yourself to do it. Disrupting yourself before others do it for you is a perfect segue to extend an invitation to all of you to join us at our Central Steel & Wire University Park, Illinois Facility Open House on September 19th, where you can see firsthand how we have disrupted ourselves to better ourselves.
Speaker Change: Couldn't be more optimistic.
Speaker Change: The next 10 years, because counter cycles don't last forever and doing the right things pays off in the long run even when you have to disrupt yourself to do it.
Speaker Change: Wrapping yourself before others do it for you is a perfect segue to extend an invitation to all of you to join us at our Central Steel and Wire University Park, Illinois facility Open House on September 19th.
Speaker Change: Where you can see firsthand, how we disrupted ourselves to better ourselves.
Edward J. Lehner: If you would like to attend, please reach out to our investor relations team or email investorinfo at ryerson.com. Before we go to questions, I have one final item to announce before we go to questions. After a distinguished career of more than 40 years, Mike Burbach will retire from his position as Chief Operating Officer of Ryerson at the end of the year.
Speaker Change: If you would like to attend please reach out to our Investor relations team or email investor info at Ryerson Dot com.
Speaker Change: I have one final item to announce before we go to questions.
Speaker Change: After a distinguished career.
Mike: More than 40 years Mike.
Speaker Change: Mike Burbach will retire from his position as chief operating officer of Ryerson at the end of the year.
Edward J. Lehner: Mike has served as COO since April 2nd, 2021 and has been pivotal to the company's operational and financial success. Mike has been a tremendous asset to our organization and our industry and will be missed by all those who know him and have had the pleasure to work with him. He is truly a pillar of the metal service center industry and is well respected, not just within Ryerson but the entire industry as well.
Speaker Change: Mike has served as CFO since April 2nd of 2021 and has been pivotal to the company's operational and financial success.
Speaker Change: Nick has been a tremendous asset to our organization and our industry.
Speaker Change: And will be missed.
Speaker Change: All of those who know him.
Speaker Change: And have had the pleasure to work with him. He is truly a pillar of the metal service center industry and is well respected not just within ryerson, but the entire industry as well.
Edward J. Lehner: He has always been a steady hand and partner at the till, helping navigate the ebbs and flows, highs and lows, of this dynamic industry. Mike has been a truly special mentor, leader, partner, role model, and friend over the 12 plus years we have worked together at Ryerson. And as I have often said, everybody could use a little more Mike Burbach in their lives, as he is as good a person and professional as they come, and we'll go down in Ryerson history as one of the all-time greats. I am delighted that Mike is spending some more time with us in transition, and I wish Mike and Ann and their five grandkids the best of everything in retirement.
Speaker Change: He has always been.
Speaker Change: Steady hand, and partner at the pill, helping navigate the ebbs and flows highs and lows of this.
Speaker Change: This dynamic industry.
Speaker Change: Mike has been a truly special mentor leader partner role model and friend over.
Speaker Change: Over the 12 plus years, we have worked together at Ryerson.
Speaker Change: And as I've, often said everybody could use a little more Mike burbach in their lives.
Michael J. Burbach: She is as good a person in professional as they come and we will go down and Ryerson history.
Speaker Change: As one of the all time greats.
Speaker Change: I am delighted that Mike is spending some more time with us in transition and I wish, Mike and Anne and there are five grandkids.
Speaker Change: Best of everything in retirement.
Edward J. Lehner: As part of this organizational change and consistent with our long-term succession planning process, Mike's duties for Ryerson North America will be distributed amongst Ryerson's existing senior leadership team. And with that, we look forward to your questions. Operator.
Speaker Change: As part of this organizational change and consistent with our long term succession planning process Mike's duties for Ryerson North America will be distributed amongst ryerson existing senior leadership team.
Speaker Change: And with that we look forward to your questions operator.
Operator: Yes, sir. And once again, that is star one if you would like to ask a question. And just a reminder, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment.
Speaker Change: Yes, Sir and once again that is star one if he would like to ask a question.
Speaker Change: Or if you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Operator: We'll take our first question from Katja Jancic with BMO Capital Markets. Hi. Thank you for taking my questions. Starting on the cost savings program, so this quarter you achieved $18 million in savings, or you reduced operating costs by $18 million. How much of that is attributable to the $60 million you're targeting? Hi Katja, this is Eddie.
Speaker Change: We'll take our first question from Carter Johnson with BMO capital markets.
Carter Johnson: Hi, Thank you for taking my questions.
Carter Johnson: Starting on the cost savings programs. So this quarter you achieved 18 million and then or you reduce operating cost by $18 million how much of that is attributable to the $60 million you're targeting.
Edward J. Lehner: Thanks for your question. I'm going to go ahead and have Jim give you some more detail on that. Yeah, good morning Katja.
Speaker Change: Hi, Katja this is adding things to your question I'm going to go ahead and have Jim.
Jim: Give you some more detail on that.
James J. Claussen: I would say the lion's share of that is attributable to the $60 million. However, there is also variable compensation, which, you know, given margins and given earnings results, is lower, certainly quarter over quarter and year over year. So that piece is not included in that $60 million. And that was, that's roughly... Yeah, that's roughly four million.
Jim: Yeah, good morning Katja.
Jim: I would say.
Jim: The lion's share of that is attributable to the $60 million. However in that is also variable compensation, which given given margins and given earnings result is lower.
Speaker Change: Certainly quarter over quarter and year over year. So so that piece is not included in that in that $60 million.
Speaker Change: And that was about it.
Speaker Change: Yeah that that's roughly.
Speaker Change: $4 million.
Speaker Change: Hi.
James J. Claussen: Bye, year-over-year reduction in variable cost. Yeah, Connie, what you're seeing too is we do have a variable cost structure that declines as business conditions turn down as they have, and we go through this bottoming of this counter cycle. I would also say that a lot of the costs from our investment cycle that peel off, not every one of those dollars gets captured, you know, in restructuring, reorg, and pre-operating startup costs. And so we have IPO freight, for example, where we move things between our network, and we move metal from one service center to another.
Speaker Change: Year over year reduction in variable comp yet katja.
Speaker Change: What you're seeing too is.
Speaker Change: We do have a variable cost structure that declines as business conditions turned out as they have and we go through this bottoming of this counter cycle I would also say that.
Speaker Change: A lot of the costs from our investment cycle. The Peel off not every one of those dollars gets captured.
Speaker Change: In restructuring and re org and pre operating and startup costs and so we have IPO freight for example, where we move things between our network and we move metal from one service center to another we.
Speaker Change: We have a lot of opportunities to continue to improve and rationalized on a cost of freight between our service centers and around our network. As an example, so as we come through this investment cycle, which was the largest in our history as far as far back as we can go and we've discussed this at length as we peel off those costs.
Edward J. Lehner: We have a lot of opportunities to continue to improve and rationalize the cost of freight between our service centers and around our network, as an example. So as we come through this investment cycle, which was the largest in our history as far back as we can go, and we've discussed this at length, as we peel off those costs, we start to get a lot more expense leverage, and we get to reset our cost profile going forward.
Speaker Change: We start to get a lot more expense leverage and we get to reset our cost profile going forward.
Edward J. Lehner: So is it fair to say that, you know, if I do like a simple math, $18 million minus four for the variable side, so you're already close to $60 million. If we analyze that, it's already close to $60 million, is that correct? Well, I think at some point, what happens, though, is your variable comp component gets sort of asymptotic, right?
Speaker Change: So is it fair to say that you know it.
Speaker Change: I do like a simple math 18 million minus four four R&D verbal side.
Speaker Change: We're already close to 60 million off if we annualize that it's already close to the 60 million is that correct.
Speaker Change: Well I think at some point what happens, though is your variable comp component gets sort of asymptotic right I mean as as the business goes through the bottom of a counter cycle. You know the amounts that you are going to realize from variable comp and Ben decrease is going to start to.
Edward J. Lehner: I mean, as the business goes through the bottom of a counter cycle, you know, the amounts that you're going to realize from variable comp and then decrease are going to start to tail out, if you will, and get to a bottom itself. But the other cost increases that are going to kick in are going to be things where we optimize our overall network. I mean, there's some consolidations we are going to do as we bring in modern new capacity to our network.
James J. Claussen: It's going to start to tail out if you will and get to a bottom itself, but the other cost increases that are going to kick in or going to be things, where we optimize our overall network. I mean, there are some consolidations we are going to do.
Speaker Change: As we bring on modern new capacity through our network again, we have an opportunity to optimize our cost profile and so youre going to start to see the second phase of that come through where we rationalize certain parts of our network to get better operating efficiencies because we have new square footage and capacity that we brought online as a result of our investment cycle.
Edward J. Lehner: Again, we have an opportunity to optimize our cost profile, and so you're going to start to see the second phase of that come through, where we rationalize certain parts of our network to get better operating efficiencies because we have new square footage and capacity that we brought online as a result of our investment cycle. Okay, maybe quickly shifting gears to the leverage, it's, as you mentioned, above your target and probably stays there. Is it fair to assume that, at least in the near term, more of the cash flow is going to be directed to Paying Down Debt? Yeah, let me take the first part of this answer.
Speaker Change: Yeah, maybe quickly shifting gears to the leverage it's as you mentioned above your target and probably stays there is it fair to assume that at least in the near term.
Speaker Change: It's more of the cash flow is going to be directed kiln <unk>.
Speaker Change: Paying down debt.
Speaker Change: Yeah, Let me let me take the first let me take the first part of this answer high we've I, we really work hard to be very thoughtful and hopefully intelligent and how we communicate the stakeholders and we did a 10 year retrospective since our IPO for that very reason.
Edward J. Lehner: We really work hard to be very thoughtful and, hopefully, intelligent in how we communicate to stakeholders, and we did a 10-year retrospective since our IPO for that very reason. I'd like to think we understand how the industry operates and how we operate, and as we come through this counter-cycle and generate more counter-cyclical cash flow, debt will fall, and we will finish our investment cycle, and if we have the opportunity to buy back shares under our authorization below book value, then that's a very compelling opportunity for us that we should not miss.
Speaker Change: I'd like to think we understand how the industry operates and how we operate and as we come through this counter cycle and generate more counter cyclical cash flow that will fall and we will finish our investment cycle and if we have the opportunity to buy back shares under our authorized under our authorization below book value and that's a very compelling offer.
Speaker Change: <unk> for us that are that we should not.
Speaker Change: We should not miss.
Speaker Change: Okay. Thank you.
Edward J. Lehner: Okay, thank you. We'll now take our next question from Samuel McKinney with KeyBank Capital Markets. Hey, good morning, Eddie and team, and congrats on the retirement, Mike. Thank you. Thank you, ma'am. I appreciate it. Or, I should thank you. I did.
Speaker Change: We will now take our next question from Samuel Mckinney with Keybanc capital markets.
Samuel J. McKinney: Hey, good morning, Eddie and team and congrats on the retirement Mike.
Mike: Okay. Thank you Sam appreciate it our mics you. Thank you.
Speaker Change: [laughter].
Samuel J. McKinney: I appreciate the cost savings color today and wanted to start by digging into that a little more, looking at the updated annualized reduction of $60 million from $40 million. From when you published your first quarter results three months ago, where did you discover that incremental $20 million in savings, whether it be logistics, labor, or the SAP conversion? It'd be helpful if you could parse out those savings buckets a little more. Yeah, Sam. Good morning. Great question!
Samuel J. McKinney: I appreciate the cost savings color today, and I wanted to start to start by digging into that a little more looking at the updated annualized reduction of $60 million from $40 million from when you published your first quarter results three months ago, where did you discover that incremental $20 million in savings whether it be logistics labor, that's a peaking.
Speaker Change: Version that would be helpful. If you could parse out those savings buckets, a little more.
Michael J. Burbach: Where we've really started to see, I would say, more benefit, more opportunity to optimize the network from the ERP conversion is in logistics, material movements, reducing multiple handling. So, we're continually working to optimize that network, make sure we have a good inventory position close to our customers, and being able to communicate throughout that network efficiently as we're seeing more and more opportunities to reduce handling and touches in our facilities. Yes, and let me just kind of go a little bit deeper, so you have a good visualization.
Sam: Yeah Sam.
Sam: Great question.
Sam: Where we've really started to see I would say more benefit more opportunity to optimize in the network from the ERP conversion is in logistics material movements.
Michael J. Burbach: Reducing multiple handling so we're continually working to optimize that network make sure. We have good inventory position close to our customers and being able to communicate throughout that network efficiently as we're seeing more and more opportunities to reduce gambling and touches in our facilities.
Speaker Change: Yes, let me let me just kind of go a little bit deeper and so do you have a good visualization. So.
Michael J. Burbach: Given the extent of the expansion and modernization of Shelbyville, which is our primary non-ferrous processing service center, we do a lot of volume in stainless and aluminum through that processing center. So if you can imagine this,
Speaker Change: Given the extent of the expansion and modernization of Shelby Bill, which is our primary non ferrous processing service center, we do a lot of volume in stainless aluminum and stainless and aluminum through that processing centers. So you can picture of this.
Edward J. Lehner: If a good part of that capacity goes offline because you're putting in new equipment and you're expanding the facility, you've got to reroute metal throughout the rest of the Ryerson network, and you also have to buy out certain metal to maintain customer service levels and those customer relationships that are obviously vitally important to us. And so, in the short term, we have to reroute, and when you reroute, you take on a cost for doing that. But again, that's transient, short term; it's not permanent.
Sam: Have a good part of that capacity goes offline, because youre, putting a new equipment and youre expanding the facility you've got a reroute metal throughout the rest of the Ryerson network and you also have to buy out certain metal to maintain customer service levels and those customer relationships that are obviously vitally important to us.
Sam: So in the short term, we have to reroute and when you reroute.
Sam: On a cost to doing that but again, that's transient the short term, it's not permanent and then as we go and we layer in eight one inventory items to our local service centers and we also bypassed the freight involved in moving things around via IPO Shuttle you got additional network savings as you look to optimize that and part of that too is coming through coming through.
Edward J. Lehner: And then as we go, and we layer in A1 inventory items to our local service centers, and we also bypass the freight involved in moving things around via IPO shuttle, you get additional network savings as you look to optimize that. And part of that, too, is coming through the pandemic and going from what was really an availability market to a price market. And so you need to make those pivots and adjustments as well, which we're doing, and we'll see those cost benefits come through in the quarters ahead. That's very helpful. I appreciate that. Thanks. And then coming out of the first quarter, I remember you guys feeling you were a little short on inventory.
Sam: The pandemic and going from what was really an availability market to a price margin and so you need to make those pivots and adjustments as well, which we're making and we will see those cost benefits come through in the quarters ahead.
Speaker Change: That's very helpful. I appreciate that thanks, and then coming out of the first quarter I remember you guys. Feeling you were a little long inventory with the $100 million sequential reductions you made in the second quarter. How do you view current inventory levels and net working capital more broadly as we move into the back half of the year.
Edward J. Lehner: With the $100 million sequential reduction you made in the second quarter, how do you view current inventory levels and networking capital more broadly as we move into the back half of the year? Sure, and I teed it up in my comments by saying when I was doing some homework and some prep for the call, I went back and looked at the MSCI industry month-on-hand information and looked at the differences between stainless, aluminum, and carbon. So when you look at stainless inventories industry-wide, for example, months-on-hand are still 3.1 months. When you look at aluminum, months on hand are 2.7 months. When you look at the carbon sheet, it's right at two months.
Speaker Change: Sure.
Speaker Change: I teed it up in my comments by saying when I was doing some some homework and some prep for the call and I went back and looked at the MSCI industry months on hand information and look at the differences between stainless aluminum and carbon so when you look at stainless inventories industry wide for example months on hand.
Sam: Still three one months when you look at aluminum months on hand, or two seven months when you look at carbon sheet.
Sam: It's right at two months and so when you look at how that's all tension aluminum and stainless still have some destocking to go and I would say that we certainly.
Edward J. Lehner: And so when you look at how that's all tensioned, aluminum and stainless still have some destocking to go. And I would say that we certainly had our share of that. When you look at the relative inventory levels, carbon has turned better. And for stainless and aluminum, it's taken time to unwind and destock some of the overbuying and excesses that accumulated in 21, 22, and even the first half of 2023. So what you're seeing as we come through Q1 to Q2 is a more focused reduction in what has been elevated aluminum and stainless inventory stocks and then making sure that we have the right A1 item profile in our service centers without carrying that excess. Okay.
Sam: Had our share of that when you look at the relative inventory levels carbon has turned better and stainless and aluminum it's taken time to unwind and destock some of the over buying in excess that accumulated in 'twenty, one 'twenty two and even the first half of 2023, so what youre seeing as we come through Q1 to Q2 is a more focused reduction.
Sam: On what has been elevated aluminum and stainless inventory stocks and then making sure that we have the right a one item profile in our service centers without carrying that excess.
Sam: Okay.
Edward J. Lehner: And then last one for me, looking ahead to the third quarter, given the third quarter pricing guidance of down 3-5% versus a weaker than expected second quarter baseline that featured a higher percentage mix of carbon flat rolled versus previous quarters. Now that we're a month through this third quarter, how do you anticipate your third quarter mix of carbon versus stainless versus aluminum shipments will compare to the second quarter? Yeah, I mean, based on what you've heard from other companies that have reported, you know, Q3 and certainly July have been relatively slower than the six months that preceded them.
Sam: And then last one for me looking ahead to the third quarter, given the third quarter pricing guidance down 3% to 5% versus the weaker than expected second quarter baseline that featured a higher percentage mix of carbon flat rolled versus previous quarters.
Speaker Change: Now that we're a month through this third quarter, how do you anticipate your third quarter mix of carbon versus stainless versus aluminum shipments will compare to the second quarter.
Speaker Change: Yeah, I mean, I think based on what you've heard from other companies that reported Q.
Speaker Change: Q3, and certainly July has been relatively slower than the six months that preceded it.
Edward J. Lehner: You know, that said, we'll continue to pick up carbon volumes as more of our investments come online. And so, given the relative weakness of stainless and aluminum as compared to carbon, I would expect in Q3 and even Q4, the bounce of the year, even though we're taking spot margin compression for carbon sheet, because prices have gone from $1,100 to $650 from January 1st, all the way through the present, you know, I'd say, present CRU price, new core eclipse price, although those have kind of gone up a little bit over the last week, we'll start to, we'll still see margin compression, but I do believe on a relative basis, we'll see carbon volumes outpace stainless and aluminum, at least in the, you know, over the bounce of the year. Okay, that's it for me.
Speaker Change: That said, we will continue to pick up carbon volumes as four of our investments come online and so given the relative weakness of stainless and aluminum as compared to carbon I would expect in Q3, and even Q4 for the balance of the year, even though we're taking spot margin compression for carbon sheet because prices have gone from.
Speaker Change: 1100 to 650 from January one all the way through the present I'd.
Speaker Change: I'd say resident fee are you price Newport cliffs price, although those kind of gone up a little bit over the last week.
Speaker Change: We'll start to see we'll still see margin compression, but I do believe on a relative basis, we'll see carbon volumes outpaced stainless aluminum at least over the balance of the year.
Samuel J. McKinney: Thanks guys. Thanks, Sam. And once again, that is star number one if you would like to ask a question. We'll take our next question from Alan Weber with Roboty Advisors. Good morning. First, good morning.
Speaker Change: Okay. That's it for me thanks, guys.
Sam: Thanks Sam.
Speaker Change: And once again that is star one if you would like to ask a question well take our next question from Alan Weber with robotic advisors.
Alan W. Weber: And, Mike, again, congratulations and good luck. Thank you. Thank you, Alan. So just a question: when you talk about the cost savings going forward, what assumptions are you making, in terms of volumes or shipments? Sure. So when you look at the MSCI being down 3% year over year and being down more in carbon and aluminum now, we see this as being a bottoming of the counter cycle. Do we know exactly how long it's going to last? No, we don't.
Alan W. Weber: Oh, good morning, first good morning, and Mike again, congratulations and good luck. Thank you.
Alan W. Weber: Thanks Alan.
Speaker Change: You're welcome. So just a question on <unk> when you talk about the cost savings going forward.
Speaker Change: What assumptions are you baking in in terms of volumes or.
Alan W. Weber: Shipments.
Alan W. Weber: Sure.
Speaker Change: So when you look at when you look at the MSCI being down 3% year over year and being down more in carbon and aluminum alloy and we see this as being a bottoming of the countercyclical, we know exactly how long it's going to last we don't but it's been eight quarters and historically, that's a long counter cycle.
Edward J. Lehner: But it's been eight quarters, and historically, that's a long counter-cyclical period. And so at some point, we're going to bottom out, and shipments will increase. I believe there's a lot of pent-up secular demand, even though the cycle is really dampening that right now. So we would expect volumes to increase, we'd expect our market share to increase, and we would expect the value of our investments, as they fully operationalize, to make us more competitive with a better operating model.
Alan W. Weber: And so at some point, we're going to bottom and shipments will increase I believe theres a lot of pent up secular demand, even though the cycle is really dampening that right. Now. So we would expect volumes to increase we would expect our market share to increase and we would expect to die.
Alan W. Weber: The value of our investments as they fully operationalize the value of those investments is going to make us more competitive with a better operating model and so you know as we come into the upturn as we said as we go from counter cyclical cycle.
Edward J. Lehner: And so, you know, as we come into the upturn, as we've said, as we go from counter cycle to cycle, we should be able to realize a lot of the benefits of that operating leverage that we've invested in and that we'll get as we pivot from counter cycle to cycle. Okay, I mean, because actually, if that took place, some of those quote-unquote cost savings that you talk about would actually become greater, right? Yeah, I mean, I would say this, and then I'll let Jim append to it.
Alan W. Weber: Should be able to realize a lot of the benefits of that operating leverage that we've invested in and that we'll get as we pivot from counter cyclical cycle.
Alan W. Weber: Okay.
Speaker Change: They actually if that takes place that some of those quote unquote cost savings that you talked about would actually become greater than right.
Edward J. Lehner: I mean, the history typically is when we do go, I'd say, pro-cyclical and we go into a growth curve, sure, we'll have to put working capital to use at that point. But what you get then is, historically, you go back and even look at 21, you look at the expense leverage that you get as you come into an upturn, and you get off the bottom. So what we will get is a lot of expense leverage, where for every incremental dollar of revenue, it takes less and less expense to generate that dollar of revenue.
Alan W. Weber: Yeah, I mean, I would say this and then I'll, let Jim at Penn to it I mean, the history typically is when we when we do go.
Jim: I'd say pro cyclical and we go we go into a growth curve sure we'll have to put working capital to use at that point, but what you get then is historically if you go back to even look at 'twenty. One you look at the expense leverage that you get as you come into an upturn in you get off the bottom. So what we will get US a lot of expense leverage where for every incremental dollar of revenue it takes less and less.
Edward J. Lehner: Expense to generate that dollar revenue. So what we look for as we go into an upturn as we look for greater expense leverage even though on a nominal basis, we may have to incur additional cost to service that growth.
Edward J. Lehner: So what we look for as we go into an upturn is greater expense leverage, even though, on a nominal basis, we may have to incur additional costs to service that growth. [inaudible] Go ahead, Alan.
Alan: Right and then.
Alan W. Weber: Well.
Edward J. Lehner: Go ahead go ahead Alan.
Edward J. Lehner: Just unrelated, short term, when you look at the third quarter, how are you thinking about cash flow and working capital and for the balance of the year also? Yeah, we expect to generate cash flows for the balance of the year, you know, in line with business conditions. And as I said, cash flow will also improve as we wind up a lot of the investments that we've been making that have really spanned a couple years now.
Alan W. Weber: Oh, just unrelated short term when you look at the third quarter. How are you thinking about cash flow and working capital and for the balance of the year also.
Alan W. Weber: Yes, we expect to generate cash flows the balance of the year.
Edward J. Lehner: In line with business conditions, and as I said cash flow will improve also.
Alan W. Weber: So as we wind up a lot of the investments that we've been making that have really spanned a couple years now so there's been there's been a lot of overlap since we began this investment cycle and so now as we wrap up a lot of those projects to the second half of the year in Shelbyville really becoming operational in the first quarter of 2025, we will start to see cash flows.
Edward J. Lehner: So there's been a lot of overlap since we began this investment cycle. And so now, as we wrap up a lot of those projects for the second half of the year, and Shelbyville really becomes operational in the first quarter of 2025, we'll start to see cash flows improve as a result of completing that investment cycle and going back to a much more normalized capex spend, which is going to come in, as we said, at about 50 million for next year. And is 50 million kind of what you think is more of a normal rate going forward in CapEx, or does that still include some Shelby villain like that?
Edward Lehner: As a result of completing that investment cycle and going back to a much more normalized.
Edward J. Lehner: Capex spend which is going to come in as we said at about $50 million for next year.
Speaker Change: And he's 50 million kind of what you think is more of a normal.
Speaker Change: Right going forward and Capex is that still includes some shelbyville in like that.
Edward J. Lehner: Yeah, no. I think getting to a gap rate of depreciation replacement capex is probably about right, plus or minus opportunities we may see that have really attractive internal rates of return. But I do think coming off this particular investment cycle, which has been, I think, the largest in the industry as a percentage of revenue, and we mentioned this in our shareholder letter at 3.7% on a two-year stack, we need time to optimize the investments we've made, and integrate them so that we can get the most value and cash flow from those assets. These are high-quality assets, and assets that haven't really been started up and commissioned yet; they don't generate cash. I think we all understand that and know that.
Speaker Change: Yeah, No I think I think getting to a GAAP rate of depreciation replacement Capex is probably about right plus or minus opportunities. We may see that have really attractive internal rates of return, but I do think coming off this particular investment cycle, which has been I think the largest in the industry as a percentage of revenue and we mentioned this in our shareholder letter at three seven.
Edward J. Lehner: On a two year stack, we need time to optimize the investments we've made integrate them. So that we can get the most value and cash flow from those assets. These are high quality assets and assets that hadn't really been started up in commission yet they don't generate cash I think we all understand that and know that so as these investments come up and operationalize.
Edward J. Lehner: So as these investments come up and operationalize, they will start generating cash, cash flow will increase, and costs will come down, and we'll get expense leverage. Okay, great. Thank you very much.
Edward J. Lehner: It will start generating cash cash level will increase and costs will come down and we will get expense leverage.
Alan W. Weber: And again, my congratulations and good luck. Thank you very much, Alan. Thanks, Al. I appreciate you, as always.
Speaker Change: Okay, great. Thank you very much and again my congratulations and good luck.
Alan W. Weber: Thank you very much Allen.
al: Thanks Al appreciate it as always.
Operator: So we have a written question from an investor that I'm going to read out loud. Sure. Uh, it's a question in three parts, and they're interrelated. Where do you think I brought a danger pill back to school, man?
Speaker Change: So we have a written question from an investor, but I'm going to read out loud.
Operator: Sure.
Speaker Change: It's a question in three parts and they're interrelated.
Speaker Change: Rodney Dangerfield back to school, Matt One question in 22 parts.
Operator: One question in 22 parts. Where are we in the optimization phase? How has it been impacting customers? What have been the most common issues, and how are they being solved? Oh, that's a great question.
Speaker Change: Where are we in the optimization phase how has it been impacting customers.
Alan W. Weber: What have been the most common issues and how are they being salt.
Edward J. Lehner: Okay, so let me explain. So in terms of the optimization phase, it's overlapping, right? I mean, as you complete projects, and as you start them up and commission those assets, whether it's a brand new cut-to-length line in Dallas, whether it's the Centralia Service Center, which is new, whether it's University Park, which is obviously 900,000 square feet. And I referenced the open house.
Speaker Change: That's great question, Okay. So.
Edward J. Lehner: Let me.
Edward J. Lehner: So in terms of the optimization phase, it's overlapping right I mean as you complete projects.
Edward J. Lehner: And as you start them up in commission those assets whether it's.
Edward J. Lehner: Brand new cut to length line in Dallas, whether it's this until your service center, which was new whether its University Park, which obviously is 900000 square feet and I referenced the open house.
Edward J. Lehner: As those projects come online, and they fully operationalize, you are getting further through the optimization cycle. Let's talk about SAP for a minute. So we talked about this in Q1 and in the shareholder letter. We converted the South Region and our southern service center network to SAP. That's a big conversion, but they are getting through it.
Edward J. Lehner: As those projects come online and they fully operationalized you are getting further through the optimization cycle, let's talk about SAP for a minute. So we talked about this in Q1 and in the shareholder letter.
Speaker Change: We converted the South region in our Southern Service Center Network Asap, That's a big version.
Edward J. Lehner: They are getting through it they are becoming more fluid and S&P as they assimilate the differences in ERP systems, and so as we come through that things begin to normalize and we don't have any major projects on tap.
Edward J. Lehner: They are becoming more fluent in SAP as they acclimate to the differences in ERP systems. And so as we come through that, things will begin to normalize. And we don't have any major projects on tap besides the ones that we've announced. And the optimization cycle is going to start to really mature and come into full bloom as we get through 2025 and we get through the Shelbyville startups. That's the optimization cycle.
Edward J. Lehner: The ones that we've announced the optimization cycle is going to start to really mature and come into full bloom as we get through 2025, and we get through the Shelbyville startups, that's the optimization cycle everyday that goes by we optimize in terms of.
Edward J. Lehner: Every day that goes by, we optimize in terms of being more familiar and more fluid in how we use ERP, being more fluid and familiar with how we use these new assets and get the most benefit out of them as to how they service customers. Now, to your second question, or part two of question one. We have positive churn. I would say that as we went through the optimization cycle, we certainly had some negative churn intervals where, because we, when you unplug a service center, I mean, imagine this, you disappear and then you reappear. So you disappear in Seattle, and you reappear in Centralia. You're gonna take a hit for that. If you disappear from Ketsey and you reappear at University Park, you're gonna take a hit for that.
Edward J. Lehner: Being more familiar and more fluid in how we use ERP being more fluid and familiar how we use these new assets and get the most benefit out of them as to how they service customers now to your second question.
Edward J. Lehner: Part two of question one.
Edward J. Lehner: We have positive churn.
Alan W. Weber: I would see that as we went through the optimization cycle.
Edward J. Lehner: We certainly had some negative churn intervals, where because we when you Unplug a service center I mean imagine. This you disappear then your reappears you're disappear in Seattle and you reappear in Centralia.
Edward J. Lehner: Take a hit for that if you disappeared from pets, each reappeared University Park Youre going to take a hit for that.
Edward J. Lehner: If you go ahead and do a major expansion in Shelbyville, you're gonna take a hit for that. That said, we've gone back to positive churn over the last 12 months, meaning we've added more accounts than we've lost. So that's a good sign.
Edward J. Lehner: If you go ahead and do a major expansion in Shelby Bill Youre going to take a hit for that that said you've got we've gone back to positive churn over the last 12 months, meaning we've added more accounts that we've lost so that's a good sign and we expect to continue generating positive churn as our service levels get better as our lead times get better and as our on time delivery gets better.
Edward J. Lehner: And we expect to continue generating positive churn as our service levels get better, as our lead times get better, and as our on-time delivery gets better. So, I think I've talked about what the most common issues are and how they're being solved; the way you solve them. You look at every single one of them by doing deep root cause analysis of what's going on through your investment cycle and through your network, and you identify, okay, how are we going to improve on time delivery?
Edward J. Lehner: <unk>.
Edward J. Lehner: So I think I've talked about what are the most common issues and how they're being solved the way you solve them is huge.
Edward J. Lehner: How are we going to improve the service level? So let's let me just give you one example, because I know we don't have all the time in the world on this call. Let's take service levels as an example. Our target for service levels is 93% of A-items. When we fall below that target level, we go in and look and say, "where are we below our target level for A-items?", meaning these are the things that our customers buy from us most frequently that we should have in stock at the local service center for same day, next day, two to three day delivery, which are really the competitive benchmarks for the transactional business in our industry.
Edward J. Lehner: You look at every single one of them doing deep root cause analysis of what's going on through your investment cycle and through your network and you identify okay. How are we going to improve on time delivery. How are we going to improve service level. So let's let me just give you. One example, because I know we don't have all the time and the rollout this call.
Edward J. Lehner: Let's take service levels as example.
Edward J. Lehner: Our target for service levels, 93% of a items when we fall below that target level. We go in and look and say where are we below our target level for a items, meaning these are the things that our customers buy from US most frequently that we should have in stock at the local service Center for same day next day, two to three day delivery, which are really the competitive benchmark.
Edward J. Lehner: For the transactional business in our industry.
Edward J. Lehner: If we fall below 93%, we have plenty of analytics that tell us what we need to either buy out or get on order with the mills or even move, you know, between our networks so we can replenish that inventory at our A1 benchmarks. And that makes a big difference. When a customer calls us or emails us for a quoting opportunity, we have to have the material, we have to quote fast, we have to quote complete, and we have to meet our lead time, and we have to meet our on-time delivery target. And when we do that, with more and more running water consistency, that's how you solve the most common issues that I think are inherent in your question.
Edward J. Lehner: We fall below 93%, we have plenty of analytics to tell us what we need to either buy out or get on order with the mills, where you didn't move between our networks, we can replenish that inventory to our Avon benchmarks and that makes a big difference when a customer calls us or email us for recruiting opportunity.
Edward J. Lehner: We have to have a material we have to quote fast we have to quote complete and we have to meet our lead time that we have to meet our on time delivery target and when we do that with more and more running water consistency. That's how you solve the most common issues that I think are inherent in your question.
Operator: Thanks, operator. Yes, it appears there are no further telephone questions. I might turn the conference back over to Mr. Lehner for any additional or closing comments. Hey, we really appreciate your support and your interest in Ryerson. Come see us at the University Park Open House on September 19th. And definitely give e-commerce a try at www.ryerson.com.
Ed: Thanks, Ed.
Operator: Thanks a lot. We'll see you next quarter. And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect. Copyright 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent.
Edward J. Lehner: Operator.
Operator: Yes, and it appears there are no further telephone questions I'd like to turn the conference back over to Mr. Liang for any additional or closing comments.
Operator: Hey, we really appreciate your support and your interest in Ryerson come see US University Park Open House in September 19, and definitely give e-commerce, who try at www Dot Ryerson dotcom. Thanks, a lot we'll see you next quarter.
Operator: And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: Okay.