Ryerson Holding Corporation

Good day and welcome to the Ryerson Holding Corporation's first quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Justine Carlson. Please go ahead, ma'am.

Good morning. Thank you for joining Ryerson Holding Corporation's first quarter 2021 earnings call. I'm here this morning with Eddie Lehner, Ryerson's President and Chief Executive Officer, Mike Burbach, our Chief Operating Officer, Jim Claussen, our Executive Vice President and Chief Financial Officer, and Molly Kannan, our Controller and Chief Accounting Officer. John Orth, our Executive Vice President of Operations, will be joining us for Q&A. Before we get started, let me remind you that certain comments we make on this call contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve a number of risks and uncertainties. including the impacts of COVID-19 and related economic conditions that could cause actual results to differ materially from those implied by the forward-looking statement. Such risks and uncertainties 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, 2020. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the day 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 the non-GAAP financial measures discussed on today's call to the most directly comparable GAAP measures is provided in our first quarter 2021 earnings release filed on Form 8K yesterday, which is available on the Investor Relations section of our website. I'll now turn the call over to Eddie.

Thank you, Justine. and thank you all for joining us this morning to discuss our first quarter 2021 results. I hope this call finds you all safe and well. I want to begin by thanking my writers and colleagues for making the most of our opportunities and overcoming the many challenges engendered by the pandemic now in its second year as we together achieved truly outstanding results safely and productively I also want to thank our customers for every opportunity to earn your business and to our suppliers as we work through the supply side challenges posed by this very unique time in our shared history. At this point, the pandemic is still very much with us. However, vaccination efficacy data looks to be promising, indicating that better days are ahead. Whether we debate commodity and demand regular cycles or super cycles, supply chain squeezes and their duration, fiscal and monetary policy support effects, decarbonization, supply chain reorientations and rotations, and ongoing secular growth stories, what is clear is that the current environment of higher prices and recovering demand looks to be stronger for longer. This is evidenced clearly in channel inventories that are still well below restocking parity before even mentioning inventory levels necessary to support growth. The PMI report from this week illuminated what we're experiencing in that demand is recovering and getting stronger but for acknowledged shortages of various manufacturing inputs, whether it is labor transportation, lumber, metal, semiconductors, phones, sealants, and you name it. Even end markets which have been trailing the recovery such as heavy truck and trailer and machinery and equipment have strengthening backlogs amidst the aforementioned supply-side constraints. We see continuing strength in commodity price drivers supporting stainless steel and Aluminum and Carbon Steel average selling prices and margins through the second quarter given a trifecta of pandemic, trade policy and decarbonization impacts. This spells a favorable setup for the second quarter and argues well for tailwinds supporting improving program pricing and gradual improvement in supply chain bottlenecks for the balance of the year. 2021's Basecase is shaping up as an opportunity for Ryerson to accelerate the deleveraging of the balance sheet to further de-risk legacy liabilities and to advance our operating model as we continue executing on our customer-centric operating model driven by our overarching mission of consistently delivering great customer experiences at speed, scale, and value-add throughout our intelligently connected network of service centers. I'll now turn the call over to Mike to discuss the first quarter pricing and demand environment.

Thank you, Eddie, and good morning everyone. Returning to the commodity environment, the aggressive price increases in carbon products that began in the second half of last year have continued to unprecedented levels as lead times remain extended and there appears to be Little give in futures pricing until possibly later in the year or early next, depending on when new capacity becomes available and input constraints abate. Likewise, LME aluminum ended the first quarter 8.6% above the year-end price and continues to appreciate into the second quarter. LME nickel prices had, on the other hand, softened slightly by the end of the first quarter compared to year-end, but have recently turned higher again given global stainless steel demand and emergent EV battery needs despite recent nickel matte processing and refinement capacity announcements in Indonesia. At this time, we anticipate that prices across all three of our primary commodities will remain elevated throughout the second and third quarters As supply chains recover, and we expect that price normalization will be gradual given supportive demand conditions. Expanding on the demand environment, macroeconomic indicators continue to report recovery in the first quarter. North American industry shipments, as measured by the Metal Service Center Institute, or MSCI, reported first quarter volumes only 1.2% below year-ago pre-COVID levels, while U.S. industrial production reported year-over-year growth in March after 18 months of contraction. Ryerson's North American customer activity also continued to improve on balance in the first quarter. Compared to the fourth quarter of 2020, we noted shipment improvement across all of our end markets except oil and gas on a sequential per-day basis. Commercial ground transportation, metal fabrication on machine shop, and in industrial equipment sectors showed the strongest improvement quarter over quarter, supported by renewed strength in the Class 8 market and improving manufacturing activity. Our construction and HVAC sectors also showed strong sequential improvement on a per day basis, benefiting from healthy construction activity. With that, I will turn the call over to Jim for our second quarter outlook.

Thank you, Mike, and good morning, everyone. Building on the market dynamics that Mike discussed, although pandemic-driven uncertainties persist, Ryerson is optimistic about the second quarter business environment. At this point in the quarter, demand momentum continues to build, and coupled with supply tightness, support elevated pricing across all three of Ryerson's primary commodities. Therefore, Ryerson anticipates second quarter 2021 revenues of $1.32 billion to $1.34 billion, assuming sequential average selling price growth of 12% to 14% and shipment growth of 1% to 3%. Lifeboat expense in the second quarter is expected to be in the range of $74 to $78 million as replacement costs continue to increase relative to average inventory costs. The lowest achieved since 2007. In the first quarter, working capital investments and pension contributions drove a use of operating cash of $47.3 million. During the quarter, Ryerson was able to grow sales by an 8 to 1 net working capital ratio through leveraging our interconnected network, supply chain analytics, and mapped inventory database. First quarter capital expenditure investment totaled $6.5 million. At this time, we affirm our previously announced maintenance and growth CapEx budget base case of $40 million in 2021. Turning to expense management, while warehousing, delivery, selling, general administrative expenses increased by 10.3% compared to the year-ago period. Ryerson realized expense leverage in the first quarter as expensive as a percentage of sales decreased by 40 basis points in comparison to the first quarter of 2020. There are inflationary effects noted in areas such as lumber, delivery, packaging materials that are working their way into costs. Variable incentive compensation expenses also increased by $20.6 million compared to the year-ago period due to the significant increases in revenue, gross margin dollars, and adjusted EBITDA excluding LIFO realized during the first quarter of 2021. However, this increase was partially offset by reduced salaries and wages expense as pandemic-induced workforce adjustments during 2020 resulted in lower headcount. Our progress continued with respect to the turnaround at Central Steel and Wire. Since we acquired the company on July 1st, 2018, we have optimized working capital, reduced expenses, sold non-core assets, completed an ERP conversion to SAP, and introduced new systems to the business and are pleased to report that Central Steel and Wire generated $108 million in revenue and $10.4 million in adjusted EBITDA excluding LIFO in the quarter. We see good things ahead for the Central Steel and Wire business and franchise as we move further up the transformational curve. Now I'll turn the call over to Molly to provide further detail on our first quarter financial results.

Thank you, Jim, and good morning. In the first quarter of 2021, Ryerson achieved revenues of $1.15 billion, which exceeds the range communicated in our first quarter guidance, with average selling prices up 21.9% and volume up 10.4% from Q4 2020. First quarter revenue represents an increase of 13.6% compared to the first quarter of 2020 with average selling prices up 18.4% and tons shipped down 4.1%. Gross margin contracted to 17.2% due to higher costs of goods sold recognition compared to 19.4% for the first quarter of 2020. Reflective of the period's rapid and steep industrial metal price increases, most notably in carbon seals, Included in first quarter 2021 gross margin is LIFO expense of $83.8 million, which significantly exceeded our guidance expectations due to inventory average costs rising more than estimated. Excluding the impact of LIFO, first quarter gross margin expanded by 720 basis points from the first quarter of 2020 and sequentially from the fourth quarter of 2020 by 530 basis points to 24.6%. Net income attributable to Ryerson Holding Corporation for the first quarter was 25.3 million or 66 cents per diluted share compared to net income of 16.4 million or 43 cents per diluted share for the year-ago period. Included in first quarter 2021 net income is a gain on the sale of assets of $20.3 million related to the sale of our Renton, Washington facility. The sale of the facility is consistent with Ryerson's plans and past actions to optimize its asset portfolio to improve the capital structure by taking out higher cost debt and the resultant interest expense. Last year's bond refinancing contains special redemption features to pay down the bonds on an accelerated timetable on favorable terms. And we believe we have an opportunity to reduce our long-term debt balance by up to $150 million by year-end, thus potentially reducing cash interest expense by another $12.75 million. Adjusted net income attributable to Ryerson Holding Corporation, excluding the gain on sale of assets and the associated income taxes, was 10.2 million for the first quarter of 2021, or 26 cents for diluted share. If we were to also exclude the impact of actual LIFO in excess of our estimated LIFO expense for our first quarter 2020 earnings release and the associate income taxes, adjusted net income attributable to Ryerson Holding Corporation would have been 34.6 million, or 90 cents per diluted share. Ryerson achieved adjusted EBITDA excluding LIFO of $123.5 million in the first quarter of 2021, which represents a year-over-year increase of 259%. The company's first quarter total debt remained relatively consistent with net debt rising slightly since the fourth quarter by $19.5 million to 698.1 million as revenue increases and pension contributions required less networking capital than in prior recovery cycles. The significant debt reductions made in 2020 coupled with our increasingly trailing 12-month adjusted EBITDA excluding LIFO produced a leverage ratio of 3.3 times for the quarter down from 5.7 times at the end of the year and just outside of our long-term strategic target range. At the same time, Ryerson's liquidity increased significantly and ended the quarter with $583 million of global liquidity as the company's adjusted EBITDA, excluding LIFO, and working capital assets rose in value consistent with higher underlying commodity drivers and recovering demand. In all, Ryerson's first quarter results highlight the important balance sheet improvements we have made to date and display our enhanced operating profile. With that, I'll turn the call back over to Eddie to conclude.

Thank you, Molly. During the NFL draft last weekend, the following was said about my beloved Cleveland Browns, and I quote, This really is about the process. because over time, process wins, plans win. There will be misses along the way, maybe big ones, but if you believe in smart ideas and stick to them, good things start to happen long term. It can almost look and feel easy, like you knew moves would happen before they happened. It's clear two years in that Andrew Berry's big plan for putting together the Browns roster is to always have a plan, unquote. Now I'll say it's never been or felt easy, but it's a joy nonetheless to see our progress amidst the many great and small turbulences experienced since I joined Ryerson in the summer of 2012. I thought this comment about the Browns' transformation was particularly relevant to Ryerson and our journey As we have a plan, we have a process, and we've executed that plan within our process in an under-the-radar but always advancing way despite existential industry crises in 2009, 2015, and 2020-21. I thought it useful to do a freeze frame to look back, not just year over year sequentially, but over the past 24 months to Q1 of 2019 and would note the following. Ryerson delivered just under two times the amount of adjusted EBITDA excluding LIFO at 123.5 million than we did during the first quarter of 2019. We did that with 85% of the full-time equivalent headcount at a cash conversion cycle lower by 24 days, at net debt lower by $436 million and deferred employee liabilities lower by $40 million. We could say over 179 years and the past 13 years in particular that we are not exactly an overnight sensation. If you like feel-good stories and make good stories about companies that truly transform themselves without a lot of fanfare and notoriety, then Ryerson might be the story you're looking for. We expect the best for ourselves by giving our stakeholders the best of ourselves. If we take a look back to our IPO in 2014, Ryerson had an enterprise value of approximately $1.75 billion with fixed cash commitments of $181 million, net debt of $1.1 billion, and legacy liabilities of $396 million. Today we have an enterprise value of approximately $1.475 billion. Our fixed cash commitments today are squarely under $100 million and falling. Our net debt is a little more than half what it was at the time of our IPO and falling, and our legacy liabilities are nearly half of what they were and falling. Looking at our current financial position, I believe it might be time to have a more substantive discussion as to where enterprise value is and goes as math is ultimately math. And when debt declines and legacy liabilities decline structurally while the operating model continues to improve, price value go. We look forward to making our case to the shareholder community in the months and years to come. Whether this recovery cycle lasts for one year, two years, or three years, the emergent base case for Ryerson is a company with a plan, process, Thank you for joining us today. of how societies want and need to live and prosper now and in the future. To tie it all together, let's say it one more time in harmony, it's time to build and we're grateful that Ryerson through its 179th year in business is in the thick of the action with a plan, a process, with passion and purpose, ready to write the best chapters yet in our organization's fantastic journey. With that, we look forward to your questions. Operator.

And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on your phone line will indicate when your line is open. Again, that is star 1 if you would like to ask a question. And we'll pause for just a moment. Once again, that is Star 1 if you would like to ask a question. And we will now take a question from Matthews Mills with Bank of America.

Hey, Eddie. Hey, everyone. Good morning. A couple sort of general field questions first, and then maybe some more detailed ones on the balance sheet. But, you know, obviously the demand for steel is very high in the U.S., but, you know, it seems like mills are holding back production. on one hand by not sort of opening up blast furnaces, but it seems like, you know, with auto slowdowns and chip shortages, they can divert tons to the spot market. Imports coming up but not quite alleviating, you know, the demand. You know, why isn't the service center community able to respond and get the tons that are needed to sort of balance out supply and demand?

Hey, Matt. Hope you're doing well. Boy, that's a mouthful, right? Look, I think if we go back to last August and we look at a CRU number of 434 and we look at where the price is today, you're not going to find anybody that I know that really predicted that. And I think it's certainly mostly pandemic-related, but you see all these dislocations, whether it's been Semiconductors, labor, workforce dislocations, lack of containers, logistical bottlenecks, various inputs that just don't seem to be in the right place at the right time. There's just a lot of things that are being remediated right now as a result of economic reopenings that are really asynchronous. And I don't think anything is... that intentional right now. I think that everything that's been reported is more or less accurate. And I think this is a response, even though it feels like a clumsy response throughout the value chain, this is a response to those dislocations that are really quite extreme and stacking on top of one another. So when we look at service centers and what we can get, lead times are extended domestically. They've almost tripled since August, September of last year. International lead times are longer and are less predictable. You overall have a supported dollar. You've got low import availability and international prices are rising as economies reopen and as demand for goods, maybe more so than services, demand for goods is clearly outpacing supply. And we mentioned this in our comments that we're still a long ways away from what I'll call inventory parity where You're really not long or short and your inventory is able to support maybe a midpoint of cyclical demand. So demand indicators are pointing us above average demand when we look back over the last 10 years or the pre-pandemic levels. So right now there's a positive catalyst far outweigh the negative catalyst right now looking out over the next several quarters. and we would expect for supply chains to repair and for them to incrementally get better. I don't think people are holding back capacity intentionally. I think everyone's trying to work through bottlenecks that really start with labor, frankly, and then move on to other inputs in terms of getting your entire workforce back and then being able to apply those resources to backlogs and schedules in a more balanced way.

From the import point of view, It seems like China is ramping up production. Iron ore has just hit another record. So they're not holding back anything. Is the problem getting steel from other parts of the world to the U.S., not availability of steel in other parts of the world?

Matt, there's a lot of different cross currents right now. I mean, you've got to put some weighting on decarbonization efforts. certainly China's consuming most of, they're pretty much consuming all of what they're making and they're actually a net importer for the first time in probably, I don't know, 13, 14 years and so when you look around the world and you look at these asynchronous recoveries but you look at how people are trying to ramp up capacity and where it's going, clearly the availability of import that was, that really is of not, of really recent memory going back, you know, Two years, three years, four years, five years, ten years. That availability just hasn't been there. And that availability that is there, it's priced much higher at a longer lead time. So these things are going to take a while, I think, to smooth out. And I think eventually, of course, we'll get to some type of equilibrium or a better balance than what we're seeing today. But it's hard to see that happening over the next three to six months right now. I mean, hard to see it based on all the indicators and the information we have.

Everybody says that the cure for high prices is high prices, but we seem to be breaking that paradigm right now.

Yeah, I mean, there's no shortage of information, Matt, that's out there. I mean, people are talking about, okay, eventually high prices will cause demand destruction or cancel backlogs, but we're just not seeing it right now. This could be a time where secular growth catalysts in infrastructure... and reopening and recovery. This could be a time where we do see a more sustained upcycle than what we've seen over the last decade.

And then on the balance sheet, I think you mentioned an opportunity to reduce debt by $150 million. I just kind of wanted to go over how you break down that number. Is that focused on ABL pay down? Is that Using your special bond redemption features, whether it's the $50 million at 103 or an equity claw or what, just walk me through how you get to 150. Sure.

So there's a special redemption feature we have in the indenture that allows us to redeem $100 million using real estate sale proceeds. And that's at 103. And we can do that any time. There's also a second of three. We already exercised the first one in October last year. But there's the second of three $50 million amortization options where we can use general liquidity to reduce the outstanding principle of our high-yield notes. So, I mean, it's certainly reasonable to expect as a base case based on how the year is emerging and how the base case is emerging for the year that We would have the ability to prospectively exercise those options, pay down that high yield note balance, take out $12.75 million of cash interest, and accelerate deleveraging, take down fixed cash commitments, and really accelerate that virtuous cycle of fixed cash commitments continuing to fall. When we look at fixed cash commitments, it's cash interest expense, it's pension contributions, and it's maintenance capex. We're getting to a point now where, as we mentioned in our comments, where there's two things that we see when we look at Ryerson and we look at intrinsic value and enterprise value. Clearly, we're getting to a point now where we're liberating ourselves from more of an LBO capital structure. We're liberating ourselves from these fixed cash commitments that were really weighing us down. And we should have really much better options going forward in terms of how we look at allocating capital to stakeholders going forward.

Okay, great. And then just on the timing of that, the $50 million at 103, you can't use that again until October of 2021?

No, I believe it's 12 months from the actual date of the indenture. So it would be August 1st, if my recall is correct. It would be August 1st. We'd be able to notice the note holders that we intended to redeem. The $50 million amortization piece. And the real estate piece we can do as soon as we have proceeds from real estate sales.

And I'm sorry, on the real estate front, you've sold $29 million of proceeds this quarter. You still have about $70 million to go. $70 million to go on the tow board, my man. But as soon as you do it, you can announce the redemption like the next day?

Yeah, I'm going to go ring that bell in the town square. Perfect.

I'll listen out for that. Thanks a lot, Eddie, and good luck. I appreciate it, as always. Thanks, Matt. Appreciate it. Take care.

Once again, that is Star 1. If you would like to ask a question, we'll now take a question from Alan Weber with Rabadi Advisors.

Good morning. I had a question about when you talk about the warehousing industry Delivery expenses X depreciation. You don't really measure that versus tons sold. And I would think over time, shouldn't you be able to get that leveraging of kind of the infrastructure as opposed to just looking at it versus revenue?

Hi, Alan. How are you doing? So we look at it three different ways. We're consistent with how we've always reported it, which is as a percentage of revenue. Also because where we're really looking for expense leverage is how are our warehousing selling and delivery expenses and administrative expenses and our selling expenses, how are those really reacting to changes in the cycle and counter cycle, right? So we're looking for that expense leverage as revenues go up and then of course we're looking to variableize our cost structure as we get into a counter cycle and then revenues decline on a on a price and on a volumetric basis. But having said that, we look at it three ways. We look at it and we've been reporting it historically as OpEx as a percentage of revenue. We also look at it as a percentage of gross margin because there are times when you make investments in capabilities where you expect to get gross margin to justify an incremental cost to serve or an incremental investment in machinery and equipment. And then we also look at it, as you mentioned, we look at it volumetrically as well.

Okay, that was really my, that's, I mean, but again, all things considered over time, you should be able to get some leveraging of, you know, relative to volume.

Yeah, absolutely. I mean, we have initiatives that are ongoing in the company to get those efficiencies and get that productivity up. I mean, I'm really pleased to say, and Really just have to compliment all my Ryerson teammates. Productivity has been up significantly over the last six months, particularly in the first quarter. And that's a difficult equation to balance right now, just given all the different upsets that have been caused by the pandemic. So productivity is on the rise. Safety performance has been really, really good. And we have projects underway to always optimize our footprint. We have a project in the company that's Headed by John Worth called Project Copernicus. And we look at how to optimize the Ryerson network consistently in terms of facility split print, equipment positioning, and inventory positioning, and how we make the most of that network.

Okay, great. Thank you.

Thanks, Alan. Take care.

and as a final reminder that is star one if you would like to ask a question and we'll pause for just a moment. And it appears there are no further telephone questions. I'd like to turn the conference back over to Mr. Lehner for any additional or closing remarks.

Thank you. We appreciate your continued support and interest in Ryerson. Please stay safe and well and we look forward to being with all of you again in August.

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