Ryerson Q1 2023 Earnings Call Transcript

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May 2, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the Ryerson Holding Corporation's First Quarter 2023 Conference Call. Today's conference is being recorded. There will be a question and answer session later. At this time, I'd like to turn the conference over to Mr. Jorge Verastain.

Operator

Please go ahead, sir.

Speaker 1

Good morning. Thank you

Speaker 2

for joining Ryerson Holding Corporation's Q1 2023 Earnings Call. On our call, we have Teddy Lehner, Ryerson's President and Chief Executive Officer Mike Burbach, our Chief Operating Officer Jim Clausen, our Chief Financial Officer and Molly Cannon, Our Chief Accounting Officer and Corporate Controller John Orth, our Executive Vice President of Operations and Mike Hamilton, Our Vice President of Corporate Supply Chain will be joining us for Q and A. Certain comments on this call contain forward looking statements within the meaning of the federal securities laws. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those implied by the forward looking statements. These risks include, but are not limited to, those set forth under Risk Factors in our annual report on Form 10 ks for the year ended December 31, 2022, our quarterly report on Form 10 Q for the quarter ended March 31, 2023, and in our other filings with the Securities and Exchange Commission.

Speaker 2

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 A reconciliation of non GAAP measures to the most directly comparable GAAP financial measures is provided in our earnings release filed on Form 8 ks yesterday, also available on the Investor Relations section of our website. I'll now turn the call over to Eddie.

Speaker 1

Thank you, Jorge, and thank you all for joining us this morning. I want to start by expressing my heartfelt thanks An appreciation to our 4,200 plus strong Ryerson team, which now includes BLP Holdings and its divisions for their dedicated efforts and commitment to a safe work environment that enables our mission of delivering great customer experiences throughout our network of intelligently connected industrial metals service centers. While noting ongoing supply chain distortions, credit market distress, rising interest rates and still tight labor markets, Technicolor Manufacturing Strength Got the Better of Countercyclical Indicators During the Q1 of 2023. As an ever present reminder around the promise and potential of our industry and business, While these cyclical factors may be framed and clocked in quarters, our business is investing for the years ahead As we look forward to the growth opportunities engendered by long term emergent trends that we expect will lead to a growing And sustainable industrial economy in North America. Overall, our first quarter Started the year with encouraging results, whereby we generated positive operating cash flow, solidly exceeded our expectations on earnings per share, Increased our quarterly dividend and maintained our net leverage ratio at the low end of our target range.

Speaker 1

We continued modernizing and growing our business through construction progress at our 900,000 Square Foot State of the art service center campus in University Park, Illinois, which will be operational later this year, As well as adding to our Ryerson family of companies with the acquisition of value added processor, BLP Holdings, which will enable us to do more for our customers across various end markets, while expanding our footprint in the Southwest United States. Additionally, during the quarter, we participated significantly in our largest shareholders' secondary share offering through the repurchase of 1,500,000 shares of Ryerson stock for $53,000,000 further increasing Free float, while simultaneously accreting more ownership to non selling shareholders. As we demonstrate further our commitment to shareholder returns and we'll continue to do so in a balanced and prudent manner. The progress of our past work sets the stage for our future. The years ahead will be shaped by emerging trends in onshoring, Shifting trade paradigms favoring North American manufacturing, fiscal investments in infrastructure and climate transitioning, which we expect Will lead to an imperative recyclable metals intensive overhaul of our society and economy.

Speaker 1

Industrial metals are the reusable and sustainable enablers essential to shaping the world around us And paving the way for the required advances in the human experience, living conditions and societal well-being. In this new paradigm, Ryerson's investments in value added manufacturing, customer centric connected distribution networks As well as modernized plants, equipment and systems position us squarely at the nexus of these global megatrends and propel us With that, I'll now turn the call over to our Chief Operating Officer, Mike Burbach, to further discuss the pricing and demand environment.

Speaker 3

Thank you, Eddie, and good morning, everyone. I want to start by thanking our team for continuing to prioritize a safe and productive working environment as well as creating a culture of partnership with our customers and suppliers, Where our extensive offering and capabilities can provide value while improving their overall experience. In the Q1, we saw a continuation of the shifting price trends for the commodity prices underlying our product mix That were led by supply driven factors. Since late in Q4, domestic steel mills raised prices, Increasing HRC spot prices from approximately $6.50 per tonne in December to just north of $1200 per tonne as of April. Additionally, HRC lead times extended from recent lows late last year to 6 weeks by the end of March.

Speaker 3

Supply side dynamics, low imports and strong seasonal restocking have helped support a surge in domestic spot pricing. Conversely, compared to the end of 2022, prices for our Bright Metals franchise experienced The Q1 was $2,709 per ton or just over a 2% sequential decrease in line with our guidance range. Turning to the demand environment. Over the Q1, sales volumes improved as customers accelerated the restocking as meal prices rose, While we continue to see healthy customer order backlogs, the first quarter sales volume grew by 11.6%, Coming at the high end of our guidance expectations of up 10% to 12%. We see sequential shipment increases across almost all end markets, Notably with commercial, round transportation up 20%, food processing and agriculture equipment up 19% or MSCI grew by 15.7 percent quarter over quarter compared to Ryerson's North America volume increase of 14.5%.

Speaker 3

Ryerson's performance delta was largely end market exposure related. There was a strong uptick in auto industry and nonresidential flat carbon shipments, areas where Ryerson does not have a high end market presence. To briefly discuss the macroeconomic factors, high interest rates, high inflation, cost of input materials, As well as the availability and cost of credit weigh on industrial manufacturing companies and was reflected in some key indicators. U. S.

Speaker 3

Industrial production reported a lowered trend of positive year over year growth continuing to exhibit deceleration since the latter half The U. S. Purchasing Manders' Index or PMI, after indicating slowing growth Starting the Q2 of last year, continues to report below the growth threshold of 50 as of March. The trend of this report indicates that overall companies are slowing outputs to better match demand. Finally, as a continuation of that theme, I would like to say that while demand can fluctuate quarter over quarter Encyclical factors can weigh on the cost of doing business.

Speaker 3

We run our business serving the growing needs of our customers The investments we have made in our

Operator

.:] .:]

Speaker 3

As well as the upcoming 900,000 square foot modernized facility in University Park, Illinois are geared for the current and future needs of our customers. As our customers have experienced over the past few years, change in supply chains can have a large impact on our business. While upcoming changes in decarbonization are fluid and the evolution of product needs present a changing landscape, Ryerson can serve as an important one stop shop business partner that can help navigate change through solutions based on our interconnected network And Advanced Service Capabilities. As we look forward to the rest of 2023 and beyond, we are excited about the work we can do with our customers And the future we can build together. And with that, I will turn the call over to Jim for our Q2 outlook as well as Q1 review of

Speaker 4

Thanks, Mike, and good morning, everyone. Looking to the Q2 of 2023, We expect volumes to be effectively flat compared to the Q1 of 2023. As such, We see 2nd quarter revenues to be in the range of $1,400,000,000 to $1,440,000,000 with average selling prices up slightly For 0% to 1%. Based on these expectations, we forecast adjusted EBITDA for the Q2 of 2023, Excluding LIFO, in the range of $93,000,000 to $97,000,000 and earnings in the range of $1.28 to $1.36 per diluted share. We also expect LIFO expense of approximately $5,000,000 In the Q1, we generated $80,000,000 of operating cash flow from our operations, which included $54,000,000 released from our balance sheet.

Speaker 4

We ended the period with $395,000,000 in total debt and $351,000,000 of net debt. Ryerson's leverage ratio increased slightly quarter over quarter to 0.8 times, but remains low historically and at the low end of our leverage target range. While the company's available global liquidity remains near historic highs at $856,000,000 Capital expenditures were $28,000,000 in the 1st quarter, largely in line with our annual budget of approximately $95,000,000 This amount comprises both maintenance and growth projects, Including service center modernizations such as our upcoming state of the art facility in University Park, Illinois, which replaces the previously sold Central Steel and Wire Facility in Chicago. We look forward to opening this facility in the second half of twenty twenty three. Additionally, we acquired BLP Holdings during the Q1, a specialty service center, which is comprised of 3 divisions that provide value added capabilities to customers in the oil and gas, Aerospace and Telecommunications Markets as well as creating broader industrial applications.

Speaker 4

We're very excited about welcoming the BLP team to our family of companies and the future we will create together. Turning to shareholder returns, Ryerson returned approximately $59,000,000 in the form of share repurchases and dividends. The largest contributor to that figure was an opportunistic $53,000,000 repurchase of 1,500,000 shares from our largest shareholder, Platinum Equity, in their secondary offering. Their sell down and our repurchase Has contributed to our free float reaching 67%. During the quarter, we also returned $6,000,000 to shareholders in the form of a quarterly dividend of $0.17 per share.

Speaker 4

We announced a second quarter cash dividend of $0.18 per share, An increase of 6%, marking our 7th consecutive quarterly dividend raise. Finally, on May 1, The Board of Directors approved increasing the share repurchase authorization by approximately $80,000,000 to $100,000,000 and extending the term from August 2024 to April of 2025. With that, I'll turn the call over to Mollie

Speaker 5

Thank you, Jim, and good morning, everyone. In the Q1 of 2023, Ryerson reported net sales of $1,400,000,000 which met our guidance and was 9% higher sequentially, driven by a combination of 12% higher volumes, offset by 2% lower average selling prices. In the same period, gross margin of 18.8 percent was an expansion of 610 basis points versus the previous quarter. We also recorded LIFO expense of $4,000,000 Excluding LIFO expense, gross margin was 19.1% as cost of goods sold reflected consumption of lower cost of materials through our metal sales mix. On the expense side, warehousing, delivery, selling, general and administrative expenses increased 2% sequentially to $194,000,000 primarily driven by variable expenses related to higher sales volumes as well as expenses at our recent acquisitions, BLP and Excelsior.

Speaker 5

For the Q1 of 2023, net income attributable to Ryerson was $47,000,000 or $1.27 per diluted share compared to a loss of $24,000,000 and a loss per share of $0.65 in the prior quarter. Finally, Ryerson And we have a question and answer session achieved adjusted EBITDA excluding LIFO of $90,000,000 in the Q1 of 2023, which compares to $29,000,000 in the prior quarter. Free cash flow generation was $53,000,000 this quarter and compares to $148,000,000 in the prior quarter period, which was driven by significant working capital release in the prior quarter. And with this, I'll turn the call back to Eddie.

Speaker 1

Thank you, Molly. As we reflect on a strong Q1 and look forward to the next stage of Ryerson's advancement, Our ongoing development of and investment in an intelligent network of value added metal service centers Delivering industrial metal solutions with joy, speed, value add, scale and consistency is the mission we're on With indefatigable passion and purpose, better quality of life and well-being require greater investment In recyclable industrial metals, that is why metal matters as you'll experience when visiting us atryerson.com and why the Build Now movement at msci.org are so vital and imperative. Let's all passionately advocate for manufacturing and all the good it creates, and let's keep progressing together. With that, we look forward to your questions. Operator?

Operator

We'll take our first question from Samuel Makini with KeyBanc.

Speaker 1

Hi, good morning. Hi, Sam. Good morning. How are you doing?

Speaker 6

Good, good. I'd like to start off asking about the demand evolution in the 2nd quarter, specifically if you could talk us through April versus sort of the average you saw in the Q1? And then specifically any differences among your key end markets?

Speaker 1

Sure. I'm going to go ahead and turn the question over to Mike Burbach in a second. But just for context, We felt demand was good in the Q1. B2B was stronger than B2C, which you would expect just given The cyclical dynamics in place through the quarter. Given that early April, we had a holiday, We're still looking for those demand trends to emerge, a little flat to the quarter.

Speaker 1

But so far, there's Still, I mean, everywhere I look, there's demand. The question is whether that demand is going to get let or not, but everywhere we look, there's demand. We're just looking to see that demand come through And Phoenix backlog is too warmer than we think are still pretty robust. So let me go ahead and turn it over to Mike Burbach and he can give us more color.

Speaker 3

Thanks, Eddie, and hi, Sam. Yes, I think Eddie hit the key points here. As we look at Q2, what we hear from our customers is generally positive. Backlogs remains fairly robust. There's a couple of themes that seem to happen more often than not.

Speaker 3

Talking to customers is The biggest concern people have is still labor shortages from a lot of our OEM and manufacturing companies, customers. So But generally speaking, the sentiment is positive. No serious differences in the end markets, Q2 versus Q1 that we see, just more of the same and should be a fairly steady and good quarter.

Speaker 1

Yes. So the only thing I would append onto that is the CapEx economy is strong and that B2B CapEx economy seems to be strong. And right now, we see that continuing.

Speaker 6

Okay. Thank you. And then balance sheet inventories were down more than 10% quarter over quarter in the Q1. Was that more a function of pricing or volumes in your opinion? And how does that dynamic

Speaker 1

Sure. With respect to inventory, We saw lead times come in from Q4 into early Q1 before those lead times started to inch out Again, but the extension of lead times was not dramatic. And so it just gave us the opportunity to bring our cycle and to bring our And take out some excesses that accumulated throughout COVID. But I'm going to go ahead and I'm going to flip this to Mike Hamilton. He can give

Speaker 7

us some more color on that.

Speaker 1

Hey, thank you, Eddie. Sam, I think Eddie covered off most of the points and the reality is imports have remained subdued. Lead times are manageable and in line with what we would expect. And so with the shipments in line with what we expected for Q1, we were

Speaker 6

Okay. Thank you. And then lastly for me, just if you could provide an update on your internal growth initiatives and the progress within the facilities at

Speaker 1

Sure. I'm going to go ahead and tip this over to China Arc in just a moment. But for context, We're really pleased that we've been able to continue to execute our growth plans Fuel was a mini counter cycle in the second half of last year and continue to be able to invest in growth with really good shareholder returns alongside those initiatives. So in terms of building these systems and in terms of bringing up and starting up Centralia and Starting up University Park at the end of Q2 and into Q3. See, this is all part of how we have to modernize our business across The 100 plus locations that we have now, in order to provide the customer experiences we want to provide, we really have to be able to provide A very low friction or frictionless experience, sharing inventory, sharing equipment, being able to buy inside and out and Moving our materials inside and out of our network even though 3rd party outside processors.

Speaker 1

So we need to make those investments to bring that vision about and to get to that next level operating model that we think is going to drive EBITDA growth and allow us to meet and surpass Our next stage financial targets that we discussed during our Investor Day last November in New York. But specifically to Centralia and University Park, I'm going to ask John Orr to give you a little bit more color on that. Thank you, Eddie, and good

Speaker 7

morning, Sam. As Eddie mentioned, we have really focused on reinvestment and growth, specifically around value add investments, Safety, productivity and throughput. At Centralia, our team has successfully and safely brought that facility into operating status And we are ramping up production and completing some of our automation projects around our plate processing investments. And at University Park, construction is proceeding very well. We have actually taken possession of the facility now.

Speaker 7

And we will begin moving into the facility in Q2 and begin operations in H2. And just to touch on a key point here also, we're utilizing our proprietary systems and tools that we've developed around the Ryerson production

Speaker 1

Thanks, Kate.

Operator

Thank you. We'll now take our next question from Katja Jansick with BMO Capital Markets.

Speaker 8

Hi. Thank you for taking my questions. First, you're guiding for pricing in the Q2 to be flat to up 1%. Now I would expect that would be better given the significant increase in the carbon many carbon steel pricing. So could you provide some of the color of what why the pricing only flat to up 1%?

Speaker 1

Hi, Katya. Good morning, and I hope you're doing well. With the pricing, we're really seeing just some early quarter offsets where You had some reversion in aluminum nickel pricing or price drivers that although they've turned up recently and they're more range bound, That just seems to work its way through our P and L from a spot and contract perspective. And you're right, carbon Our resets, particularly in our program business, we should start to see those come through as accretive to average selling price through the quarter. But taking a little bit more of a conservative stance just in terms of price, just given the timing of the flows of when does aluminum and stainless Come back up and I would say level out from being down, I'd say in the second half of Q1,

Speaker 8

And it seems that margins in the Q1 were better than expected. Is that driven by mix? Can you talk about that?

Speaker 1

Yes. So coming out of Q4 and the tailing effects of Q4 And while we reported in Q4, we were certainly seeing margins expand even towards the end of the year and going into Q1. I would really direct your focus to our value add mix, and we did more value add in Q1. And as we've said, The more transactional business, the more value add business we do, that will drive that margin profile higher. So We certainly saw a lift from Excelsior.

Speaker 1

We saw a lift from Howard Aluminum. We also saw a lift from our Ryerson Advanced Processing business And those fabrication margins that have been a strategic target for us for some time now.

Speaker 8

Can you remind us how much value added positive currency is of revenues?

Speaker 1

Yes. So we were during Investor Day last year, we had communicated There was presently at 14%. Our target is 20%, and we came in excuse me, we came in at about 17.5 in Q1. So we made some positive nice progress.

Speaker 8

And is that sustainable? Or is that just the Q1 and maybe it's going to trend lower? How should we

Speaker 1

think about that? I think the regression line is certainly up into the right. Just based on cyclicality, I mean, we could have quarters where we get Down a few basis points here and there, but I think the trend is decidedly up when you look at it on a regression line basis.

Speaker 8

Okay. Thank you very much.

Speaker 1

Thanks,

Operator

We'll move to our next question, which is from Alan Weber with Robotti Advisors.

Speaker 9

Good morning. How are you?

Speaker 1

Hi, Alan. How are you doing?

Speaker 9

Good. So can you talk about, First, the acquisitions that you've made since the Q3 of last year, how fully integrated are they? And kind of if you think how do you think about the potential when you look at a year or 2 in terms of EBITDA like that?

Speaker 1

Thanks, Alan. Without getting into specific EBITDA targets for those acquisitions, I would say this. When we buy businesses like Howard and like Excelsior, like VLP, we first take the Hippocratic Oath and that is to do no harm. Those are strong businesses with really good franchises and value add. So we really look to work with them in terms of that post close synergy case where We want to get those capabilities that they have and things that they do really well.

Speaker 1

We want to get those mapped into our overall network, so we can sell that to a broader audience. And then we start to look at system synergies without disrupting the flow of what they do really well. So you can imagine we start to look for some back office synergies, some purchasing synergies, things will be really to lend to helping hand lower cost of overall capital. But with those businesses that really do have goodwill, they've proven that they have sustaining goodwill. We really want to Increase that commercial envelope while training our people on those products, on the things that they do well and then getting those things expanded throughout our network With that value add, within that, I'd say in Howard's case, aluminum, Excelsior being more broad based, BLP being more broad based, but maybe more carbon We want to drive more opportunities into those plants and also take their best practices And apply them to other plants in our network.

Speaker 9

So I realize each acquisition is different. But when you think about kind of Like how do you think about when do you think about it being getting all those benefits? Does it take a year, 2 years? How do you think about it?

Speaker 1

In the case of Excelsior and Howard BLP, the benefits accrued on day 1. I think Going back to 2018 when we acquired Central Steel and Wire, those benefits, they continue to play out, but they take longer to realize. When we do investments in new service centers, those benefits may be stretched out over a slightly longer horizon as that facility gets commissioned and really starts to season out. But it's the potential that is really so enticing and that really gives us so much optimism because Once those facilities are fully equipped, once those once you get to that shakeout process, you really see a significant leap forward In service, you see a leap forward in the types of customer solutions you can provide. So in that continuum, it can be day 1, Cycles are a little bit longer.

Speaker 1

So we're going through an enterprise resource planning system upgrade throughout our network to facilities that were on legacy systems That really needs to be replaced and really for us to make that next leap forward, we need to be on a uniform EOT platform. So a lot of the digital Tools that we're developing, making scale throughout our enterprise. So that's going to continue to unfold and fulfill its promise over the next several years and even beyond.

Speaker 9

Okay. Thanks. And then my other question was, when you look at CapEx of $95,000,000 it A little over $100,000,000 last year. How do you think about the amount that yielding is maintenance versus growth?

Speaker 1

That's a good question. I would say just given the increase in our overall footprint, maintenance CapEx, I would tell you this is probably at a run rate of 30 to 35. If we go into a protracted downturn, I mean, we can go ahead and we can We can pull that down to $25,000,000 But right now given the expansion of our footprint over the last several years, $30,000,000 to $35,000,000 on maintenance CapEx and no shortage of convertible luxuries. But as I've discussed with the stakeholder community before, There's a very there's a point of intersection between even the amount of capital that may be available to you to invest and what you can Successfully deployed because your organization can assimilate that capital investment and put it to the best use to where you stay on schedule on time And you generate returns along the time horizon that you expect. So 95, good number for us.

Speaker 1

We have no shortage of good projects to do. Frankly, right now, we're seeing some lead times extend with equipment suppliers, which is the other half of that demand answer I gave earlier, which is We would have expected in a counter cycle and a downturn, we would have expected that equipment lead times Would have already come in, and then maybe there would be cancellations or the ability to substitute pieces of equipment because of order cancellations or pauses in other people spending, but we haven't seen that yet. So really from a perspective of ongoing Supply chain angles and extended lead times to procure CapEx. Surprisingly, those lead times are still somewhat extended, which is maybe causing a little bit more of an extension of when we would like to get that equipment in, get it installed And running revenue across it.

Speaker 3

And then

Speaker 9

just my last question is, obviously, given your financial improvements over the last few years, Can you talk about acquisitions, how you're thinking about acquisitions today and like that?

Speaker 1

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

Speaker 1

And I would say that we look at everything from Yes, smaller to larger. It's really just a question of, does it really fit our strategy? I go back to a conversation I had years ago with another CEO, just talking about how important it is to stay disciplined when it comes to M and A. It's really easy to make mistakes in M and A, And you really have to keep the discipline to make sure that the companies you acquire are really going to deliver the goods. And so We have to keep that discipline, but no shortage of opportunities.

Speaker 9

Okay, great. Thank you very much.

Speaker 1

Thanks, Alan.

Operator

Any additional or closing comments.

Speaker 1

Thank you for joining us for this morning's Q1 2023 earnings call. Stay well And we look forward to seeing and being with all of you again next quarter. Take care.

Operator

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

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