Ryerson Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 8 speakers on the call.

Operator

Good day,

Speaker 1

and welcome to the Ryerson Holding Corporation Second Quarter 2023 Conference Call. Today's conference is being recorded. There will be a question and answer session later. At this time, I would like to turn the conference over to Pranthan Deer. Please go ahead, sir.

Speaker 2

Good morning. Thank you for joining Ryerson Holding Corporation's Q2 2023 earnings call. On our call, we have Eddie 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. Jon 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.

Speaker 2

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 June 30, 2023, and in our 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. 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.

Speaker 2

I'll now turn the call over to Edgy.

Operator

Thank you, Pratham, and thank you all for joining us this morning. I want to start by expressing my heartfelt thanks and appreciation to our 4,300 plus strong Ryerson team For their dedicated efforts and commitment to a safe and productive work environment that enables our mission of delivering Great customer experiences throughout our network of intelligently connected Industrial Metals Service Centers. The Q2 of 2023 was a period of countercyclical headwinds In our Bright Metals franchise characterized by falling prices and slowing customer demand, particularly in our Stainless Products segment and late cycle end markets. While our business performed well, we are experiencing some short term growing pains from Greenfield Service Center Startups in Centralia, Washington University Park, Illinois as well as a facility expansion and modernization in Shelbyville, Kentucky And ongoing ERP system conversions. Despite some temporary discomfort, these investments are essential To Ryerson's next relay leg of its operating model transformation, as we gather momentum toward our next stage financial targets And create the best industrial metals customer experience across a wide expanse of metal selection, Value added distribution, fabrication and service, all at differentiated speed, scale and consistency.

Operator

Coming back to countercyclical industry catalysts that popped during the Q2 and into the Q3, We noted shifting consumer spending from goods to experiences, the impact of higher interest rates, Credit tightening, contractionary PMI and industrial production indicators, late cycle end markets And a long expected economic recovery in China that has thus far failed to materialize. All that said, we've seen counter cycles many times before and managed through them well. Current manufacturing indicators aside, our enthusiasm and optimism around longer term secular drivers for manufacturing growth in North America Is undiminished. Taking a more holistic view of the 2nd quarter, we generated positive operating cash flow, Increased our dividend for the 8th consecutive quarter and maintained our net leverage ratio within our target range, while carrying our organic and acquisition growth investments over the aforementioned countercyclical waters. 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, Liddy, and good morning, everyone. I want to start by thanking our team for continuing to prioritize a safe In the second quarter, We saw a continuation of shifting price trends in the commodities that underlie our product mix. Increases in domestic steel prices That started in the Q4 of last year and continued into the Q1 of this year, reversed by approximately $300 per ton over the Q2. Similarly, supply exceeded demand, which impacted prices for our Bright Metals franchise, As we saw continued declines in alamy nickel and alamy aluminum during the Q2. Due to our sales mix, The continued declines in pricing on alamy nickel and aluminum contributed to margin compression over the quarter.

Speaker 3

Despite the pricing turbulence, on balance, our average sale price was in line with our guidance range Turning to the demand environment. 2nd quarter sales volumes were lower sequentially as we saw easing conditions in our end markets As customers slow down industrial metals purchases during a period of falling prices, tighter credit conditions And an uncertain economic outlook for the second half of twenty twenty three. Sequentially, volumes were lower by 4.4% led by shipment Decreases in Industrial Machinery and Equipment, HVAC and Food Processing and Agriculture And partially offset by strong increases in Construction Equipment and Oil and Gas. Although countercyclical conditions as noted Pervaded the Q2 and have continued early into the Q3, industry inventories are better balanced to demand than a year ago, thus somewhat tempering near term price pressures. Finally, I would like to say that while we saw ebbs in demand conditions, Ryerson continues to partner with our customers for their long term needs.

Speaker 3

To that end, we continue to invest in the equipment, Technology, processes and our people. Strategic investments within our business as well as additions to our family of companies We have increased our value added sales to 18%, which is expected to translate into higher and more durable margins throughout the cycle. And we continue to work towards our target of at least 20% value added sales. We see the increase in value added sales As a promising area of growth that will benefit from secular trends of near shoring, decarbonization, creating an emergent need for Smart Manufacturing in North America, whereby our customers can benefit from our scale and value added capabilities That will be complemented by our digitalized network of connected service centers. Similarly, we are also excited about the upcoming startup of operations at our new facility in University Park, Illinois, which will serve as our long product hub in the Midwest with state of the art equipment, Service capabilities and more efficient operations.

Speaker 3

Finally, our investments in improved facilities, IT infrastructure and enhanced value added capabilities continue to support our drive to enhance our customers' experiences. And with that, I will turn the call over to Jim for Q2 financial highlights as well as our Q3 outlook.

Speaker 4

Thanks, Mike. Good morning, everyone. Before discussing the Q3, I would like to highlight the drivers for our 2nd quarter performance compared to our guidance expectations. The primary driver in our 2nd quarter volume shortfall was softness in later cycle end markets, which affected all three of our primary material franchises. Along with this broad based demand driven fall off, Excluding strength in automotive, aerospace and non residential construction, stainless steel average selling prices and margins We're further impacted by sharper stainless specific commodity price declines and still elevated channel inventories.

Speaker 4

While we expect strong long term demand underpinnings in our Brightmetals franchise given decarbonization led efforts, The supply demand imbalance in the quarter significantly pressured market pricing and margins. Looking to the Q3 of 2023, we expect volumes to be down sequentially compared to the 2nd quarter in line with normal seasonality. As such, we expect 3rd quarter revenues to be in the range of 1.25 to $1,300,000,000 with average selling prices down 1% to 2%. Based on these expectations, We forecast adjusted EBITDA for the Q3 of 2023, excluding LIFO, in the range of $43,000,000 to $47,000,000 And earnings in the range of $0.31 to $0.43 per diluted share. We expect LIFO income of Approximately $2,000,000 In the second quarter, we generated 115 $1,000,000 of cash flow from our operations, which included $38,000,000 released from lower working capital requirements.

Speaker 4

We ended the period with $396,000,000 of total debt and $366,000,000 of net debt. Ryerson's leverage ratio increased quarter over quarter to 1.4 times, but remains within our leverage target range, While the company's available global liquidity remains robust at $790,000,000 Due to our improved capital structure and multi year progress deleveraging the company, Ryerson generated $196,000,000 Cash flows from operations in the first half of twenty twenty three compared to $168,000,000 in the first half of twenty twenty two. With a healthy balance sheet and several highly accretive strategic projects, we remain focused on investing back into our business through the cycle. Capital expenditures were $46,000,000 in the 2nd quarter, which included $24,000,000 for the purchase of building and land related to the BLP Holdings acquisition. Given this real estate purchase, our updated expectations for full year 2023 capital expenditures Are now approximately $125,000,000 This amount comprises both maintenance and growth projects, including Service Center Modernizations.

Speaker 4

We are very excited about the modernization efforts taking place across our network, which will continue to drive better customer experiences, enhance long term potential of our equipment and improve asset utilization. Turning to shareholder returns, Ryerson returned approximately $57,000,000 in the form of share repurchases and dividends. The largest contributor to that figure was an opportunistic $50,000,000 repurchase of 1,400,000 shares from our largest shareholder, Platinum Equity, in conjunction with their secondary offering. Their sale and our repurchase has contributed to our free float reaching 77%. After having increased our share repurchase authorization to $100,000,000 last quarter and extending the term to April 2025, We currently have approximately $50,000,000 remaining on our authorization and will continue to prudently evaluate our shareholder return opportunities as well as our overall capital allocation strategy to maximize long term shareholder value.

Speaker 4

During the quarter, we also returned $6,000,000 to shareholders in the form of a quarterly dividend of $0.18 per share. Additionally, we announced a 3rd quarter cash dividend of $0.18125 per share, an increase of 1.4%, marking our 8th consecutive quarterly dividend raise. With that, I'll turn the call over to Mollie to provide further detail on our Q2 financial results.

Speaker 5

Thank you, Jim, and good morning, everyone. In the Q2 of 2023, Ryerson reported net sales of $1,300,000,000 which was 5% lower sequentially driven primarily by 4% lower volumes. In the same period, gross margin of 19.4% was an expansion of 60 basis points versus the previous quarter. Excluding LIFO, gross margin fell 40 basis points from the 1st quarter to 18.7% as our average selling prices for our stainless steel sales mix decreased faster than cost of goods sold. On the expense side, warehousing, delivery, selling, general and administrative expenses increased 4% sequentially to $203,000,000 driven partially by higher expense related to our acquisitions, higher depreciation from additional assets Park Service Center, which were partially offset by lower fixed operating expenses.

Speaker 5

For the Q2 of 2023, Net income attributable to Ryerson was $37,600,000 or $1.06 per diluted share compared to net income of $47,300,000 and diluted earnings per share of $1.27 in the prior quarter. In the first half of twenty twenty three, net income attributable to Ryerson was $84,900,000 And diluted earnings per share was $2.33 Finally, Ryerson achieved adjusted EBITDA, excluding LIFO, of $70,000,000 in the Q2 of 2023, which compares to $90,000,000 in the prior quarter. Free cash flow generation was $69,000,000 this quarter and compares to $53,000,000 in the prior quarter period, driven by operating earnings as well as working capital release. In the first half of twenty twenty three, Ryerson has generated $160,000,000 in adjusted EBITDA, including LIFO, and $122,000,000 in free cash flow. And with this, I'll turn the call back to Eddie.

Operator

Thank you, Molly. While we encountered countercyclical headwinds During the quarter sooner than anticipated, our belief in the greater and sustained need for longer life manufactured assets To improve quality of life and better the human experience remains resolute. Metals are the perennial materials enabling both the remedial and transformative manufacturing and building required to meet the formidable challenges Of these times and beyond, the investments Ryerson is making through the cycle in our network of intelligently connected Industrial metal service centers that deliver customer solutions with joy, speed, scale, value added consistency positions Ryerson and its stakeholders well for an enduring and valuable future as these immutable trends

Speaker 1

Thank And our first Question is going to come from Catharine Jannet from BMO Capital Markets. Hi. Thank you for taking my questions. First, maybe if we can start with margin outlook. Can you talk a little bit about how you think how you're thinking about margins over the next few quarters?

Speaker 1

What are some of the puts and takes there?

Operator

Hi, Kasia. Good morning. Three cases when it comes to margins. I think there's evidence right now that The upside case would be stabilization and there are actually signs. You look at the Bloomberg Industrial Metals Sub index, when we were having our conference call a quarter ago that was at 170.

Operator

It got as low as 120. It's actually rebounded To 150. So I think there's a good case to be made for stabilization, maybe on the upside. Base case, I'd say mild counter Effects where you're still going to see indexes drift lower through the quarter. And so you'll see some margin compression as a result of those falling prices, but base case is going to be mild and that's more or less And then there's a downside case where you have a more aggressive power cycle and there's more pressure on prices, there's Following demand and so you've got a lot of competitors that are trying to take orders and POs off the street by bidding more competitively for those orders.

Operator

So Three cases and that's how we would see it over the back half of the year.

Speaker 1

And then I think I heard that the CapEx increase is driven by land purchase. Is that correct?

Operator

Yes. It was a good opportunistic purchase. We did the BLP acquisition towards the end of Q1 of 2023, And we had an option to purchase that land. We're certainly bullish long term on industrial real estate. So we saw it as good opportunities.

Operator

We went ahead and

Speaker 1

And what is the plan with that land specifically?

Speaker 2

I'm sorry?

Speaker 1

What is the plan? Are you planning to maybe build on that Land or how are you thinking about it?

Operator

There are 3 facilities that are on that industrial property site and We just like the property, like the real estate, like the configuration and gives us more control if we decide to expand those assets going into the future, but also we think it's just going to create value longer term when we look at it as part of our industrial Real Estate Portfolio.

Speaker 1

And maybe just one last one. What can you remind us what the maintenance CapEx is right now?

Operator

Yes. Maintenance CapEx is running at about $30,000,000 per year as we picked up some additional square footage through our acquisitions. So we can get down to, I'd say, about $30,000,000 in maintenance CapEx. Looking ahead, just given some Tactical adjustments that we'll make going forward based on economic conditions. Right now, I would say Early look at 2024 would be, we would reinvest in CapEx at the rate of GAAP depreciation plus the carryover From 2023, we think it's really important given that we have the ability and we have the liquidity.

Operator

It's really important to carry these growth initiatives sort of across these kind of cyclical waters and see them through to the benefits that we believe they're going to provide.

Speaker 1

Okay. Thank you very much. We'll take our next question from Samuel McKinney, KeyBanc Capital Markets. Please go ahead.

Speaker 6

Good morning, Eddie and team. How are you? Good. I wanted to start off on operating expenses. Volumes were down 4% in the quarter versus the Q1, But your warehouse delivery and SG and A expense increased by 4%.

Speaker 6

Can you talk through the specifics of what happened to drive that OpEx number higher despite the decrease in total volumes?

Operator

Yes, sure. Part of that sequentially, Samuel, is reorganization. And then really that's about and I'll have Jim add some commentary to this, but we've got about $3,200,000 in reorg That goes to that expense bridge quarter over quarter. And then we have about $4,000,000 that's related to acquisition activity sequentially. So that's the majority of it.

Operator

It's growth based. As we move through the back half of the year, we'll be able to flex down on costs. As I mentioned in the earnings release, we're very good at it. We know how to run a countercyclical playbook and we'll be able to further revise these investments as we move to the back half of the year. Jim, do you want to add any color to that?

Speaker 4

Good morning, Sam. No, Eddie, I think you covered it. Really, it's It was a function of some acquisitions we added and then the initiatives with some reorganization costs. And Sam, we would expect those costs to be the reorganization costs to be maybe $4,000,000 to $6,000,000 in Q3.

Speaker 6

Okay. Okay. Thank you. And then your outlook for the Q3 on pricing and mix Holding in pretty well, only down 1% or 2%. Is that a function of higher value stainless aluminum being a higher sequential

Operator

Yes. Let's go ahead and we'll kind of unpack it like this. There are some signs that we're seeing stabilization coming off of Q2 that maybe countercyclical conditions arrived a quarter before we anticipated at the time that we offered guidance last quarter. So there are some increasing signs of stabilization. Obviously, when you look at end markets, Automotive has performed better.

Operator

Aerospace has performed better. Non resi has performed better. As we show in our investor deck, Broad based industrial has been in a malaise, which has tracked the indicators around PMI and industrial production. But we did see some Strength in construction and heavy equipment and energy as well. But the consumer right now is showing fatigue.

Operator

You've seen a shift in So durable goods and goods manufactured goods related to the consumer, you can see the impact of higher interest rates And a change in preference as to how those dollars are spent. So I'd say upside cases we see stabilization Price and demand and then you start to see a reset in replacement cost, which starts to expand your margins as you go through the quarter. Base cases, again, mild conditions that are more or less represented not more or less, but represented in our guidance for the quarter. And I think stainless, again, being more levered to the consumer, stainless that countercyclicality is still playing out. There's been more of a stabilization around aluminum and aluminum demand and more of a stabilization for now around carbon demand.

Operator

That's how we would see it on the commodity side, but I'll ask Mike Burbach to pitch in with any additional comments you may have.

Speaker 3

Yes. Thanks, Eddie, and good morning, Sam. No, I think you hit the high points already there, Eddie. So The stabilization is something that we're watching. There was a lot of change that took place through Q2 with Futures prices of nickel and aluminum coming down off of places where they were late in Q1, which triggered

Speaker 4

Maybe some demand deferral

Speaker 3

in Q2, especially in stainless steel where industry shipments were off Nearly 8% sequentially from Q1. So but that appears to be stabilizing to some extent, but We'll play it as she comes. Thanks.

Speaker 6

Okay. Thanks. And then lastly for me, I know that a Stringing together a lot of value add M and A can have a big impact on your margin. But Eddie, you mentioned recently that the market for any really sizable M and A has been difficult to complete given the And evaluation, how has that market been developing recently?

Operator

I would characterize This way, I think still for bigger deals and I'll go back and just give everyone a historical perspective. I mean, you had the Minerals USA Reliance transaction in 2013, you had a deal that we did in 2018 for Central Steel and Wire. I think you'd be hard pressed to really name Any additional deals in the space that have been bigger than those deals. And so there's still a gap I think between what Buyers want to pay and what sellers want to sell for. So that's in the bigger transaction that's in the bigger what I'll call transformational acquisition space.

Operator

But the bolt on pipeline is still healthy and we're excited about what we have in our bolt on pipeline and the opportunities that are there that we're Currently working through now. We'll see which ones come to fruition, but activity within our bulldog pipeline is good, it's robust and it's attractive given our strategy and what we're looking to accomplish over the next 5 years and beyond.

Speaker 6

Okay. Thank you. That's it for me.

Operator

Thanks, Dan.

Speaker 1

And our next question is going to come from Alan Weber from Robotti Advisors. Please go ahead.

Speaker 7

Good morning. How are you?

Operator

Good morning. How are you doing?

Speaker 7

Good. So just a quick question. In some of the presentations, you used to give a talk about Projected EBITDA through the cycle like that. Can you talk about your thoughts there given You have ramped up the acquisition, you ramped up the CapEx and things have changed. How do you think about that today?

Operator

Yes, absolutely. Alan, a couple of things. So we put out our next stage financial targets When we were at our Investor Day in New York last November and we look at mid cycle EBITDA within that next stage Between $350,000,000 $400,000,000 We look at those margins at mid cycle being at about 22% With that neutrality of not really having holding gains or holding losses in inventory, and then we talked about value add being Up to 20% of our mix, we've certainly seen good progress on the value add front, certainly given some of the acquisitions we made and some of the organic Improvements and accomplishments that we've had within the Ryerson Ryerson, Advanced Processing segment of our business. I would also say this, the things that we're doing at University Park In Illinois, the things that we're doing in Centralia in Washington, which is on the Oregon Washington border, we're doing in Shelbyville, Kentucky. The ERP conversions that we're doing, the systems investments that we're making, these are all very important things.

Operator

They're harder, But they're really important things to get into that next stage operating model. And we're in the kitchen right now. We're cooking that. In the meantime, we're running our existing business and we're doing that well. However, you've got to carry these things from early, middle to the finish line and we'll get there and they will produce the returns that we expect And that will get us to those next level operating and financial targets.

Operator

But it all fits together really well. There's just the work in between and we'll do that work and we'll get it done.

Speaker 7

So when you just kind of when you talk about the targets, Because again, from November you've made a few acquisitions, you've ramped up CapEx, should those targets be a little higher?

Operator

So, those targets will be a little bit higher. Yes, I mean, look, we it's So really where we've seen the industry be historically where we think it's going to go. Certainly, as we look at conditions right now, they are decidedly Counter cyclical. I mean, if you look at PMIs, they're counter cyclical. So that creates a certain To what happens as we go from countercyclical back to cyclical, but when we look at those next stage financial targets, Especially at mid cycle, because we've seen a peak, right?

Operator

I mean, we saw a peak in 2021. We know what that peak was. It was $861,000,000 So we know when conditions are at what we'll call a cyclical peak. We sort of know what that looks like and what it can look like. We also know what it looks like at the trough, depending on whether it's a pandemic or whether it's a severe Manufacturing recession, we know what that looks like as well.

Operator

So we set those peaks straight we set those targets very thoughtfully When we did those next stage financial targets and we believe that when we do hit those financial targets, it's going to be very good for stakeholders

Speaker 7

And just the last question for me. When if you exclude auto and aerospace, which you're not as big in, How do you think about your market share, let's say, for the first half of the year?

Operator

Yes. I would say this. We market share is fluid. And so right now in the industry, Market share is being over weighted to stronger end markets. So if you've got more exposure to automotive, if you've got more exposure to aerospace, You've got more exposure to non resi.

Operator

Market share is going to be tilted in your favor. When you look at Market share statistics, going back to 2021, which was, I'd say, much more compatible with Ryerson's end market exposure overall. Obviously, we were the beneficiaries of that opportunity where we were able to capitalize on our higher market share in those verticals And that helped really be a significant driver of profitability at that time. So you get these puts and takes in the cycle. But right now, as I look at our investments and I look at our plans moving forward, we're planning for that next up turn and that next up cycle and Really have a lot of optimism and enthusiasm around what we're going to see when we come up into that next upturn and how we're going to have Exposures to end markets, including penetrations into other verticals and progress in other verticals where maybe we've been lighter historically.

Speaker 1

And it appears there are no further questions at this time. I'll turn the conference back over to you guys for additional comments or closing remarks.

Operator

So we thank you for your continued support and interest in Ryerson. Please stay safe and be well. We look forward to being with all of you in November for our Q3 2023 earnings release and conference call.

Speaker 1

And this concludes today's call. Thank you for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Ryerson Q2 2023
00:00 / 00:00